4 Common Budgeting Mistakes Companies Make

November 24, 2020
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Author: Mara Zemicael

Budgeting mistakes can lead to expensive lessons learned. Whether it’s incorrectly completing employee paperwork or not accurately setting employee pay, most such errors can be prevented or quickly fixed if caught early enough.

Budgeting mistakes are usually avoidable, but they can be costly to fix.

Here are four common budgeting mistakes organizations make, as well as solutions for avoiding them.

1. Relying on crowdsourced and/or outdated salary data. If you often refer to what former employees earned or what other job listings set for salary, then your data is likely not accurate. This also goes for the unvalidated, crowdsourced data found on many platforms supplying salary information. Like many other things, salary data is subject to change. The employment conditions in a city, along with the industry, required skills, level of education, and even company size, all factor in determining the actual market value of a salary or wage. So, the next time you’re recruiting a new team member, ensure you’re using real-time, validated salary data. This is especially helpful when hiring for in-demand roles where competition for candidates is strong and salary is often a deciding factor.

2. Not regularly benchmarking salaries. For fast-moving companies with lean teams or limited staff, it can be easy to overlook annual compensation reviews. However, performing a companywide review over time can save money. Benchmarking salaries provides insight into whether salary bands are accurate and how much budget there is for raises or to add additional team members. For instance, understanding the market value of a role’s salary, along with your overall budget, can help better estimate how much of a raise to offer. Sometimes, the standard 3%-5% pay increase is not enough. If you offer a pay increase of 3% and the demand for the role is high, thereby driving up the recommended salary, you increase the chance of losing great talent to a competitor or another company.

Without the proper salary analysis and benchmarking tools, you risk not planning for enough headcount budget to meet market demands, which can lead to turnover, reduced employee engagement and uneven distribution of budget. Whether you decide to review salaries when bringing on a new employee, every 18-24 months or during your annual headcount planning process, this step can prevent pay discrepancies going unnoticed.

3. Misclassifying employees as independent contractors. This is an expensive mistake. If misclassification occurs, companies may be forced to pay back payments to misclassified workers, as well as back taxes and interest owed on misclassified employee’s wages. Companies may also face criminal and civil penalties if the IRS finds the error to be intentional. Misclassifying employees may not only result in owing millions of dollars, but it can cause long-term damage to a company’s credibility and reputation.

So, how do you prevent this mistake? Make sure you understand your local, state and federal laws regarding who is considered an employee. Review the Fair Labor Standards Act’s guidelines. For many companies, this is a cut-and-dry distinction. For every new hire, human resources will want to ensure proper paperwork is completed and there is a process to pay the necessary taxes and expenses required for taking on an employee.

4. Inaccurately measuring total cost to correct. Ideas centered on being compensated unfairly – real or perceived – can negatively impact a company. Misclassifying employees or ignoring pay inequities can lead to expensive penalties and lawsuits. It can also lead to high turnover, which prevents companies from focusing on production and can decrease profitability. Companies viewed as being unethical or unfair to employees will have difficulty attracting and retaining top-tier talent and meeting customer needs. The solution? Talent acquisition teams must school hiring managers and supervisors on how to properly talk to candidates and employees about issues related to pay. As part of the annual headcount planning and budgeting process, review the current salary structure to make sure pay data aligns with market demand for the role and management has allocated funds to accommodate pay raises and new hires.

Budgeting Requires the Right Tools and Planning

With the right salary tools and budget planning, companies can avoid these mistakes. Having the right tools to evaluate salary data and market analysis and properly aligning talent acquisition with business needs, will go a long way toward making sure your business is on the right track to attract and retain talent -- now and in the future.

LaborIQ by ThinkWhy continuously forecasts and reports labor data at all levels, measuring impact to cities, industries, occupations and business across the U.S.