When preparing annual budgets and forecasts, how to scientifically plan headcount and compensation expenses is a challenge faced by many companies. Our company currently uses a relatively complex process: for each department, for each month of the forecast period, we separately forecast "Authorized headcount" and "attrition/vacancy", and calculate the "net headcount" accordingly. Currently, the company has 65 departments, with a total net headcount of about 980 people and annual revenue of approximately $150 million. However, this process is cumbersome, inefficient, and prone to deviations in practice.

In budget meetings, a common phenomenon is that department heads tend to adopt very conservative assumptions about vacancy rates to ensure that net headcount and compensation budgets are not overly aggressive. While this conservative attitude is understandable, it often leads to budget results that deviate from reality and triggers disputes among departments.

To optimize this process, we are considering two possible adjustment options. The first option is: let each department only be responsible for budgeting "Authorized headcount" and its corresponding total compensation; while at the company level, a unified assumption of vacancy/attrition rate and corresponding compensation savings rate is applied. This way, the company's overall aggregated net headcount and total compensation will be closer to actual forecasts. The second option is: based on the first option, the company allocates the uniformly assumed vacancy rate to each department monthly according to actual occurrences, meaning only departments with actual vacancies bear the corresponding compensation savings.

These two options each have their pros and cons. The first option simplifies budget work at the department level, but may not reflect the actual vacancy differences among departments; the second option is more detailed, but requires monthly tracking and allocation at the company level, increasing management complexity. Additionally, we would like to learn whether other companies have more mature or innovative practices, such as using rolling forecasts, driver-based modeling, or regression analysis of historical data.

We look forward to hearing more insights on how to balance budget accuracy and operational efficiency, as well as how to avoid budget distortion caused by excessive conservatism. If your company has similar experiences or different approaches, you are welcome to share and discuss.