Human capital is the most essential asset to any organization; nothing gets done without it. Although you can’t touch or assign it a value on your balance sheet, human capital is vital to essential business functions like innovation, customer satisfaction, and profitability.
It’s not uncommon for companies to invest resources in people development without fully understanding the human capital ROI. Quantifying the value of human capital in your organization is important, especially since labor costs are generally a company’s most significant operating expense.
What is Human Capital?
Human capital refers to the collective intangible assets that employees contribute to the economic value of an organization. These assets include:
- Education
- Skills and expertise
- Training
- Loyalty
- Health
- Work ethic
- Talent
- Knowledge
- Personality
These assets are unique to each individual and hard to replicate, making them highly valuable to the organization. Employers that value human capital allocate finances to wellness programs, training, and mentorship to maximize employee potential. The payoff is low turnover, high efficiency, and customer satisfaction.
What is Human Capital ROI?
Human capital ROI is a metric that reflects the individual and collective financial value employees add to an organization as a result of the resources spent on them. In essence, it demonstrates a true measure of the productivity of your workforce which helps you assess the effectiveness of your investments.
Some of the resources companies invest in their employees include benefits packages, recruiting, compensation, and training. In return, they get productive, engaged employees whose work brings more value to the company.
Why Measuring Human Capital ROI is Important
Measuring human capital ROI is important because it will allow you to secure stakeholder buy in, effectively guide strategic decision making and identify areas for improvement and cost-savings.
To evaluate human capital performance. ROI data shows you the effectiveness of your human capital investments, so you can decide which ones to continue or scrap. For example, a sales training program that produces a 20% increase in revenue is effective and should continue for business growth.
To secure stakeholder buy-in. ROI data allows you to show stakeholders the direct impact of the human capital investment on an organization’s finances. Demonstrating tangible results of your programs, like cost savings and revenue growth, boosts investor confidence and secures stakeholder buy-in going forward.
To guide strategic human capital decision-making. Knowing human capital ROI helps you make crucial decisions, like hiring or training. For example, if an employee training program increases productivity by 30% and decreases turnover by 20%, you can invest more resources in training programs to achieve even better results.
To identify areas for improvement. As the famous quote goes, “You can’t improve what you don’t measure.” Measuring ROI gives you the information you need to improve and adjust your human capital processes and activities. For example, your wellness initiative might have a low engagement rate because employees don’t have the time to attend an in-person gym class. In this instance, you can improve your wellness program with flexible home workout options.
To find human capital cost-saving opportunities. Measuring human capital ROI helps you find ways to save money. For instance, your company may find that hiring a full-time employee is more expensive than outsourcing a specific task, allowing you to justify an outsourcing strategy that will cut costs while maintaining quality.
How to Measure Human Capital ROI
There is no standard method for measuring human capital ROI. Organizations may use different metrics and approaches depending on their goals and culture. Either way, this measurement can help you quantify the impact of human capital on your company’s success.
We’ll begin with the steps you should take to start your measurement and then give you a formula for how to calculate human capital ROI for your organization.
Define objectives
Define specific goals for your human capital initiatives. For example, “hire two senior sales executives” or “start a leadership development training program in the finance department.” These goals must be tied to metrics that are important to the company, like increased sales revenue and improved efficiency.
Collect data
You’ll need to collect benchmark data before, during, and after executing a human capital initiative to determine its efficiency. Here are some data points to consider:
- Offer acceptance rate: the percentage of candidates who accept your offers (divide the number of offers accepted by the total number of offers made).
- New hire turnover rate: the percentage of new employees who leave within their first 90 days (divide the total number of new employees who leave within 90 days by the number of total hires made in that same period).
- Employee turnover: the number of employees who leave an organization over a given time period.
- Retention rate: the percentage of employees that stay at your company over a specific period.
- Cost per hire: the total cost of hiring a new employee (posting the job, recruiting, interview process, and onboarding).
- Time to productivity: the amount of time it takes for new employees to reach full productivity.
- Revenue per employee: the approximate amount of money each employee makes for the business (divide the company’s total revenue by the total number of current employees).
- Absenteeism rate: the rate of unplanned absence due to sickness or other causes (divide the total number of absent days (or hours) by the number of available workdays (or hours) in a given period).
This process may involve assessments, surveys, feedback, and data reports.
Analyze the data
You should analyze your data in two steps:
- First, isolate the effects of the human capital initiative: Several factors can influence performance, and you want to measure the impact of human capital specifically. You can do this by collecting benchmark data on a cohort or sample and controlling as many variables as possible that can impact output.
- Then, translate human capital data to financial results: This means accounting for the cost of every human capital initiative and the resulting output.
Finally, share your findings with other stakeholders, analyze the data to determine the consequences, and take the appropriate next steps.
Human Capital ROI Formula
To calculate the impact of human capital initiatives on your company, you’ll use an ROI formula.
HCROI = (Revenue – Human Capital Cost) / (Human Capital Cost)
For example, let’s say your company’s revenue is $300,000, and your human capital expenses are $100,000.
Your human capital ROI would be: ($300,000 – $100,000) / $100,000 = $2. That means, for every single dollar spent, you received $2 back.
Remember to include benefits for temporary and part-time employees. Also, many variables, including economic downturns, will affect your ROI.
Make Strategic Decisions with Human Capital ROI
Calculating your ROI will help you determine human capital effectiveness and allow you to leverage data to make strategic decisions to improve your organization. Your ROI data can give you direction on the right strategies to implement so that you can continue adding value to your business, financially and otherwise
