HR Budget: All You Need To Know [2025 Edition]
60% of HR leaders anticipate flat or decreased budgets in the near future due to tighter budgets and growing business demands. That’s why carefully planning your HR budget and ensuring you don’t over (or under) spend is key to achieving organizational success.
Planning and preparing an HR budget to account for the entire organization’s hiring, compensation, benefits, training, and more is no small task. Yet, it’s critical if you want to manage your resources and build an excellent workforce effectively. No matter how small an organization is, changes in the job economy, rising supply costs, and unforeseen challenges can all significantly affect the amount an HR department has to spend, and a considered HR budget can mean the difference between a business sinking or swimming like an Olympian.
In this article, we’ll explore what an HR budget is, why it’s so important, how to plan and prepare one, and some real-life examples.
Contents
What is an HR budget?
HR budget items
Why do you need to plan your HR budget?
HR budget planning process
How to optimize your HR budget: 6 tips
HR budget management best practices
HR budget examples
HR budget template
FAQ
What is an HR budget?
An HR budget is a financial plan that details the expenses associated with employing, managing, and developing the organization’s workforce for a specific period, typically a fiscal year. It must be carefully planned out, communicated to, and approved by the leadership team.
The HR budget takes a close look at the expenses of previous years, the current year’s costs, and future plans to estimate the following years’ costs. For example, perhaps you’re expanding and opening a new office in a new location, which will mean a significant investment in recruitment and hiring. Or maybe you’re rolling out a new software across the business, which will require more spend on training. However, an increase in operating expenses – which many companies have experienced at some point – will often result in the HR budget being cut.
Organizations typically follow three main types of HR budgets. The type you choose will depend on several factors, including available funds, projected expenses, profits, and the size of the business.
- Incremental budgeting: Instead of creating a brand new plan or completely changing your previous one, this method focuses on making small adjustments to the previous year’s HR budget based on any anticipated changes or objectives.
- Zero-based budgeting: In this approach, a brand new plan is created based on the upcoming year, and each expense must be justified. Although this method is more time-consuming, it can help you better allocate resources and identify any inefficiencies.
- Flexible budgeting: A flexible HR budget is one that can be adjusted throughout the year. This is appropriate for newer businesses and SMEs that are most vulnerable to changes in the market, as well as seasonal businesses that have variable costs that greatly differ from one quarter to the next.
HR budget items
There are many areas that the Human Resources function encompasses, so how can you be sure to include everything in an HR budget? Even a small business can underestimate the costs of recruitment, hiring, training, and other measures to build a thriving workforce, while external sources can wreak havoc overnight (case in point, the 2020 global pandemic). With shifting priorities, all organizations need to reevaluate their HR budgeting strategy to ensure effective HR management throughout the year.
Having a clear overview of your HR budget items can assist with planning a reasonable budget for the coming year. Here are the main components of a typical HR budget.
Talent acquisition & recruitment
For most organizations, recruitment is a high priority. Planning for new hires requires having an HR budget that can support everything from job advertising to onboarding. With competition for top talent on the rise, it’s essential to allocate a sizable portion of your budget here. You should budget for:
- Advertising open positions
- Interviewing and screening candidates
- Conducting background checks
- Onboarding new hires
- Agency fees
- Employee relocation or remote office setup costs
- Recruitment marketing tools (e.g., TalentLyft, SmartDreamers, Manatal, Yello).
Learning and development
Set up a reasonable amount for learning and development efforts, which offer a positive return on investment. Consider:
- Workshops, seminars, and networking events
- Ongoing education classes and online tutorials
- Employee certification programs
- Food, travel, and accommodation expenses
- Implementing learning systems
- E-learning vendors.
HR upskilling
HR has to address not only employee skills gaps but also their own. If you want your HR team to have a real impact on the organization, you need to ensure that all members of your department have the future-proof HR competencies – business acumen, digital agility, people advocacy, data literacy, and execution excellence – that will help your business succeed. That’s why you need to include HR upskilling opportunities in your budget planning.
- A team or enterprise license for HR e-learning courses
- HR certifications
- Personal training budgets for HR employees
- Workshops
- College courses.
