Why and How to Measure Human Capital ROI (Part 1)

October 2, 2019 - minute read

HCROI1Understanding your ROI helps, no matter what you’re investing in– and more likely than not, human capital is your number one investment. But do you know how to measure it?

Human Capital ROI or “HCROI” provides an HR metric that can measure the financial value added by your workforce in relation to the money you spend on salaries and benefits. Put another way, it consolidates everything to do with people management and performance tracking into one easy metric.

You might be wondering if this metric is really worth calculating. After all, you already have plenty of other metrics to keep track of. However, the HCROI offers something unique. More specifically, it allows you to compare your business to your competitors’ and directly supports your business planning initiatives.

It goes without saying: the most successful businesses obtain, retain, and manage the best possible people for their workforce. Since this is the case, it makes sense to have a baseline metric that can easily leverage workforce analytics to fine-tune your business strategy.

Benefits of Using Human Capital ROI

Human Capital ROI helps to analyze which factors help or hinder the profitability and productivity of your organization. If there’s a problem, HCROI is bound to not only pick it up but identify which area of your operation is devaluing your overall return on investment.  That can include organizational factors on a systematic or procedural level, as well as personal factors.

Additionally, using HCROI can help:

  • Identify whether or not you’re hiring and retaining the right candidates as part of your operation
  • Determine whether or not your workers have received optimal training and skills development
  • Enable you to place employees in the best possible environments and roles for individual and operational success
  • Identify whether the right leadership support and managerial guidance are available to employees

Now that you understand the benefits of using HCROI, you’re probably curious how best to calculate it for your own business. It’s easier than you think.

How to Calculate Human Capital ROI

Human Capital ROI shows the financial value individually or collectively contributed by your employees. In fact, it’s often termed the ultimate productivity measurement. The formula for calculating HC ROI is:

 

HCROI  =  [(Revenue) - (Human Capital Cost)]

                               (Human Capital Cost)

 

To be clear, Human Capital cost includes things like salaries, software, onboarding, training, etc.

Be sure to include extra compensation and monetary benefits spent on FTEs and temporary, contracted, and part-time employees. The more data you have to add, the more accurate your calculation of HCROI will be.

Here’s an example: Company X’s revenue after deducting the appropriate costs (such as capital costs, depreciation, operating expenses, etc.) are $250,000. Their Human Capital Expenses (comprised of employee benefits and compensation) is $95,000. If we apply the above formula:

 

HCROI = ($250,000 – $95,000) = 1.63                      HCROI = 163%

                            $95,000

 

This means that for every single dollar spent you receive $1.63. This is your Human Capital Return on Investment.

In part two of this series, we will discuss how best to obtain this data and how to act on it, as well as tips for executing optimizing plans based on this metric insight. If you’re ready to take your workforce to the next level, HCROI is the key to laying the groundwork.

Go Further with EPAY’s Workforce Analytics

EPAY’s Workforce and HR Analytics are equipped to give you complete visibility into your labor force. Our latest workforce platform offers detailed reporting and analysis capabilities around your workforce, recruiting, turnover, time labor management, management, and workforce productivity data. Plus, with our advanced dashboard and customization features, you’ll be able to pull reports simply by asking your browser a question.

Using HR Analytics, for example, you could quickly identify things like ‘terminations and hires by hiring source’, ‘voluntary reasons for departure’, ‘turnover rate’, or ‘total new hire salaries by supervisor’ to better identify weaknesses in your business operation.  

Check out our on-demand webinar, “Workforce Reporting & Dashboards” to see how much of an impact investing in analytics software could make on your bottom line. Ready to see these powerful analytics in action? Contact us for a live demo or check out our 2-minute tour today. 

Filed Under: Human Capital Management Performance Management Analytics