5 Financial Considerations for Human Capital in 2021
The 2020 experience has every company thinking about its workforce. Whether it was keeping teams safe, helping them be productive from home, or finding judicious cuts that would shore up sagging cash flows, business leaders dealt with unforeseen challenges.
Now, in 2021, it’s time to reset for growth, finding new customers and moving more product. Your workforce is, of course, a critical driver of initiatives like these, and therefore perfecting your HR practices will be more important than ever.
Given their prominent role, HR teams need to have the confidence and common language to partner with peers across the organization to achieve this year’s business goals. This “common language” turns subjective topics such as talent development into targeted, personally-achievable goals for each team member. Teams would do well to revisit these goals throughout any year, but 2021 will present a unique requirement to focus on a select few.
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In short:
- HR should work closely with cross-functional teams to proactively manage KPIs related to human capital and get a granular view of costs across the organization.
- As businesses return, at least partially, to a more typical workforce and associated measurements, they must take new or previously under-emphasized metrics into account.
- Understanding metrics such as labor costs, unemployment costs and cost of benefits requires specific knowledge of regulations, tax rates and legal considerations — and we’ve got you covered.
Here are Five Human Capital Analytics Factors That Will Likely Get More Attention in 2021:
1. Unemployment claims cost
In 2020 Q4, the nationwide unemployment rate remained mostly unchanged throughout the quarter, at 6.7%, per the Bureau of Labor Statistics. This number is nearly twice what the agency reported in February 2020, but much lower than April’s numbers. Now, in early 2021, the way that HR manages internal unemployment numbers and new unemployment claims will shift.
Unemployment claims cost is an HR and finance metric determined by both experience (i.e., the number of claims) and the state and federal unemployment taxes which employers must pay on the number of allowed claims from former employees. Keep in mind the variables here: First off, unemployment insurance varies by state. Secondly, just as with car insurance, the number and severity of claims affect premiums. The tax rates increase with harder hits and higher frequency. And some states are giving employers a break from premium hikes.
Companies pay “SUTA” taxes (State Unemployment Tax Act) on a percentage — within a range determined by the state — of each employee’s earnings. States assign SUTA tax rates for each business based on industry, as well as the volume of current and separated employees who file for unemployment benefits. These ranges can be quite large: Kentucky’s, for example, is 3.5-10%. The “FUTA” tax rate (Federal Unemployment Tax Act), meanwhile, is 6% across all industries and applies to the first $7,000 you pay each employee during the year. Unemployment claims costs go far beyond the cost of paying out benefits.
During most of 2020, we generally accepted that if an organization terminated an employee, it was due to pandemic-related causes. Fast-forward to 21Q1, and organizations have had time to reorganize and right-size their labor models. For the most part, the scramble is over, and companies are hoping that customer and financial confidence will return in the second half of 2021, if not sooner.
In 2020, many employers didn’t contest any new unemployment claims, but that “all-allowed” approach is shifting in 2021. Check with your state’s unemployment office to learn specifically how your company’s unemployment experience is affecting your tax rate. Reducing your company’s number of unemployment claims by thoroughly documenting the reasons for termination can help set your unemployment claims costs back to pre-pandemic numbers more quickly.
2. Cost of turnover
Employee turnover is extremely expensive, with both tangible and intangible costs associated. A company can easily save thousands of dollars by objectively evaluating talent and formulating employee retention strategies.
Free internet tools can estimate the cost of turnover by position. Generally, a company can use the hourly average rate of pay, salary of the supervisor and HR recruitment wages to create an Excel formula that may look something like this:
Payout of time off benefits such as sick or vacation time earned and accrued + Unemployment costs + Severance + Team member added shifts or overtime to compensate for vacancy (multiplied by the number of days it takes to fill the position) + Labor cost of temporary workers + Contract trainers + Recruitment marketing + Cost of pre-employment screenings such as background and drug checks = Tangible cost of turning over one employee
Leaders cannot ignore the intangible costs of employee turnover, either. These may include loss of knowledge that slows operations, a new-hire learning curve that adversely impacts the quality of customer service or product development, or the costs of interviewing, onboarding and providing additional coaching to new hires. Clearly, there is a significant reduction in costs if an organization is experiencing a 10% turnover versus a 20% turnover.
As HR spends more time on recruitment and training, they’ll either incur overtime or give less attention to other duties — incurring not new costs, but costs in the form of lost opportunities to do other work.
Using a simplified cost of turnover calculator, we can calculate that an hourly employee compensated $20 per hour who reports to a supervisor compensated $50,000 and supported by an HR coordinator making $45,000 equates to a $8,800 tangible and intangible cost of turnover.
