Human labour is a main production factor within a company and incurs costs accordingly. These costs arising from employees are known as personnel expenses. Precisely because they often represent a main cost item, they are an important tool in corporate planning and need to be calculated and planned meticulously by employers. However, there is often a lack of clarity over the level of personnel expenses or they are vastly underestimated, particularly at small and medium-sized companies. This can have catastrophic consequences, especially for start-ups. Companies which do not know how much their employees cost are not able to calculate the price of their products or services properly. In order to plan personnel costs, the future headcount and the expected wage growth constitute important information.

Personnel expenses are more than just the salary

Personnel expenses comprise various components. The salaries paid to employees are obviously the main component of personnel expenses planning. However, this does not just include the fixed gross salary, but also variable salary components, such as commissions, bonuses and profit shares. Other costs, such as extra pay for working late, at the weekend or on public holidays, should not be overlooked either.

Salary costs account for the lion’s share of personnel expenses. However, to restrict them to that would be wide of the mark. Indirect personnel expenses must also be included in the calculation. Indirect personnel expenses are often called incidental wage costs. These also include legal provisions and the conditions of collective employment agreements. Some examples:

• Payment of the employer’s share of social insurance contributions (such as for old-age and surviving dependants insurance in Switzerland)
• Continued salary payments in the event of illness
• Maternity pay

These also include voluntary payments made by the employer to employees – such as covering the costs of training and education, vouchers for meals outside the company or a canteen.   

Various factors influence personnel expenses

Besides the make-up of personnel expenses, it is also important to understand which factors influence them. Certain provisions of employment and social security law and the contribution rates to social security or the guidelines of a collective employment contract are outside of the company’s control and apply to all competitors. Conversely, the number of employees and the make-up of the workforce in terms of the level of qualifications and age is a strategic decision for the management board. Similarly, voluntary allowances can be taxed directly by the company and are variable. These include, for example, contributions for meals, mobility, health insurance or leisure activities. Employers have at least indirect control over other influential factors within the company, such as staff turnover and absenteeism.

How to calculate personnel expenses

The number of staff the company employs is the basis for determining personnel expenses. This is done by using a human resources plan. Important: it is not just filled positions that are taken into account, but also those currently vacant as well as any being created or cut. In the second step, the salary for the positions concerned is estimated and updated accordingly. Changes to the employment contracts, amendments to collective employment agreements, modified working hours or different types of salary are all taken into account to ensure the calculation is as accurate as possible.

Finally, the incidental wage costs must also be included in personnel expenses planning. They include:

• Statutory employer contributions to social security (old-age and surviving dependants insurance, invalidity insurance, fund for loss of earned income, unemployment insurance, accident insurance and family allowances)
• Employee benefits contributions (OPA)
• Costs of professional training and education
• Recruitment costs
• Voluntary additional payments made by the company to employees

In Switzerland, incidental wage costs stand at between 15% and 25% of the gross salary. They naturally vary depending on the sector and the employee’s age. This means that if an employee earns CHF 6,000 a month and is paid a 13th monthly salary on top of that, his wage costs amount to CHF 78,000 a year. If the incidental wage costs are calculated at 20%, this results in a total of CHF 15,600. The annual personnel expenses for this employee would stand at CHF 93,600.

Careful personnel expenses planning as a guarantee of cost-effectiveness

Even though personnel expenses vary greatly depending on the sector, they make up a significant share of fixed costs in most cases and particularly in the service sector. This means effective personnel expenses planning is not just a key part of all budget planning, but it also helps to ensure a company’s financial viability over the long-term and a prosperous future.