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.
Human capital refers to the collective intangible assets that employees contribute to the economic value of an organization. These assets include:
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.
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.
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.
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 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.
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:
This process may involve assessments, surveys, feedback, and data reports.
You should analyze your data in two steps:
Finally, share your findings with other stakeholders, analyze the data to determine the consequences, and take the appropriate next steps.
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.
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