When you roll a pair of dice there are 36 possible outcomes. If you make a simple table of all the possibilities, you will quickly see that there are only two ways to roll an eleven (six-five and five-six) but there are six ways to roll a seven (six-one, five-two, four-three, three-four, two-five, and one-six).
Workforce planning is the art and science of having the right people with the right skills in the right place at the right time. There are two parts to this process. The “art” is having a strategic understanding of the various skills, abilities and experiences you need on your staff to fulfill your mission. Once you have a clear picture of these needs, the “science” part is the analytical process of determining the size, makeup, allocation and management of your workforce so you can actualize your plans.
I want to talk about the second part of the process today: how you determine the optimum number of employees to have, how much to pay them and how to allocate their efforts. Rolling dice is a game of chance and workforce planning is an analytical process, but in both, you will see that there are multiple ways to achieve your goals.
Typically, before we even start this part of workforce planning, culture and experience put blinders on us. We set some arbitrary limitations on our options so we usually only consider approaches we’ve seen before. Among these limits is the core belief that we pay our employees for 52-weeks each year and we get (roughly) 47-weeks of productive time (two weeks of vacation plus one week of sick time plus 10 days of paid vacation) from them.
It doesn’t have to be that way. Like the various combinations resulting from rolling a pair of dice, you have some variables to work with. I’m going to show you how you can do it differently and get better results. And we can do this by experimenting with changes in just three variables:
- Your total number of employees
- How much productive time they work
- Their pay
As I pointed out at the top, you can achieve the same revenue and cost results with different combinations of these variables. With a few basic facts about your workplace, we can use a calculator to help us understand the effect of manipulating these variables. I’ve attached an Alternative Workforce Planning calculator to use if you want to experiment with these suggestions in your workplace. Let’s delve into the details with an example.
The standard 47-week work year (after vacation, sick time and vacations) yields 235 productive days per year per person; if you have 100 employees on this schedule your company requires 23,500 a total of productive days per year.
The equation looks like this:
52 weeks in a year
x 5 business days each week
= 260 business days in a year
- 10 days (2 weeks) of vacation
- 10 paid holidays
- 5 paid sick days
= 235 productive days per employee per year
x 100 employees
= 23,500 total productive days for all employees in one year
You can generate about the same number of productive days by having more employees working fewer days. One way to achieve this is by hiring 7 additional employees and giving every one of your 107 employees an additional 3 weeks of paid vacation. The new equation looks like this:
52 weeks in a year
x 5 business days each week
= 260 business days in a year
- 25 days (5 weeks) of vacation
- 10 paid holidays
- 5 paid sick days
= 220 productive days per employee per year
x 107 employees
= 23,540 total productive days for all employees in one year
Just like a pair of dice, where a “four-three” and a “six-one” both add up to seven. Except we’re not relying on chance; we’re planning the company we want to build.
But we’re not quite done: you can’t simply add more employees at the same salary or your payroll / revenue ratio goes through the roof. And because you haven’t changed your total number of productive days, your revenue will remain the same. That means that you must pay each one of your 107 employees a modest fraction less than before in order to keep your total payroll from escalating. This is not an easy thing to contemplate but stay with me a moment and we’ll look at why, in many cases, this is not only acceptable but potentially beneficial for everybody.
Next, let’s look at how we can adjust pay to keep our new system in synch. Remember that revenue hasn’t changed and we want to keep the pay / revenue ratio the same; obviously this means that total payroll and related costs must stay the same too even though we’ve hired 7 additional people. How do we adjust cash compensation to do this? Play with the calculator a bit and we find that an 8% decrease in cash compensation across the board will bring total staff cost to exactly where it was before we added the 7 new employees.
Here’s the original situation:
100 total employees
* $70,000 average cash pay per employee
= $7,000,000 total payroll
+ $1,440,000 total cost of benefits (at $1,200 per employee per month)
+ $120,000 administrative costs
= $8,560,000 total staff cost
And here’s what the new scenario looks like:
107 total employees
* $64,400 average cash pay per employee
= $6,890,800 total payroll
+ $1,540,800 total cost of benefits (at $1,200 per employee per month)
+ $128,400 administrative costs (pro-rated to account for more employees)
= $8,560,000 total staff cost
Cash comp goes down, benefits and admin costs go up and the net result is no change in total staff cost.
But we’re cutting people’s pay a lot. How can this be ok? Let’s look at this from a few angles:
First, remember that your employees are working substantially less than they were before – three weeks less in this example. So if the average cash compensation in your company before the shift was $70,000 per year, the average employee made $297.87 per workday. (70,000 / 235). Now, an 8% cut brings the same employee’s cash compensation to $64,400 but she or he is only working 220 days; this means that her daily cash pay has been reduced to $292.73 (64,400 / 220), a reduction of $5.15 per day or 1.7%.
Second, let’s look at total compensation, a much truer indicator of take-home value for the employee: cash comp plus the value of company paid employee benefits. Remember that the value of our benefits remains unchanged so total compensation per day of work decreases just .3%.
Old:
$70,000 cash compensation
+ $14,400 value of benefits
= $84,400 total compensation
/ 235 productive work days
= $359.15 total compensation per day worked
New:
$64,400 cash compensation
+ $14,400 value of benefits
= $78,800 total compensation
/ 220 productive work days
= $358.18 total compensation per day worked (a decrease of 97 cents or .3%)
Okay, but still, we’ve reduced cash compensation by an average of $5,600 per employee. That won’t go over very well, will it? This is a hard fact and shouldn’t be sugar coated; that said, times are challenging and people are losing their jobs left and right. Structuring your workforce with this model strengthens your company, builds organizational resiliency, actually increases employment, increases the likelihood that jobs will not be lost in the future and provides employees with a healthier work life relationship. Is that worth taking a bit of a pay cut?
All of this logic aside, some human decisions have to come into play; remember we’re working with averages in this example. I suggest that, below a certain level of pay, cash comp shouldn’t be cut at all. People making $150,000 a year can absorb a cut better than can someone making $35,000 a year. In this example, our goal is an overall 8% cut… that doesn’t mean that every employee can or should account for the same amount.
Let’s take a look at some of the benefits in more detail.
1. More employees means you have the ability to hire for a broader variety and scope of skills, abilities, experiences, personalities, cultures, approaches and perspectives on life and that’s a good thing.
2. More time off is a good thing for employees and for the company. Study after study demonstrates clearly that overwork and work place stress is a killer. An additional three weeks off each year gives people more time with family, more time for community involvement, more time for R & R, more time for hobbies, more time to recharge their batteries. All of that makes for more productive and happier employees.
3. More time off is one serious plus to add to your branding arsenal in your effort to become an employer of choice. For candidates and new employees, they’ll come in to your culture knowing that salaries may be a touch lower than another firm but nobody can match the quality of life that you’ll be offering.
4. And, as an additional social benefit, by increasing your staff you are doing your part to decrease unemployment, keep more citizens productive (and insured) and increase buying power in the community. How can that not be a good thing?
This is not a one size fits all solution. But I hope it will stimulate some thinking about the options you have in planning your workforce.
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If you want to try this with your organization feel free to use the attached calculator. First, fill in the blue cells with the information applicable to your organization. Data you will need:
- The number of employees you have
- The total annual payroll
- How much the company spends every month per employee for benefits
- How much the company spends annually on administrative costs
- How many vacation days, holidays and sick days the company pays for
- Total annual revenue
Then experiment with the three variables – a number of employees to hire, an amount to reduce pay, and a number of additional vacation days – by entering various options in the yellow cells. The goal is to get as many “results” boxes shaded green as possible.
