A new role costs a fraction of its salary in the year it starts and all of it every year after. The budget needs both numbers.
Budget each hire at its fully loaded annual cost times the months it will be on payroll, divided by twelve. Eight hires costing 925,000 a year once all are in post cost 537,500 in the budget year if they start on plan, 58.1 per cent of the annual figure. Budgeting them at their annual cost overstates the year by 387,500; budgeting only the in-year cost and forgetting the run-rate understates next year by the same 387,500.
Worked in full in Financial Planning and Analysis by Julian R. Sterling, with every figure reproduced in a free workbook.See the book on Amazon →
A fictional software company plans eight new roles for its budget year, each starting on the first day of the month shown. Employer on-costs, payroll taxes and benefits, are taken at a flat illustrative 25 per cent of salary to keep the arithmetic visible. That is a simplification, not a recommendation: built line by line, with bonus, equipment, recruiting and space, an 80,000 salary loads to 1.58 times, as shown in how to calculate the fully loaded cost of an employee, which also works the first-year cost of a single hire. This article deals with the plan as a whole: the in-year total, the run-rate it leaves behind and the slippage. Replace the 25 per cent with your own loaded rate per role, and add one-off recruiting fees in the month they are incurred.
| Role | Salary | Start | Annual loaded cost | Months in year | In-year cost |
|---|---|---|---|---|---|
| Financial analyst | 70,000 | Mar | 87,500 | 10 | 72,917 |
| Sales representative | 80,000 | Apr | 100,000 | 9 | 75,000 |
| Sales representative | 80,000 | Jul | 100,000 | 6 | 50,000 |
| Software engineer | 110,000 | Feb | 137,500 | 11 | 126,042 |
| Software engineer | 110,000 | Jun | 137,500 | 7 | 80,208 |
| Software engineer | 110,000 | Sep | 137,500 | 4 | 45,833 |
| Customer success manager | 60,000 | May | 75,000 | 8 | 50,000 |
| Product manager | 120,000 | Oct | 150,000 | 3 | 37,500 |
| Total | 740,000 | 925,000 | 537,500 |
Annual loaded cost = salary × (1 + on-cost rate); analyst = 70,000 × 1.25 = 87,500
Months on payroll = 13 − start month; a March start (month 3) is on payroll for 10 months
In-year cost = 87,500 × 10 / 12 = 72,917
Excel, salary in B, start month in C: =B2*(1+OnCost)*(13-C2)/12
Monthly profile, month number in row 1: =IF(F$1>=$C2,$B2*(1+OnCost)/12,0)
The monthly profile matters as much as the total. The cost builds from nothing in January to 77,083 a month from October, and twelve times the December figure is the 925,000 run-rate the company enters the next year with.
Exit run-rate = sum of annual loaded costs = 925,000
In-year cost = 537,500
Built-in increase next year = 925,000 − 537,500 = 387,500, before any further hire or pay rise
This is the number boards most often miss. Hires that start late in the year look cheap in the year they are approved: the product manager costs 37,500 this year and 150,000 every year after. A budget pack should show both columns for every new role, so that approving it is approving the run-rate.
Roles rarely start on the planned date. If the company's own hiring history shows starts landing two months late on average, the in-year cost falls:
| Average delay | In-year cost | Saving against plan |
|---|---|---|
| None | 537,500 | 0 |
| 1 month | 460,417 | 77,083 |
| 2 months | 383,333 | 154,167 |
| 3 months | 306,250 | 231,250 |
| 4 months | 241,667 | 295,833 |
Two months of slippage take 154,167 out of the year, 28.7 per cent of the planned cost. Whether to budget that saving is a policy choice, not an arithmetic one. Budgeting the plan dates and then reporting the underspend as favourable tells the business it is saving money when it is in fact running without people the plan said it needed. The book's own case makes the point with a 1,400,000 research and development underspend that turns out to be fourteen empty roles. Budgeting a vacancy factor instead is more accurate on cost, but then the revenue or delivery those roles were meant to support should be phased late too, or the budget is internally inconsistent.
Budgeting the annual cost. Putting 925,000 into the year for eight roles that start between February and October overstates the year by 387,500, 72.1 per cent. The excess then shows up month after month as a favourable variance that nobody can explain or spend.
Forgetting the run-rate. The reverse: approving 537,500 and being surprised by a 387,500 jump the following year.
Ignoring the start-day convention. If hires are as likely to start mid-month as on the first, counting from the middle of the start month gives 498,958, 38,542 less than the first-of-month convention. Use the convention that matches how your payroll actually starts people, and state it.
The book's operating expense sheet, where an underspend is tested against the gross profit it defers, is in the free workbook for this case. To read the year's actuals against a budget restated for what actually happened, see how to calculate a flexible budget variance.
Multiply the loaded annual cost by the months the person will be on payroll and divide by 12. A financial analyst on 70,000 with 25 per cent on-costs costs 87,500 a year; starting on 1 March, they are paid for 10 months, so the budget carries 72,917. In Excel: =Salary*(1+OnCost)*(13-StartMonth)/12.
The sum of their full annual loaded costs, the cost the business carries once everyone is in post. In the illustrative plan it is 925,000, against 537,500 in the year they join. The 387,500 difference is a built-in cost increase for the following year, before any further hire or pay rise.
Only if the company's own hiring history supports it, and only if the work the roles support is phased late too. Two months of average slippage cut the illustrative in-year cost from 537,500 to 383,333, a saving of 154,167. Budgeting the plan dates and calling the underspend favourable hides empty roles.
This article is one calculation from Financial Planning and Analysis. The book takes the same case from first principles to the decision, chapter by chapter, and every figure it prints is a live formula in the free companion workbooks.
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