Your organization may still view the human resources department as a mere cost center, but this could not be further from the truth. HR plays a pivotal role in driving business profitability. Through activities like career development, training, and compensation, HR boosts employee engagement and satisfaction. When employees are happy, their productivity and teamwork improve, leading to satisfied customers.
Quantifying the value of HR initiatives and programs is challenging; however, it’s essential to decision-making and identifying areas for improvement. Here’s everything you need to know about HR ROI, how to calculate it, and how to optimize it.
What is ROI in Human Resources?
Return on investment in human resources(HR ROI) is a quantifiable measure of the profitability of HR-related programs and initiatives. These initiatives include recruitment, benefits compensation, and training. It’s important to note that HR ROI differs from human capital ROI. While HR ROI focuses on the financial value of HR activities, human capital ROI assesses the value of employees’ contributions through their abilities, skills, and knowledge.
Why is HR ROI Important?
HR ROI not only answers questions from internal stakeholders but also helps you accurately track goal achievement via HR reporting and make changes where necessary. Here’s why it’s important to measure HR’s quantitative impact on the organization.
Informs HR Decision Making
You’ll determine the effectiveness of your HR activities and decide whether to scale them down or scrap them altogether to manage costs. For example, data on the usage of benefits like employee wellness programs will indicate what percentage of employees use them and how they improve their lives. If most employees aren’t using a specific wellness offering, it’s probably a good idea to discontinue it and incorporate initiatives they find more valuable, which will, in turn, improve their productivity and the company’s profitability.
Identifies HR Issues and Areas of Opportunity
Data collection and analysis in HR will help you determine where there are issues so you can fix them. For example, employee feedback from exit interviews and performance evaluations may indicate the reason why your business has high turnover. Employees may need training or tailor-made packages and programs to keep them engaged and satisfied at work. You’ll also learn what your employees need and want in terms of benefits and programs.
Helps Optimize HR Resources
Analyzing your HR program will help you determine which initiatives yield a positive ROI, a breakeven ROI, or a negative ROI, so you can allocate resources more efficiently. Initiatives with a positive ROI provide a higher financial value than the cost, meaning they’re successful and require priority investment. Initiatives with a breakeven ROI don’t provide a high financial return, but they may provide non-monetary benefits to the organization, like boosting motivation, engagement, and creativity. You may have to adjust or reduce initiatives with a negative ROI to avoid wasting resources.
Demonstrates HR Value to the Organization
By proving ROI within your organization, you can change the perception of other company stakeholders and show that HR isn’t a mere cost center; it’s valuable and profitable. Showcasing how benefits improve employee outcomes is invaluable and will help company executives begin to see how you’re working to achieve company goals.
How to Measure HR ROI
There are a few steps to measuring HR’s impact on your company’s success.
Set specific goals
Establish measurable goals for HR initiatives. For example, when starting a wellness initiative, define your goals in terms of metrics that matter to the company, like improved performance, productivity, or retention.
Collect relevant data
You’ll need to gather benchmark data before rolling out a new initiative so you can measure its impact. Here are some data points you may consider:
- Cost per hire: the total cost of hiring a new employee (includes the recruitment process, equipment, travel costs, administrative costs, and benefits).
- Turnover rate: the percentage of employees who leave a company within a specific time period.
- HR expense factor: the percentage of an organization’s total operating expenses spent on HR initiatives (divide the total HR expenses by the total operating expenses).
- Revenue per employee: the approximate amount of money each employee makes for the business (divide the company's total revenue by the number of employees it currently employs).
- Employee engagement: a qualitative measurement of an employee’s enthusiasm and dedication to their job.
- Employee feedback: the comments or recommendations employees provide to their managers or coworkers about their performance, conduct, or work.
Determine costs
Determine your program’s overall cost broken down into direct and indirect costs. For a new hire training program, direct costs may include equipment, the trainer’s time, and training materials, while indirect costs include transportation, food, and lost productivity due to time spent training.
HR ROI Formula
To calculate the impact of HR initiatives on your company, you’ll use an ROI formula.
ROI = (Investment Gains − Investment Costs) / Investment Costs.
Multiply the result by 100 to get the percentage ROI.
For example, if a project costs $50,000 and produces $100,000 in revenue, the ROI would be 100%.
Of course, you will not be able to measure the impact of every initiative in this way. In some instances, consider conducting an employee satisfaction survey to gather qualitative feedback on your programs. For corporate wellness programs, consider the total enrolled employees, benefit adoption rate (signed up users), and engagement rate (active users). When measuring ROI, remember that some initiatives take longer than others to show effectiveness. Also, consider factors out of your control that can affect your results, like a recession.
How to Optimize HR ROI
Whether your goal is to boost employee engagement or improve your company’s financial position, here’s how to optimize ROI within your organization.
Be transparent. Openly communicating the costs involved in HR activities helps employees act more carefully and considerately. For example, they may not know the costs of interviewing 10 more candidates or holding a training exercise.
Implement relevant technology. Technology speeds up mundane tasks and helps you work efficiently. Leverage technology that aligns with your business to maximize productivity. Monitor and listen to feedback on whether the technology is helping employees perform effectively and adjust accordingly.
Pay attention to employees’ changing needs. Employees' needs change constantly. Be proactive about gathering feedback and adjust strategies to align with their changing needs in a timely manner. This helps avoid issues like low morale and high turnover.
Choose benefits with high engagement rates. Selecting benefits that your employees want to use will boost your ROI and minimize wasted resources. Consider flexible options that allow them to tailor their choices.
Use HR ROI to Demonstrate Value
HR ROI data will help you share your tangible impact on the organization with other key stakeholders. It will also help to improve financial decisions and create a happy and productive workplace. However, it’s more than just numbers; it’s about showing your contribution to company growth. With clear goals and relevant data, you can demonstrate that HR is a strategic partner aligned with the overall company objectives.
