What is an HR budget?

An HR budget is a financial plan that estimates the monetary resources allocated for all human resource-related activities in a company over a specific period, usually annually.

This budget encompasses expenses for recruitment, training, employee benefits, salaries, compliance, and other HR functions. It is a crucial tool for aligning HR strategies with the organization’s overall financial goals, ensuring efficient resource allocation, and helping manage workforce costs effectively.

What is HR budgeting?

An HR budgeting strategy is the actual process organizations use to decide which and how many funds are going to specific human resources activities. Compared to other business budgets, such as marketing or R&D (which focus on promoting products and respectively innovation), HR budgets cater to your existing workforce.

This gives them a greater impact on internal matters like employee engagement, productivity, and turnover reduction. While HR budgets often include predictable expenses like salaries, they’re also meant to be flexible. This way, HR leaders will always have funds to rely on should there be unforeseen situations.

What percentage of revenue is typically the HR budget?

The HR budget you decide on depends primarily on your revenue but will also be influenced by your industry demands, company size, and business priorities. Generally put:

• Small and medium-sized companies (up to 5,000 employees) can budget 3%-5% of their revenue
• Large companies with over 5,000 employees don’t necessarily need to allocate a larger percentage of their revenue—as little as 1.47% (on average) of the revenue is enough to cover most HR costs

What are the key components of an HR budget?

An HR budget should contain the following key elements:

1. Salaries and wages: The largest part of your HR budget will go to compensation as these can’t be delayed or skipped
2. Benefits and perks: Companies spend as much as $221 per employee for essential and nice-to-have benefits such as health insurance, retirement plans, bonuses, and more
3. Recruitment costs: Advertising, recruitment agencies, and onboarding cost organizations an additional $401 per employee
4. Training and development: Learning allocations for skill development, workshops, seminars, and the like get companies to add $202 per employee to the existing costs
5. Compliance and legal requirements: Staying compliant with local and global labor laws and regulations should also be taken into consideration
6. Technology and tools: Investing in HRIS (Human Resource Information Systems) and other tools to take the operational burden off your HR team’s shoulders is always a good idea
7. Extras: You’ll likely incur other occasional expenses for employee engagement activities, travel, or others

Do pay raises come from HR or the department budget?

Whether the budget for the salary raise is taken out of the HR budget or the departmental budget depends on how your organization is structured and what the pay raise looks like. You can also opt for a mix of HR and departmental approvals when a department submits a pay increase request to HR for review to ensure compliance with base salary bands and equity policies.

However, the roles for each tend to be clearly defined in a couple of cases. For instance, if salaries need to be adjusted based on new costs of living or market/industry adjustments, it’s HR’s role to analyze the trends or legal requirements and come forward with a pay raise proposal. Departments, though, are the ones tasked with deciding on a salary raise whenever individuals display great performance if they want to promote a person or simply to reward results on special projects.

What are the different types of HR budgets?

There are various types of HR budgets you can consider, but here are the most common methods you can choose from.

Zero-based budgeting (ZBB)

This type of HR budget implies starting with a null baseline and gradually adding justifiable HR expenses without considering past ones.

Example: If your organization needs to re-evaluate the performance of your training programs on an annual basis, you will use the ZBB HR budget method to decide which training-related expenses you need to keep, cancel, or expand upon.

Incremental budgeting

Using incremental budgeting, you adjust your current HR budget based on the previous year’s budget, making smaller, incremental changes to adapt to your new goals and inflation.

Example: Adding 5% to last year’s recruitment budget is a simple way of ensuring you’ve got enough funds for hiring increases you’re anticipating.

Activity-based budgeting

One straightforward way of deciding on an HR budget is to allocate funds for specific activities or projects, considering the estimated costs for each activity and leaving some emergency funds aside for unexpected needs.

Example: Allocate funds specifically for activities such as job listings, onboarding tools, team-building events, or activities meant to reduce turnover.

What are the benefits of HR budgets for organizations?

An HR budget gives you more clarity and control of the costs your human resources operations involve.

First and foremost, you’ll be more effective at resource allocation as an HR budget clearly outlines where funds go for talent acquisition, employee training, and other benefits. In time, this will also let you compare past results, see if you’ve over/underspent on certain areas, and better predict future financial needs. With such a level of data, you’ll also make better decisions, focusing more on activities that are lucrative and spending less on non-profitable strategies.

Beyond reducing expenses, it’s also worth looking at the bottom line. The better organized your HR budget, the higher your chance of improving the employee experience as a whole.

By setting financial expectations for HR programs, budgets make it easier to assess the effectiveness of initiatives like training or employee wellness programs. You can also rely on past budget allocation to evaluate whether investments in employee engagement and retention have brought you the desired outcomes. Budgets also ensure you have enough resources for meeting legal and compliance requirements, such as benefits administration and labor law compliance.

How can an HR budget help improve employee retention?

An effective HR budget can improve employee retention by allocating resources to areas that enhance employee satisfaction and engagement. For instance, investing in competitive salaries, comprehensive benefits, and professional development opportunities can make employees feel valued and motivated. Additionally, budgeting for employee recognition programs and wellness initiatives can foster a positive work environment, reducing turnover rates.

How do you prepare an annual HR budget?

For the next steps, let’s see what the key steps for preparing your next annual HR budget are.

