|
| |
Personnel Compensation and Benefits
Calculations and Analysis
The key cost element of programs is people.
Accurately calculating the costs of the staff of an
organization is an essential skill of a competent budget
analyst. Proper analysis of staffing costs is the
foundation of the contribution that budgeting makes to
management of an agency and its operating
components. Conclusions reached from analysis lead
to management action. A detailed
example with explanations is provided, as well as examples of payroll cost items
as well as an example of what
can happen when it is not done well.
 |
| Short of laying
off or firing the staff, there is little choice
but to pay them. Managers must deal with
this fact. Poor management decisions result
if the payroll cost data in the budget is
incorrect or presented in a misleading fashion,
or if during budget execution changes in payroll
costs are not properly addressed. No
manager wants to be in a position to have to fire
people because the budget analyst failed to
properly calculate the cost of the payroll for
the budget, or to calculate the costs of existing
and prospective staff for the remainder of the
current fiscal year. |
|
| The cost of the
existing staff and the funds available to cover
these costs determine whether or not people will
be hired, whether or not sufficient staff will be
available to do the work, and the amount and type
of other costs (such as equipment or contracts)
that can be incurred. Although it can be
argued that staff and its costs are simply
another factor in an organization's operations,
this is rarely the case. Staffing tends to
be a fixed cost because there is little that
management can do to reduce the costs from one
year to the next. This is especially true
in the governmental context and in large
organizations. |
|
| Payroll costs
estimates can be looked at in two
categories: (1) To support the budget
formulation process, and (2) for budget
execution, including operating plan development
and control of funds as the operating year
unfolds. Both types of calculations involve
research into the facts as well as analysis of
the consequences related to the facts uncovered
by the research.
 |
| Budget formulation
payroll computations are done far in
advance of the start of the fiscal year,
and require analyses that look into the
far future. Techniques used for
these projections have to take into
account uncertainties associated with a
future that must involve a large number
of assumptions. The salient point
about a formulation-related payroll
computation is that it is completely a
projection into the future, where
assumptions dominate the numbers.
The analyst has to be able to project
into the future, and think about every
element of the analysis as happening in
the future, i.e., every fact uncovered in
the research for analysis must be
adjusted to conditions that are likely to
exist in the future. Present
conditions may or may not be
relevant. They need to be evaluated
and adjusted to the likely reality of the
future.
 |
| The starting
point for a payroll computation
for budget development is the
existing staffing level. A
careful computation of the
existing staff's payroll costs is
readily possible by using
information from the accounting
system, which would allow
establishing a base level of
payroll costs for a specified
date. Extending this base
level to the budget year or years
being addressed may require
extensive adjustments and
analysis. |
|
| Adjustments to
the base level are made to
account for factors such as
changes in staffing, pay rates,
attrition, promotions, benefits,
and non-recurring events, such as
a major reorganization that may
result in transferring people or
major severance or other
termination costs. |
|
| For the rare
cases in which the payroll is to
be projected without an
accounting basis, such as for a
new agency or in a system with
chaotic accounting procedures,
the starting point has to be
determined by the analyst in
consultation with
management. The initial
basis for the base calculation
can be averages based on
fragmentary accounting data, a
schedule of positions to be
available (with salaries), a
listing of all employees with
current salaries, or even a
person to person census to find
out what they make.
Whatever the basis for
establishing the base, additional
work needs to be done to make
sure that all factors that affect
the payroll are accounted for,
including benefits and unusual
costs. |
|
| Click for
an example of a payroll
computation for budget
projections or operating
planning, annotated with
explanations. |
|
|
| Budget execution
related payroll computations use a range
of techniques, some similar to those used
for budget formulation in that they deal
with a distant future and others based
more directly on actual payroll data,
with little uncertainty in the
estimates. As the fiscal year goes
on, less and less of the payroll numbers
are based estimates and more and more of
the numbers represent data from the
accounting system as people are paid and
benefit costs are incurred. |
|
|
| Doing the
computations for the payroll is, however, not all
there is to doing budget analysis for the payroll
of an organization. An analysis of the
meaning of the numbers must be performed.
There are implications associated with the
payroll figures, and the analyst must identify
these implications for management action.
The types of questions to be addressed depend on
the budget phase involved, i.e., formulation or
execution, and include:
|
| Are we
budgeting enough to cover the payroll for
the likely level of staff we will have?
Are we being overoptimistic in our
assumptions about equipment and other
purchases we will be able to make by
understating our payroll costs?
Will the payroll exceed the budgeted
amount? Will it be under? Is
the staffing level sufficient to meet
program objectives? Are there
actions in process that will adversely
affect the budget, such as mass
promotions? What will be the
consequences of a surplus (or deficit) in
the payroll amounts for future
years? Should actions be taken to
slow down (or speed up) hiring? |
|
| There are many
other questions that could come up,
depending on the organization's
situation, staffing, and budget.
The analyst must be alert to the full
range of implications for management of
the significance of the payroll numbers,
and must take action to communicate the
significance of the results of the
analysis. |
|
|
| Presentation of
the results of the computations for payroll is as
important as the computations and analyses
themselves. Management will not understand
what the numbers mean unless they are presented
in an understandable fashion that highlights:
|
| Significant
factors that drive the estimate (e.g., a
reduced attrition rate that may result in
exceeding the budget), and |
|
| Actions that
can be taken to make a difference (e.g.,
reprogram funds into the payroll account
to take care of the deficit, or stop
hiring so the funds budgeted for new
staff become available to cover the
projected deficit). The analyst
must develop a sound understanding of the
practical actions that management can
take, and present these actions to
management backed up by the data that led
to the analytical conclusions. |
|
| Presentation of
the information is important for both
formulation and execution, but it is more
critical to management for budget
execution purposes since there is little
time for corrective action once the
fiscal year is started. |
|
|
| If the analyst
has done a full and complete research, analytical
and presentation job, she will have contributed
greatly to the efficient management of the
organization, and will become a valued member of
the management team. |
|
