What Are Fixed Costs?
Fixed costs are the expenses that remain constant regardless of business output. Unlike variable costs, which change based on activity (e.g., recruiting spend, overtime), fixed costs stay stable over time.
Examples of general business fixed costs:
- Rent or lease payments
- Insurance
- Software systems and licenses
- Salaries for permanent employees
In workforce planning, the largest fixed cost is the predictable portion of labor cost — the compensation paid to employees that doesn’t fluctuate with business activity.
Fixed Costs vs. Variable Costs
Understanding the distinction helps HR leaders communicate clearly with Finance:
Fixed Costs
Remain steady regardless of business volume.
In HR, this includes:
- Base salaries
- Annualized wages
- Employer-paid benefits (if consistent)
Variable Costs
Fluctuate based on activity or demand.
In HR, this includes:
- Overtime
- Contract labor
- Hiring costs
- Bonuses (in some pay structures)
Semi-Variable (Mixed) Costs
Part fixed, part variable, e.g., sales roles with base pay + commission.
HR owns a large portion of the company’s total spend, so knowing which labor expenses are fixed is essential for accuracy in forecasting and planning.
Why Fixed Costs Matter for HR
Fixed costs matter because they are:
Predictable
They allow HR and Finance to forecast people-related spending with stability and accuracy.
Vital for workforce planning
Fixed labor cost is a core input for modeling:
- Headcount plans
- Compensation budgets
- Hiring scenarios
- Value creation expectations
Required for executive and board reporting
Especially in PE-backed environments, fixed cost visibility supports:
- EBITDA modeling
- Budget planning
- Cost-reduction strategies
- Workforce investment decisions
Tied to talent strategy
High workforce fixed costs can indicate:
- A senior-heavy workforce
- Over-reliance on full-time roles
- Opportunities for restructuring, automation, or re-skilling
HR-Specific Definition of Fixed Costs
In people analytics, fixed labor cost is defined as:
Sum of current annual pay of most recent employments for active employees at the ending date.
This calculation gives you the total annualized salary investment for your active workforce as of a specific point in time.
This excludes:
- Contractors
- Bonuses
- Overtime
- One-time payments
- Variable compensation components
This makes it a pure, predictable cost metric.
Formula: How to Calculate Workforce Fixed Costs
The formula is straightforward:
Fixed Labor Cost = Σ (Current Annual Pay for All Active Employees)
* (Σ = sum across all employees)
This number answers:
“How much does our active workforce cost annually at this moment?”
Example Calculation
Imagine a company with 300 active employees.
Each has a defined annual salary.
If the total annualized salaries sum to $27,600,000, then:
Fixed Labor Cost = $27,600,000
This means that—regardless of sales, hiring freezes, or operational swings—your baseline annual payroll is $27.6M.
What Data You Need to Calculate Fixed Labor Costs
To calculate fixed costs accurately, HR will need:
Employee List
All active employees at the measurement date.
Current Annual Pay
Annualized salary or hourly wage converted to yearly figures.
FTE Status
Part-time employees should be converted to full-time equivalent amounts.
Employment Status
Exclude:
- Contractors
- Interns (if not standard)
- Variable comp roles (if focusing only on base pay)
Compensation Effective Dates
Use the current pay rate, not historical salary.
Why Businesses Calculate Fixed Costs
Fixed costs support decisions across the entire company, including:
Budgeting
Enables accurate annual budget creation and rolling forecasts.
Scenario Planning
Fixed labor cost is a baseline for:
- Hiring freezes
- RIF planning
- Expansion modeling
- M&A headcount integration
Finance & Investor Reporting
Workforce stability and cost predictability impact valuation and profitability.
Operational Efficiency
Helps identify:
- Over-staffing
- Skill misalignment
- Cost savings opportunities
Why HR Needs to Understand Fixed Costs
Historically, fixed costs were seen as a Finance-only metric.
Today, HR owns the largest share of the company’s expenses — so understanding fixed costs is now essential for:
Strategic workforce planning
Connecting headcount decisions to budget constraints and business needs.
Communicating with executives
Talking in financial terms builds credibility and trust.
Modeling the impact of HR initiatives
Every compensation adjustment changes the fixed cost baseline.
Value creation work in PE-backed environments
Growth initiatives rely on predictable labor cost modeling.
HR Examples of Fixed Costs
Examples of what counts as fixed labor costs include:
- Annual base salary
- Guaranteed allowances
- Standard employer contributions
- PTO payouts (if predictable and accrued)
- Union-regulated pay bands
- Salaries for exempt staff
Not included:
- Hiring costs
- Attrition costs
- Bonuses tied to performance
- Travel and development budgets
- Variable labor (contractors, overtime)
Interpreting Workforce Fixed Costs
Fixed costs increase when:
- Salaries rise
- Teams expand
- Senior roles are added
- Market adjustments are made
Fixed costs decrease when:
- Hiring slows
- Restructuring occurs
- Lower-cost regions are utilized
- Workforce mix shifts to variable labor
The key insight:
Fixed labor cost = baseline cost of your workforce, regardless of short-term business fluctuations.
Common Mistakes When Calculating Fixed Costs
Avoid these common pitfalls:
- Using headcount instead of active employee pay: Headcount alone doesn’t reflect cost.
- Mixing fixed and variable compensation: This inflates or skews the metric.
- Not annualizing hourly wages: Convert all pay types to a consistent yearly figure.
- Ignoring effective dates of raises: Use the current rate, not last quarter’s.
- Including contractors or freelancers: These are variable, not fixed costs.
Best Practices for HR Leaders
To maintain accurate fixed cost calculations:
- Update salary data monthly or quarterly
- Track compensation changes and promotions in real time
- Align definitions with Finance and Accounting
- Use fixed cost as a core input in workforce planning
- Pair it with variable labor cost for a complete picture
Final Thoughts
Fixed costs—especially fixed labor costs—are one of the foundational metrics bridging HR and Finance.
By understanding how to calculate them and what influences them, HR leaders become better strategic partners in:
- Budgeting
- Workforce planning
- Executive reporting
- Value creation
As organizations focus increasingly on efficiency, predictability, and data-driven decision making, fixed labor costs are becoming one of the most important metrics in the HR toolkit.