1. Analyze previous budgets: Review the prior year’s HR budget to identify trends, overspending, or underspending—use this as a baseline for forecasting
2. Assess workforce needs: Evaluate current and projected workforce requirements, including headcount, recruitment needs, and employee turnover rates
3. Plan for compensation and benefits: Calculate salaries, bonuses, raises, and benefits costs—include mandatory expenses like health insurance and retirement contributions
4. Allocate for recruitment and onboarding: Budget for hiring expenses such as job postings, recruitment agencies, onboarding programs, and background checks
5. Include training and development: Account for employee learning programs, workshops, certifications, and leadership development initiatives
6. Factor in HR technology and tools: Budget for HRIS systems, payroll software, and other tools required for efficient HR operations
7. Plan for compliance and legal costs: Include costs for compliance training, legal consultations, or audits to ensure adherence to labor laws and regulations
8. Account for miscellaneous HR initiatives: Budget for employee engagement programs, wellness initiatives, diversity and inclusion efforts, and team-building activities
9. Review with leadership: Present the draft budget to senior management for alignment with organizational goals and make necessary adjustments
10. Monitor and adjust: Once approved, monitor expenditures regularly throughout the year and make adjustments as needed to stay on track

How can an organization measure the effectiveness of its HR budget?

To measure the effectiveness of an HR budget, opt for a couple of key performance indicators (KPIs) such as:

• Employee turnover rate: A declining turnover rate means your retention efforts are solid, so the investments you’ve made in employee engagement can be continued or scaled
• Cost per hire: This KPI evaluates the efficiency of your budget for recruitment so you can decide if you’re spending too much on attracting talent
• Training ROI: By linking training programs to performance, you can measure whether training costs are effective
• Employee satisfaction scores: Opt for this metric to track the results of your employee surveys and feedback tools for a qualitative analysis of which activities are worth funding ahead
• Budget variance analysis: Comparing planned versus actual spending highlights overspending or underspending and identifies areas for better financial control
• HR software ROI: Measuring the return on investment for HR technology ensures that software expenses are justified by increased productivity or cost savings

What strategies can be employed to optimize an HR budget?

To optimize your HR budget, you’ll most likely start with a complete analysis of your past performance vs. the costs implied. From here, you can opt for strategies like:

Leverage HR analytics to optimize budget allocations

Turn to HR analytics solutions to examine your workforce performance, recruitment needs, and retention strategies.

For example: Using data from previous years, you can redistribute your funds to areas with the highest impact, like talent acquisition or training.

Prioritize high ROI activities

Identify and pick the HR initiatives that will bring you the most/best results.

For example: A retail company will want to prioritize spending on employee engagement programs to improve show rates.

Cost-benefit analysis

Evaluate the potential return on investment (ROI) for your HR activities of choice. For example: A tech firm will compare the cost of hosting an in-house training session versus working with external mentors or consultants and what the impact of this change will have on employee skill development.

Consider outsourcing

You’ll likely opt for outsourcing non-core HR functions to reduce costs or work with talent unavailable within the team.

For example: A small business will outsource payroll to a third-party provider, saving costs annually compared to having someone manage this in-house.

Continuously monitor spending

By examining what worked (or did not), you can reduce costs or redirect funds towards the activities that yield the highest ROI.

For example: A web development firm runs quarterly reviews of its training budget to determine which tools and services the team is no longer using. They can cancel these and use the money to try new methods for improving learning and team performance.

Consolidate HR tools

Start by choosing two to three systems to test for various HR operations like payroll, performance management, and recruitment. You can also use an all-in-one tool if it meets your must-have requirements to help you track your budget and compare results against spending.

Stay ahead of regulatory changes

Ensure your budget accounts for potential regulatory changes in areas like employee benefits, labor laws, or health and safety regulations. This will keep penalties away while you stay compliant as early as the forecasting stage.

What challenges might an organization face when creating an HR budget?

Challenges in HR budget planning include:

1. Forecasting accuracy: Predicting your future costs can save your budget, but without proper data analysis, it can be difficult to know exactly what you’re going to need the extra funds for
2. Resource allocation: Limited resources will make it more difficult for you to balance the needs of different HR functions
3. Stakeholder alignment: While you want to get stakeholders on board and have them agree on budget priorities, you need a solid system for tracking communication and feedback from them
4. Regulatory changes: New labor laws and regulations can pose threats or new requirements to your HR budget
5. Technological advancements: Besides making you more productive, the proper HR budgeting tools will help you meet regulations that might require you to record specific employee data

How do economic conditions affect HR budgets?

Economic conditions will inevitably change the way your HR budget looks. In a booming economy, organizations may have more resources to invest in HR initiatives, such as hiring, training, and employee benefits.

In contrast, companies may need to tighten budgets during economic downturns, leading to cost-cutting measures such as hiring freezes, reduced training opportunities, or scaled-back employee benefits. Therefore, HR budgets must be flexible and adaptable to changing economic climates.

Explore Deel’s State of Global Compensation Report to uncover insights on emerging trends in employee compensation, regional pay benchmarks and global comparisons, and more strategies for attracting and retaining top talent worldwide.

Optimize your HR budget with Deel

Deel offers a comprehensive HR platform to help you speed up and consolidate hiring, HR, payroll, and talent management for diverse workforces, including full-time employees, contractors, and direct employees globally.

The platform supports businesses in managing their operations across multiple countries without opening separate entities. Deel’s global payroll automation handles regulatory compliance, tax deductions, and filings, all run by in-house payroll experts.

The platform also offers secure EOR services across 150+ countries, facilitating global hiring and onboarding without the complexity of setting up local entities. With integrated payroll, tax, and compliance solutions, Deel is your complete solution for managing and expanding an international workforce efficiently.

Additionally, our HRIS solution, designed around the needs of companies operating globally and remotely, is always free.

Book a demo to see how our solutions will help you manage and improve your human resources budget.