Compensation and benefits
Comparing last year’s hires and the cost of employee compensation and benefits, increase your HR budget by around 3-5% to ensure you have enough for the following year. Take into account:
- Employee salaries
- Health insurance
- Life insurance
- Retirement plans
- Paid time off
- Overtime pay
- Bonuses
- Other perks.
Diversity, Equity, Inclusion and Belonging
Leading organizations increasingly recognize the value of Diversity, Equity, Inclusion, and Belonging (DEIB) initiatives. Consider allocating a portion of your Human Resources budget to support DEIB education and cultural development efforts, as these can contribute to a more inclusive and engaged workplace.
- Increasing diversity of hiring
- Implementing inclusive hiring practices
- DEI training and culture building
- Leadership DEI programs.
Employee relations and talent management
Compensation and benefits are just the beginning of rewarding employees, and your employees need to feel appreciated. When planning your HR budget, consider other ways to boost incentives and recognition for your best workers.
- Engaging employees
- Creating a positive work environment
- Team building and coaching
- Accurate placement of candidates
- Management relationship building
- Labor relations.
Employee safety and wellbeing
All employers are legally responsible for providing a secure and safety-focused workplace. As part of your HR budget preparation, audit the policies and systems in place to determine the costs associated with improvements.
- Physical safety compliance
- Mental wellbeing
- Employee health
- Workplace security.
HR technology
With new software and technology being created every day, it may be an excellent opportunity to let go of your outdated HR systems and invest in some new ones that reduce manual, repetitive tasks and create more efficient ways of working.
- HR Information System (HRIS): E.g., BambooHR, Workday, Bright HR, Rippling.
- Applicant Tracking System (ATS): E.g., Greenhouse, Pinpoint, Spark Hire, Lever.
- Learning Management System (LMS): E.g., TalentLMS, AbsorbLMS, Docebo, 360Learning.
- Payroll and benefits systems: E.g., Paycom, Pave, PayScale.
- Remote working tools: E.g., Slack, Asana, Google Drive, Zoom.
Administration of HR
Create space in your HR budget to cover the general costs of running an HR department. Whether it’s for a department in a small business, a big team at a large company, or managing a large team of recruiters and HR specialists, every employee must feel supported.
- Unplanned administrative needs
- HR communications
- General HR administration.
Why do you need to plan your HR budget?
Planning your HR budget is just as important as doing it for any other area of operations. In fact, it’s at the heart of why your organization thrives. Here are some of the main benefits of having a clear annual HR budget plan:
- Manage the cost of human capital: A well-planned HR budget will help you avoid over- and under-spending and allow you to reallocate resources when faced with unexpected changes.
- Ensure HR operational efficiency: A clear overview that shows where you can spend money – and how much – enables you to operate effectively and efficiently.
- Understand your recruitment needs: A solid HR budget will offer insight into your staffing needs and prevent you from hiring too many people and being left short-staffed.
- Attract top talent: Allocating sufficient resources to the right recruitment marketing channels and your hiring process helps you to attract better and more qualified candidates to your organization.
- Reduce turnover: A well-crafted HR budget will help you support and develop your employees, which helps you reduce turnover and boost your employer brand and company culture.
- Receive the resources you need: HR budget planning helps you clarify the resources you need, which enables you to ask (and receive) these so that you can accomplish your goals.
- Achieve organizational success: Through HR efficiency, organizations can get the best out of their staff, be productive, and reach their goals. This also prepares you for regulatory changes that impact various areas of HR.
- Gain a seat at the decision-making table: Presenting a well-developed budget plan can elevate HR’s value to the organization and help you be recognized as a business partner.
HR budget planning process
Here are some simple steps to follow to prepare, plan, and implement an effective HR budget in your organization.
1. Define your business goals
All HR planning must align with the organization’s wider goals to ensure that HR activities contribute to its overall success. First, determine the business’s main priorities, then move into lesser critical areas. Setting OKRs—objectives and key results—can help clarify these goals and track progress effectively. This approach ensures that HR initiatives are strategically focused and impactful.
