Labor cost planning: Make workforce spend more predictable

Labor costs are one of the largest, most volatile, and difficult-to-forecast expenses for a business. In fact, wages and salaries account for almost 70% of total operating costs on average, according to the U.S. Bureau of Labor Statistics. This makes workforce planning one of the chief drivers of financial performance. 

Despite the significant size of their investment in talent, many organizations still struggle to accurately forecast employee-related expenses. 

Often, this is due to a disconnect between the HR and finance teams. The intent to collaborate more closely is there: according to Anaplan research, 52% of organizations are working to strengthen alignment between their talent strategies and financial sustainability.  

But in most businesses, the two functions are still working with separate tools, processes, and systems and as a result, two different versions of the truth. A major source of this discrepancy is that finance and HR often work off different hierarchies (such as cost centers versus supervisory orgs) which don’t always align one-to-one.  

This mismatch leads to extensive reconciliation reporting and hours wasted trying to balance the numbers. And even small discrepancies in data can have a huge impact downstream. For example, conflicting headcount numbers can result in significant budget variances.

Without a shared view of financial realities and talent data, HR and finance leaders struggle to understand the true cost of their workforce. While most organizations already cascade top-down financial budgets into HR headcount plans, the real challenge lies in ongoing alignment.  

Managing the day-to-day details of compensation, benefits, and hiring against the financial plan requires continuous collaboration. Only by maintaining this dynamic alignment can you build an accurate workforce budget that meets current business requirements and accurately anticipates future needs.  

The ripple effect: How headcount decisions impact your bottom line 

Workforce decisions are more interconnected and complex than they appear on the surface. A compensation increase, for instance, impacts payroll, taxes, and benefit costs. A new hiring plan influences onboarding expenses, productivity timelines, and future merit cycles. Geographic expansion changes salary benchmarks, compliance requirements, and region-specific costs. 

Modern workforce planning should connect HR decisions with financial and operational strategies to bring these correlations into the open.

With a shared planning process and unified data, you understand the impact every talent decision will have on labor costs for the business. This visibility leads to more accurate workforce budgeting, enabling top-down financial targets to be aligned with bottom-up HR plans. Finance and business leaders have greater confidence in profitability forecasts, operating margins, and departmental budgets. 

It also brings greater agility — positioning your organization to respond quickly to a change in the job market, for example. This is a powerful competitive advantage.  

The four core workforce cost drivers 

While compensation (including salary structures) often represents the largest portion of workforce and labor spending, comprehensive workforce cost planning extends much further. It includes: 

• Base compensation  
• Merit increases, bonuses, and equity  
• Benefits and employer-paid taxes  
• Recruiting and hiring expenses  
• Contractors and contingent labor  
• Promotions and market adjustments  
• Retirement contributions and wellness programs 
• Severance 
• Non-financial rewards 
• Capitalized versus expensed labor 
• Investment in professional development 

The total workforce cost (TWC) is your budgeted headcount, multiplied by the full, loaded cost of each employee, across all the spend areas. Because planned headcount can change as budgets, market conditions, and business priorities shift, TWC has to evolve with it. Connecting your workforce and financial planning helps keep headcount plans and costs aligned with the company’s broader strategy and financial revenue goal.  

There are four main areas that form the foundation of workforce cost planning: 

1: Projecting compensation and base pay 

You need the capability to model and plan for compensation packages that ensure competitive and fair remuneration and rewards, aligned with organizational goals and standards. 

This involves balancing multiple factors, including: 

• Market adjustments – changes in base pay to match current external salary rates. 
• Geographic pay – adjusting salary based on the specific economic conditions of where an employee works.  
• Fixing pay compression – compensating employees according to their experience, qualifications, responsibilities, or tenure. 
• Promotion planning – determining pay increases and budget allocations when employees move to higher tier roles. 
• Pay equity – compensating employees fairly and consistently for comparable work. 
• Hourly and organized labor – factoring in any union rates, collective bargaining agreements, overtime, and shift differentials for shift-based workforces. 

2: Structuring merit increases and bonuses 

Annual merit planning can be a complex process, often requiring more thought than simply applying a standard percentage increase across the organization.  

Leaders must consider: 

• Accrual timing – recognizing costs in the period earned, not paid. 
• Performance – aligning individual achievements and business impact with proportional financial rewards. 
• Compa-ratios – comparing an employee's salary to the midpoint of the range for their role. 
• Cost of living/inflationary pressures – balancing overarching economic trends with available budget to maintain a competitive real-wage value. 
• Long-term incentives (LTIs) – a deferred reward strategy, such as shares. 
• Tenure rules – guidelines that tie an employee's pay, raises, or bonuses to their length of service. 

