How to Budget for Employee Benefits? A Step-by-Step Guide

Learning how to budget for employee benefits is a must-have skill for HR professionals. It ensures that resources are allocated efficiently to provide competitive compensation packages while also meeting the needs and expectations of employees.

While it may seem simple at first, mastering how to budget for employee benefits is challenging, especially considering the factors that influence the budget. Fortunately, this guide is here to assist you. It covers everything you need to know about budgeting for employee benefits, including the average cost per employee in the United States and the types of benefits companies should consider offering their workforce.

What is employee benefits?

Employee benefits refer to the extra rewards and perks provided by employers in addition to base salary. These can include financial security features like health insurance and retirement plans, time off for rest and personal needs (like paid time off and vacation days), and even programs that support well-being (such as health and wellbeing benefits).

The goal of offering this employee benefits package is to improve employee well-being, attract and retain talented employees, and build a happier workforce through enhanced compensation and support.

Why is it important to know how to budget for employee benefits?

Learning how to budget for employee benefits is important because it ensures your company's financial health while providing competitive benefits. Here's why:

• Financial stability: Knowing the employee benefit cost upfront helps you avoid unexpected expenses that could strain your employee benefit budget. It allows you to plan for future fluctuations and make informed decisions about benefit packages.

• Competitive advantage: A well-budgeted benefits package can be a powerful tool for attracting and retaining top talent. Understanding your employee benefit budget allows you to create benefit offerings that are attractive to potential employees without overspending.

• Strategic allocation: Budgeting allows you to prioritize benefits based on your company's goals and employee needs. You can allocate resources towards benefits that have the biggest impact on employee well-being and job satisfaction.

• Compliance: Some benefits, like health insurance, have legal requirements. Budgeting helps ensure you can meet these obligations without financial strain.

Budgeting employee benefits can be overwhelming, especially for those who are inexperienced in this area. Luckily, Compensation Planning Software is here to manage your compensation plans in one comprehensive solution, including bonuses and equity.

The average cost of benefits per employee in the US

According to December 2023 data from the U.S. Bureau of Labor Statistics , the average cost of employee benefits is $14.13 per hour for civilian workers, $12.77 per hour for private industry workers, and $23.03 for state and local government workers, making up 38.0% of their total compensation.

It's worth noting that these average benefit costs per employee vary by industry. For example, in goods-producing industries in private industry, the benefit costs averaged $14.44, while in service-providing industries, they averaged $12.44.

Employer costs for employee paid leave cover paid vacation time, holiday, sick, and personal leave. On average, in goods-producing industries, these costs were $2.82, and in service-providing industries, they were $3.34.

In the educational services industry, paid leave cost employers $4.70 per hour worked. In the health care and social assistance industry, it was $3.93 per hour worked.

Types of employee benefits

Here are the 5 major categories of employee benefits, according to the U.S. Bureau of Labor Statistics:

1. Paid leave: Vacation, holiday, sick, and personal leave;

2. Supplemental pay: Overtime and premium, shift differentials, and nonproduction bonuses;

3. Insurance: Life, health, short-term and long-term disability;

4. Retirement and savings: Defined benefit and defined contribution;

5. Legally required benefits: Social Security [refers to Old-Age, Survivors, and Disability Insurance (OASDI) program], Medicare, federal and state unemployment insurance, and workers’ compensation.

Optional benefits that companies should consider

In addition to the major types of employee benefits mentioned above, employers can offer these optional and voluntary benefits to their employees, including:

1. Flexible work options: Support employees to work remotely or adjust their schedules to achieve work-life balance.

2. Tuition reimbursement: Help eligible employees pursue education.

3. Wellness programs: Support physical and mental health.

4. Childcare support: Assist with childcare costs or provide on-site care.

5. Counseling services: Offer confidential help for personal or work issues.

6. Training opportunities: Fund workshops to boost skills and career growth.

7. Commuter perks: Provide discounts on transportation or parking.

8. Profit sharing: Share company success with employees.

9. Volunteer time off: Give paid time off for community service.

10. Health stipends and lifestyle benefits: Offer funds for fitness and wellness expenses, like gym memberships.

Factors influencing the employee benefit budget

Considering the factors below allows companies to develop a strategic employee benefits budget that attracts and retains talent while staying financially sound.

Company size and financial status

Employee benefit budgets vary based on a company's size and financial stability. Larger companies with more resources may offer better benefits than smaller ones with tighter budgets. This discrepancy often reflects the varying capacities of each company's employee benefits program.

Industry norms and benchmarks

Different industries have their own expectations for employee benefits packages. Companies compare their benefits to industry norms to remain competitive in attracting and retaining talent.

Talent competition

In fields where skilled workers are sought after, companies may need to offer comprehensive benefits to stand out. Knowing the level of competition helps companies decide what benefits to offer.

Employee preferences

Employee demographics and desires shape the employee benefits budget. Younger workers may want flexible schedules and career growth, while older employees may prioritize retirement and health benefits.

Legal and regulatory requirements

Companies must follow laws related to employee benefits, like minimum wage and healthcare rules. Ignoring these rules can lead to legal trouble and harm a company's reputation.

How to budget for employee benefits

Budgeting for competitive employee benefits is key to running a successful business. It affects how you attract and keep top talent. Here's the process for mastering how to budget for employee benefits:

1. Step 1: Understand your workforce

   Assess the demographics, needs, and preferences of your employees. This includes their age, family status, health concerns, and expectations regarding comprehensive benefits package.

   With Compensation Planning Software, employers can gather all employee compensation and benefits data, such as base pay, bonuses, PTO, employer contributions, and long-term incentives, and present them in customized total rewards statements.

2. Step 2: Set a realistic budget

   Once you understand your workforce, you need to allocate financial resources to provide suitable benefits. Here are the common methods for budgeting:

   • Percentage of salary: Allocate 20-50% of an employee's salary for benefits.

   • Cost per hour: Budget around $11.60 per hour per employee for benefits. This translates to roughly 32% of total compensation costs.

   • Multiple of base salary: A more flexible approach is to budget 1.25 to 1.4 times each employee's base salary.

   The software helps stick to your budget by automatically enforcing compensation rules. You can also set guidelines for raises and promotions, and it alerts or blocks managers from going over budget when they enter values.

3. Step 3: Prioritize mandatory benefits

   Identify and allocate funds for legally required benefits such as social security contributions, workers' compensation insurance, and any other benefits mandated by law.

4. Step 4: Choose a budgeting method

   Selecting the right budgeting method can help you allocate resources effectively and make informed decisions about benefit spending. Consider the following approaches:

   • Zero-based budgeting: Allocate every dollar to a specific benefit category based on its importance and projected costs.

   • Traditional budgeting: Use historical data on benefit costs and adjust based on projected changes.

5. Step 5: Track and analyze

   Keep an eye on your benefit spending to make sure it fits your budget and goals. Check for any differences between what you planned to spend and what you actually spent. If you find areas where you're spending too much or too little, adjust your budget to make sure you're getting the most out of your competitive benefits package without overspending.

Knowing how to budget for employee benefits means understanding your workforce and setting realistic budgets. HR professionals can simplify this with Salary.com's Compensation Planning Software. It streamlines compensation planning, saves time, and handles multi-currency planning across over 96 local currencies, from department budgets to individual bonuses.