For example, if your company plans to move to a hybrid or completely remote way of working over the next year, your HR budget should allocate resources for remote working tools and technology, training managers on how to manage remote employees effectively, home office setup costs, co-working spaces, a monthly or annual team or company bonding day, etc.
Create and manage an HR budget with confidence
Skills like financial planning and resource allocation are essential for any effective HR professional. These competencies allow you to create budgets that align with business goals and demonstrate the financial impact of HR initiatives.
AIHR’s self-paced HR Generalist Certificate Program equips you with the critical skills to not only manage HR budgets efficiently but also contribute to your organization’s overall success.
2. Review past budgets
Review past HR budgets, spending, and performance so that you can see where the majority of your resources went and if this was an effective investment. Were there any areas where you overspent or underspent? Learn from what didn’t go as planned and make adjustments for the coming year.
3. Analyze and forecast your workforce needs
Plan ahead for your anticipated recruitment needs by determining your headcounts for each department as compared to turnover rates and project performance. For example, if the business plans to expand and open a new office in a new location, it’s likely you’ll need to spend more on hiring more people to help with that expansion. But there’s more than just hiring to consider. Allow for costs for training, compensation, benefits, and rewards too.
A training needs analysis can show you the training that each department requires so that you can build this into your HR budget. Meanwhile, a strong rewards and recognition plan can help to motivate and engage your employees and reduce turnover.
4. Consider market trends and benchmarks
Even if you’re clear on your goals as an organization, it’s important to examine what your competitors are doing and keep an eye on emerging industry trends. Does your HR budget align with the current industry standards? Are you offering competitive compensation and benefits packages? Are your turnover rates below or above average?
Considering these factors will help you create a competitive HR budget, which is essential if you want to attract and retain high performers.
5. Prepare your HR budget based on data
Analyze past HR performance data so that you can make evidence-based decisions and avoid guesswork. Your analysis should include expenses, staffing, employee performance, and compensation. This data allows you to identify key areas for improvement and allocate resources so that they have the greatest positive impact on the organization as a whole.
To support this process, consolidate all performance data—both financial (e.g., payroll, recruitment costs) and non-financial (e.g., turnover rates, training progress)—into a single overview. This unified source of information enables you to create realistic budgets and determine which areas have flexibility for adjustments.
6. Plan for the best and worst-case scenarios
The 2020 pandemic taught all companies the importance of being prepared for unexpected challenges and being agile enough to pivot as needed. So make sure you have a plan to see you through no matter what the job market throws your way.
For example, your annual employee turnover may be 5% on average now, but what if it suddenly increases to 15%? In this case, you may need to increase recruitment spending to replace more people than expected.
7. Consider investments as business builders
Are you planning to launch a new HR tool or a new employee referral program? With technology evolving every day, now could be a good time to upgrade your HR systems and/or implement new technology. This is an investment in your HR department’s success. Just be sure to account for that in your budget, including what kind of ROI you expect.
8. Have realistic expectations
Your HR department budget should be a realistic view of what the coming year will bring. Don’t overspend, but also don’t shortchange any critical areas. Prepare your budget in a clear report, using realistic numbers so that it is more likely to be accepted.
9. Involve key stakeholders & get it approved
Involve key stakeholders – department leads and executives – in planning your HR budget. A variety of perspectives and insights helps to create a wider picture of what the organization needs most from HR. Plus, making these decisions together can help you gain valuable support for your HR budget and help you get it approved.
10. Monitor and track expenses
Once your HR budget is approved, the final step is to monitor and track your spending so you can see if you’re on track or need to take any action. Review your HR budget frequently and make adjustments based on any recent changes in the market or the organization’s goals.
How to optimize your HR budget: 6 tips
Here are some steps to help you optimize your HR budget and cost management so that you get the most value from your investment.
- Identify high-cost areas: Once you know the areas that require the most spending, you can identify opportunities where you can be more efficient. For example, if your analysis shows that recruitment costs are unusually high, you might want to review which job boards bring few qualified candidates and cut those.
- Review benefits packages annually: Take a look at the benefits you offer employees and see if they’re valued and being utilized and whether you can swap out some of your benefits for better alternatives. Remember that employees will value different things based on their current values and circumstances.
