Problems with “Headcount” at Profitable Companies

In medium-to-large-sized companies, there is a term of art to denote a set of open requisitions for hire or current full-time employees on a team, and that term is “headcount.” A certain team may be created “with 5 headcount” or a director may barter for “more headcount” in their department or a team may currently have “8 headcount allocated.”

Headcount are treated as a durable and fungible good among managers and executives: they can persist, move, be traded, budgeted for, invested in, reduced or disappeared. Setting aside the bizarre collision of the impersonal word with the fact that these headcount eventually describe real, breathing humans, there are some business inefficiencies that also come with its usage.

Problems with headcount

At the simplest level, headcount are people who are paid in dollars (or the business’s local currency), but then mixed in with some strange attributes like which manager the headcount have belonged to, or what level or bonus class each headcount is approved for, or which financial quarter it’s targeted for hire. These attributes can accumulate on a particular headcount over time, and they sometimes restrict what can happen with regard to hiring or changing a team, often for the worse.

Headcount end up feeling fungible to senior leaders

When many senior business leaders consider things like investment cases and quarterly business performance, they sometimes reach for control of future costs to tune the business’s operating income. Often, this control comes in the form of trading headcount or changing attributes of headcount, like approved hire date. But what those leaders are actually trying to accomplish is cost management to a budget: dollars spent over time.

Using headcount as a proxy to control costs often creates political problems between departments and teams—because of their ownership and varied restrictions—and the fungibility of headcount can encourage top-down control over all headcount, rather than delegation of that responsibility to each individual department or team.

Headcount accumulate a collectible-type value to their holders

Much like unique collectible stamps or coins, open [for hire] headcount sometimes accumulate abstract collectible value based on their history and ownership. Managers will get into arguments about how their “Jane backfill for the app team has been delayed 4 times, and down-leveled after it was up-leveled, and John agreed to trade his Joe backfill for the headcount in next year’s budget!” This in an environment where Jane quit 18 months ago, and the operational needs of this manager’s team are different today than they were at that time.

By clinging to the arbitrary attributes of whatever headcount and backfills have accumulated and been traded around and manipulated, managers, directors and support organizations like HR often lose sight of what actually matters to a team at the current moment: is the team in a good operational posture? Does it need additional people hired? How much will that cost?

Managers make lower-quality decisions with headcount vs. dollars

Managers also often form emotional attachments to backfills and open headcount because of the sometimes lengthy travails they endure to keep them, upgrade them, trade them, etc. This means when it comes time to working with their peers and other departments to solve tricky cross-team and cross-organization budget issues, they can lock onto their headcount with an iron grip, rather than looking dispassionately at the problem in terms of dollars spent over time.

Managers will almost always be in tension between the health of their own team and the larger organization around them, but when that tension is complicated by emotionally-laden collectible headcount trinkets, those managers end up making poorer-quality decisions about hiring, budgets and organizational operations than they would when dealing with the black-and-white of dollars and balance sheets.

Not all headcount are created equal

Lastly, especially at higher levels of management, headcount are often created, traded, delayed and destroyed in batches—10 new headcount for this team, 12 headcount moved to that department. But this batch treatment hides complexity about the differences between individual roles, costs, levels and other aspects required to hire and retain people in those roles.

For instance, a specialized manager of data science role may cost significantly more than an individual web developer on a team, but they are often allocated right alongside one another as simply “2 headcount,” hiding their cost differences and ultimately diluting accountability to the bottom line.

Growing a robust and sustainable organization that responds to the dynamic pressures of the market will require making strategic batch-level budget decisions, but hiding dollars by using headcount obscures many of the problems facing the business in that pursuit.

A better way forward

Hopefully an alternate way is obvious: enable teams to plan in dollars and time. If the company has quarterly expectations for operating income or its components (the “top line” and “bottom line” being chief among them), work with directors of departments and managers of teams to give them a budget in real dollars and cents. Then keep them updated as business conditions change and trust them to make the best decisions for their teams, within the scope of their changing budget.

When a team simply must stay under a dollar target for salaries on their team, they can make hiring decisions (and other compensation changes) that will make them most effective given the current landscape of their team and those adjacent. Gone are the days of advocating for Jane’s 18-month-old backfill at a Senior level, and coming are those where the team has comfortable headroom to add $16,000 per month to its bottom line. So they will.

None of this is a substitute for good financial planning, and holding income in reserve to cover unexpected expenses and downturns in the top line: that planning must still happen, and using good sense ratios of full-time employment in the bottom line versus other expenses is still prudent. But now at least everyone is talking in terms of dollars and sense.