3: Forecasting the true cost of benefits 

The true cost of employment also includes a wide range of employer-paid expenses that are frequently overlooked. These might include specialized allowances, hardware and equipment provisions, and even ongoing development opportunities. 

Especially for the United States, healthcare and insurance costs continue to rise each year, making benefits forecasting increasingly important for accurate budgeting. Retirement and wellness is another key consideration – planning for 401(k) matches, mental health programs, and other fringe benefits. You also need to factor in statutory costs, such as payroll taxes, workers' compensation, and location-specific mandates. 

It’s also crucial to differentiate your headcount scenarios: the benefits burden will yield significantly different numbers depending on whether your resourcing mix relies on full-time employees versus contingent contractors.   

4: Calculating hiring and recruitment costs 

Every new position introduces costs across multiple stages of the employee lifecycle. You need to evaluate: 

• Cost per hire that includes recruitment agency fees and job board advertising. 
• The impact of vacant roles on revenue, taking into account how long it will take a new employee to be onboarded and fully productive.  
• Whether or not you should hire full-time employees, or use contractors, freelancers, and temporary staff as flexible levers. 
• Cost and benefit comparisons between internal mobility and external hiring. 
• Geographic hiring strategies and the availability of skills and cost of talent will vary by location. 

How to forecast labor costs 

Understanding your cost drivers is only the first step. To stay ahead of evolving workforce demands, you must turn these drivers into a dynamic forecast. 

Change doesn’t happen on a neat annual schedule — so workforce planning and budgeting cannot be bound to a static, once-a-year spreadsheet. To build a more predictable, continuous labor cost forecast, organizations should follow a driver-based approach: 

Step 1: Establish a single source of truth 

Begin by connecting HR and finance data — aggregating inputs from your human capital management (HCM) and enterprise resource planning (ERP) systems into a unified planning environment. You cannot forecast accurately if departments are operating off different headcount numbers. A shared data baseline ensures that everyone sees the exact same reality regarding current talent investments and constraints. 

Step 2: Define your key workforce drivers 

Move away from flat-percentage assumptions by linking financial outcomes directly to operational metrics. Identify the specific variables that impact your labor costs — such as anticipated attrition rates, average time-to-hire, mandatory benefit hikes, or location-based salary bands. Inputting these drivers allows your forecast to automatically update as soon as an underlying assumption changes. 

Step 3: Model multiple what-if scenarios 

Don't just plan for your ideal state. Leading organizations use scenario modeling capabilities to assess the financial implications of different decisions in parallel. What if we expand into a new region with higher healthcare costs? What if we shift our hiring mix toward contingent labor? Testing these scenarios instantly reveals their impact on operating margins, helping you optimize equitable compensation structures before you commit to a decision. 

Step 4: Leverage AI for predictive insights 

Instead of manually aggregating historical data, use AI and machine learning to rapidly generate highly accurate baseline forecasts. AI can uncover hidden trends that manual processes often miss — such as compensation drift in specific departments or early warning signs of attrition. It can also help personalize and automatically adjust rewards packages when an employee’s situation changes. 

Step 5: Transition to continuous planning 

Organizations that can constantly monitor and adapt their plans are best equipped to handle market volatility. Instead of waiting for the next annual cycle, update your workforce assumptions as conditions shift in-year. This real-time visibility enables top-down financial targets to remain tightly aligned with bottom-up HR plans, continually improving forecast accuracy. 

A unified foundation for workforce and financial data 

Anaplan brings HR and finance planning together into one centralized environment, ensuring everyone is working from the same trusted reality. 

Finance and business leaders can confidently budget and plan workforce needs, with HR executing the hiring motion with a focus on continuous position planning and workforce mobility goals. HR and finance have the accurate data they need to reconcile headcount, analyze variance, and conduct workforce analytics — supported by “what-if” modeling to maintain workforce readiness when business or market shifts occur.  

The Anaplan platform provides:  

• Seamless integration with HCM, ERP, CRM, and compensation management systems. 
• Enrichment with external labor market data and third-party benchmarks. 
• Real-time, global visibility into progress and any anomalies or exceptions. 
• The ability to rapidly adapt and roll up budgets and allocations. 

With 70% of organizational spend tied to the workforce, it’s imperative that you understand how every hiring decision, compensation adjustment, and benefit investment affects financial performance. Organizations that connect HR and finance through integrated planning can respond faster to change, make better investment decisions, and confidently balance growth with financial responsibility.