- Partner with cost-efficient vendors: With new businesses starting every day, you’ll want to regularly do a sweep of the competition to see if there’s a better health insurance provider, background check service, or training provider you can use.
- Streamline your HR technology stack: Are you using all of the features and functions of the premium technology and software plans you’re on, or can you downgrade? Are there tools that have overlapping features, and there’s one you can do without? Take stock of your current HR tech stack and see if you can be more efficient and make your tools work hard for you.
- Use contingent workforce strategically: Are you asking your pool of freelancers and independent contractors and consultants to perform tasks that your employees can take on? Make sure you’re making the most of the unique skill sets these workers have and use their services strategically.
- Conduct regular budget reviews: Keep checking in with your HR budget to see where you land – if you’re overspending, underspending, or on track – and where you can be more savvy with your investments.
Using an HR budget template helps you plan and track your budget.
HR budget management best practices
Here are some best practices to keep in mind for managing an HR budget.
- Follow an HR strategy: An HR strategy is a plan that aligns workforce investments with the needs of the business so that all HR activities support the broader business goals. If you don’t have one, you can create one in-house or enlist a consultancy to help you.
- Create a culture of financial awareness in HR teams: Train all HR professionals in your team to always be mindful of budgets and put their business cap on when planning and executing on HR initiatives.
- Train HR staff on budgeting tracking: Ensure HR professionals know how to create and monitor budgets using Excel or a specialized software.
- Document the budget rationale for future reference: Create a working document that can easily be accessed by relevant stakeholders. This helps you keep track of how specific budget allocations were determined.
HR budget examples
Real-life HR budget example
In 2020, the city of Springfield, OR proposed their 2021 HR budget with an increase of 6.5%. The HR’s general fund budget remained relatively flat despite an increase in medical benefit utilization, internal facility charges, administrative contract cost increases for the onsite wellness, and major rate increases to property and liability insurances.
The most significant changes to the HR budget included an increase in self-funded medical claims (net paid claims were up by 4.6%, comparing 2019 vs. 2018), increases in property and liability insurance, and workers’ compensation.
Some of the main initiatives for 2021 included conducting a compensation market study for general service positions, redesigning job descriptions, implementing a new vendor for background checks, implementing a Risk Management Information System (RMIS), and completing a Probable Maximum Loss (PML) study.
Illustrative HR budget example
Here’s what an HR budget broken down per budget item could look like:
Personnel costs
1,150,000
74.58%
Salaries & wages
900,000
Benefits
250,000
Recruitment & onboarding
145,000
9.4%
Job advertising
15,000
Agencies
45,000
Background checks
15,000
New hire training and orientation
70,000
Employee training & development
85,000
5.51%
Online training programs
50,000
Learning Management System
20,000
Industry seminars
10,000
Food & travel expenses
5,000
Compliance & legal expenses
72,000
4.67%
Compliance audits
12,000
Workplace health & safety costs
10,000
Legal counsel fees
50,000
Employee engagement
35,000
2.27%
Wellness programs
20,000
Recognition & rewards program
15,000
HR technology
55,000
3.57%
HR software subscriptions
40,000
Maintenance & upgrades
15,000
A final word
Accurately planning your HR budget requires a thorough understanding of all the costs and a variety of real-time data. Dedicate sufficient time to your HR budget planning to ensure your budget items align with the goals of the business and use your resources effectively. Follow the simple steps and best practices outlined above to prepare and plan a solid HR budgeting strategy that supports your entire organization.
FAQ
An HR budget is a plan that includes your projected human capital costs for the whole business for a specific period, typically a year.
To allocate an HR budget, take a look at your expenses from the previous year, where you currently stand, and what your plans for the upcoming year are. It’s also important to understand the wider goals of the business so you can allocate resources that align with and support these objectives.
Your HR costs will typically include recruitment and talent acquisition, compensation and benefits, learning and development programs, diversity equity and inclusion, talent management, employee safety and wellbeing, HR technology, and general admin costs.
The average HR budget per employee varies between industries. However, according to Gartner, most HR functions spend between $1,350 and $3,800 per employee.
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