FTE vs. Headcount: The Key Differences HR Should Know
FTE vs. headcount: What exactly is the difference between these two resource management methods and how can HR use them effectively in planning and reporting? This article provides an indepth dive into the two models, what are the benefits of each, as well as the limitations and considerations for HR professionals.
FTE vs. Headcount
Full-Time Equivalent (FTE)
FTE vs. Headcount
FTE (full-time equivalent) and headcount are both methods used to count members within an organization. The key difference is that FTE refers to the number of full-time hours being worked, while headcount is the number of employees in an organization.
To work out FTE, you must know what’s considered full-time at your company. For example, if full-time is 35 hours per week, and you have two part-time employees working 17.5 hours per week, that would total 1.0 FTE.
Headcount planning is important for Human Resources because it helps ensure they have the right number of people with the right skills to meet the short and long-term needs of the organization. FTE is equally important because it helps HR standardize their headcount, simplify their payroll, and accurately forecast budgets.
FTE and headcount as resource management methods have benefits and drawbacks, which will be unpacked further in the article.
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Full-Time Equivalent (FTE)
Full-time equivalent (FTE) helps organizations combine the number of part-time hours worked to determine how many full-time employees the company has in terms of hours. For example, you might have three part-time employees whose total hours are equivalent to the hours worked by one full-time employee.
Why FTE is important for HR
FTE is an important metric for HR for several reasons. While headcount tells you the number of employees you have, FTE shows how many full-time equivalent employees are employed each year. This allows HR and management to better understand where people are allocated, forecast budgets, and verify whether the organization must provide Affordable Care Act (ACA) compliant benefits or is entitled to certain tax credits.
How FTE is used
HR departments use FTE to standardize their part-time employees’ working hours and salaries.
For example, let’s say a full-time employee works 40 hours per week in your organization. All of these employees would each have an FTE of 1.0. A part-time employee who works 20 hours per week would have an FTE of 0.5. A part-time employee who works 10 hours per week would have an FTE of 0.25.
When to use FTE
- FTE can help with headcount analysis. Headcounts can easily be compared to outputs or profits using full-time equivalent. This clearly indicates how many full-time employees are needed to complete a task, project, or workload and allocate employees to departments accordingly. Based on job descriptions, HR and management can work together to decide which positions should be full-time and which ones should be part-time. Projects can then be allocated based on how much work is required and the expected delivery.
- FTE is useful when comparing the performance of part-time and full-time employees and budgeting for hiring, training, and turnover rates. Opportunities to improve efficiency across the organization can be pinpointed when making seasonal hires or general staffing decisions. Hiring managers will better understand the types of employees they need to hire while remaining within budget.
- FTE also helps HR understand which labor laws are relevant and need to be adhered to. Plus, it makes it easy to compare the productive capacity of organizations and departments, which is not possible with headcount.
How to calculate FTE
Here’s how to calculate the FTE of a whole organization:
FTE = (Total number of hours for all part-time employees + the total number of hours for all full-time employees) / Set period
The period for calculation could be daily, monthly, or annually.
1. List all your employees and the number of hours each of them works per week: – Employee #1 works 40 hours per week
– Employee #2 works 40 hours per week
– Employee #3 works 20 hours per week
2. Decide what is considered full-time in your organization: – In this case, 40 hours is considered full-time, which is an average working week. 3. Calculate the number of hours worked per year: – Employee #1 (40 hours/week): 52 x 40 = 2,080
– Employee # 2 (40 hours/week): 52 x 40 = 2,080
– Employee #3 (20 hours/week): 52 x 20 = 1,040
4. Total the full-time hours worked per year: 2,080 x 2 = 4,160 5. Total the part-time hours worked per year 1,040 6. Calculate the part-time FTE: – To do this, divide the total hours worked by part-time employees by the annual hours of one full-time employee.
– 1,040 / 2,080 = 0.5 FTE
7. Calculate your total FTE – 2 x full-time employees = 2.0 FTE
– 1 x part-time employees = 0.5 FTE
– 2.0 + 0.5 = 2.5 FTE
This formula can be modified to calculate the FTE of a single employee, as shown below.