A commonly-accepted rule of thumb is that one turnover equals 25% of the departing employee’s wages or salary. This generality is likely not specific enough for our finance peers, which is why we recommend creating a spreadsheet tracking the organization’s true expenses. When turnover becomes an issue, it’ll be worth digging back to determine historical costs if they haven’t been closely monitored to date.
Monitoring the causes of employee turnover also allows HR and managers to create techniques that reduce turnover rate, then go a step further to dissect useful metrics and identify turnover by performance. Leaders should set goals around turnover causality and turnover rate reduction early in the year, then review them in 60-90 days. This ensures performance and organizational direction align and that performance measurements are documented. Once finance and HR establish objective scores, a company can, for instance, identify if turnover is occurring among the highest performers. If so, it can then work to pinpoint the reason.
3. Technology cost
Technology cost expenses are associated with the development, acquisition, implementation, deployment and maintenance of assets of technology that includes depreciation and amortization, according to lawdictionary.com.
(Development Cost + Acquisition Cost + Implementation Cost + Deployment Cost + Maintenance Cost) + (Depreciation + Amortization) = Technology Cost
To explain in financial and HR terms, this cost may include variables such as cost per-user per-month, cost by population, merging of data, software implementation, integration with other in-house software and the all-important end-user support. To align HR and finance, the user should be able to identify areas for savings and inspire ideas for revenue enhancements. Technology to assist these efforts has never been more readily available, and using it to automate business processes in 2021 is critical.
Determining the HR priorities of the company while researching dozens of products that may meet those needs for a reasonable cost is a challenge. With the proper technology, talent acquisition efforts are broader and positions are filled more quickly.
4. Benefit costs
Benefit costs reflect money allocated in an employer’s total rewards package outside of wages or salary to create an employer value proposition (EVP).
Total Rewards Package – Wages/Salary = Benefit Costs
The Bureau of Labor Statistics reported at the end of 2020 that private sector employers paid on average 29.8% in benefits costs, while state and local governments paid 38.2% during the year. The average hourly wage was $26.25, while benefits cost $12.01.
Image Credit: Bureau of Labor Statistics (opens in a new tab)
To find accurate health plan cost increases for your industry, visit resources like Salary.com or the Society of Human Resource Management (SHRM).
In early 2021, HR and finance professionals should consider strategies to mitigate likely healthcare cost increases. Offering employees a choice of health plans can save benefit costs. High-deductible health plans are not a fit for all — in some industries, lower-paid employees forgo company health benefits because state subsidies are available to them. In this case, the company experiences a lower take rate, which may adversely affect the bargaining power when negotiating premiums from year to year.
5. Labor cost
Labor cost is a metric that cross-discipline senior leaders must understand and manage in any company. How leaders report it as they draft strategies, however, will vary by industry and business model.
Labor cost-related metrics frequently include revenue per employee (derived from revenue divided by FTE count) and profit per employee (derived from profit divided by FTE count). If leadership is not aware or does not have quick access to this information, it’s an organizational disadvantage — but one that can be corrected.
Clearly, the compensation forecast process is nontraditional this year for many organizations. There are ways to ensure your company’s labor strategy is competitive with the talent market: Consider using compensation management software, talent acquisition marketing analytics and timely wage and salary data when drafting such strategies. The SHRM and Salary.com also offer industry-specific data on salary increase budgets for the year. Possible wage freezes, reduction in wages and performance awards, incentives, continued salary reductions and severance agreements as a product of restructuring are line items that finance, in partnership with HR, should carefully reconsider and update to align with desired 2021 financial outcomes.
Last year, many companies implemented cost-saving measures such as reduced salaries, suspension of incentive and bonus payments and reduction of benefits. When taking these measures, especially when reducing hours or salary, the employer needed to make a new agreement with the employee — whether as an amendment to the original job offer or an updated job description or employment contract. It’s important to update those agreements when returning employees to a full 40-hour work week and full salary as business allows.
For example, if in 2020 a company reduced an exempt associate’s hours to 32 per week minus 20% compensation, this should have been agreed-upon and documented at the time of implementation. In 2021, as business returns and productive hours increase, employers should update the agreement. The return of incentives and benefits is calculated and prioritized depending on the tangible and perceived value of reimplementation. As a business leader is communicating financial performance, the message may be that incentives still are out of reach but a portion of the retirement contribution is back in effect, for example.
The Bottom Line
By speaking a common language about human capital analytics, the human resource and finance disciplines align to achieve business goals — and there’s an opportunity for these analytical HR KPIs to be succinct and financially-based in 2021. With mutual understanding between the two departments, organizations will have clearer direction on how to maximize growth in 2021.
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This post was originally posted on the NetSuite Blog. By Jude Reser, regional director of human resources, Atrium Hospitality