How to calculate the FTE of a single employee:
FTE = total number of hours worked by a part-time employee / total number of hours worked by a full-time employee
This is typically done based on the number of hours worked a week.
To work out your FTE, you must determine what’s considered full-time in your organization.
FTE of a single employee example:
|– Let’s say a full-time employee works 40 hours per week. |
– Your part-time employee Kai works 32 hours per week.
|32 / 40 = 0.8|
Kai’s FTE is 0.8.
What is headcount?
Headcount (also known as employee count) is a metric that calculates the number of employees in an organization at any given time. This helps HR focus their recruitment efforts and inform workforce planning efforts to ensure they have the right people in the right place to meet organizational goals.
The key difference between headcount vs. FTE is that headcount tells you how many people are currently employed in your organization. Meanwhile, FTE tells you how many full-time hours are being collectively worked.
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For example, headcount reporting might tell you that you have 200 employees in your organization today. However, 35 of those employees are part-time. This means you don’t have 200 full-time employees working a full set of hours.
Let’s say those 35 employees all work 20 hours per week, while the remaining 165 work 40 hours per week (considered full-time at your organization). Those 35 employees only account for 17.5 full-time staff. Your organization’s FTE would be 182.5.
How to calculate headcount
Headcount is simple to calculate whether you want to determine the number of people in a particular department or over a set period (monthly, quarterly, annually).
To calculate headcount, all you have to do is add up all your employees. This includes full-time, part-time, seasonal, and temporary workers. An HRIS or payroll report can quickly give you these metrics.
The limitations of headcount
While headcount planning can help HR work with managers and business leaders to build and scale the organization’s workforce, it does have some limitations.
- Headcount planning may not identify the skills that are the highest priority, which can lead to extra employees being hired that are not the best fit for the company and do not help it meet its goals, which can have a negative effect on the budget.
- It’s difficult to accurately forecast changes in the needs of the business when looking at headcount alone, which can lead to over and understaffing.
- Headcount is often used in different ways across the business. HR tends to use headcount as a strategic tool, while managers pay more attention to what’s happening around them day-to-day.
The key thing to remember with headcount is that it is one metric, and in isolation, does not provide a clear, accurate picture of what’s going on in a business. This is why HR must combine headcount with other metrics, such as FTE, and use headcount analysis to gain more insightful data. A metric shows the difference between two or more numbers, while analysis shows us why something is happening along with the impact.
You may need to combine multiple systems to track more complicated metrics. Select relevant KPIs that are connected to business goals and set a target score for each KPI. Identify key areas where analytics will help you solve problems and meet goals that add value to the organization from a business perspective. Following analysis, the results from your HR data can be implemented to create value for your organization.
The benefits of a headcount analysis
A headcount report is a collection of data that typically contains information on an employee’s age, job title, salary, gender, ethnicity, retirement age, and more. As a best practice, employees should also be tagged as either full-time, part-time, seasonal, or temporary workers. This enables HR to categorize employees, analyze, gain valuable insight for business planning and projection, and boost the organization’s efficiency.
Headcount alone is just a number. But when you combine headcount with metrics like these, you can calculate other metrics, including FTE, employee turnover, and retention rates. These metrics help HR understand the development of their workforce and the steps needed to achieve optimal productivity and performance. Headcount reporting can also help you determine the TCOW (total cost of workforce) and revenue per employee, allowing you to weigh the financial impact of the number of employees on the business.
It’s up to HR to determine which metrics will most help to leverage the headcount metric. Too often, HR will look at headcount metrics or other metrics in isolation rather than determining what these metrics mean from a business perspective. Linking performance with business outcomes in headcount reports will provide real value to business leaders and help you meet organizational goals.
FTE and headcount are two different resource management methods that HR can combine with other key metrics to analyze, report, and plan effectively. Both approaches have benefits and limitations. When analyzed with other metrics tied to KPIs, HR professionals can better understand the entire workforce and collaborate with managers and business leaders to successfully plan for the future.
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