HR metrics that show good ROI
In business, size may not be important (multinationals fail and boutique companies flourish, as well as the other way round) but measurement certainly is. If you want to know what progress you’re making, what your priorities are, and more specifically, whether that HRMS investment is worth it, then you’re going to need to track some metrics.
The question is, which ones? After all, the activity of gathering and analyzing metric data is a time-consuming investment in its own right. So which metrics give you results that you can actually act upon? Here is a selection of metrics related to different aspects of the HR function that should be worthwhile for any business to monitor ROI, no matter what size.
Absenteeism can be a problem for any business. You might recruit the best people in the world but if they’re not at work, so what? Apart from planned time off, an employee might be absent due to sickness, a family emergency, or for less ‘legitimate’ reasons, such as borderline illness, a ‘sickies’ that coincides with a major sporting event, even an interview for another job. Before you can devise an appropriate strategy, you need to know who is not ‘in the office’ and why.
Luckily, with HRMS time and attendance functionality, this data should be easily available. Furthermore, with no shortage of research calculating the cost of employee absence, benchmarking your current performance, and then tracking measurable improvements is relatively straightforward.
For example, the most recent figures from Forbes state that in the U.S., poor worker health costs employers $575 billion annually. (Incidentally, with an improvement strategy in mind, a study by Gallup showed that high levels of employee engagement show up to a 37% drop in absenteeism).
Worse than a valuable employee being absent is when they leave altogether. Again, given the cost of recruitment, it’s worth measuring the results of that investment and your rate of turnover is a key indicator. The calculation is simple, expressing the number of staff who left in a given period as a percentage of the total number employed in the same period.
As to what constitutes an acceptable turnover rate, that depends on your industry. For example, in the finance or government sectors, 5% would be seen as high whereas, in retail, that same 5% would be a cause for celebration (dailypay.com offers some research-backed figures to serve as a starting point). When you consider that recruiting a new employee can cost you thousands of dollars, any reduction in turnover carries an immediate ROI.
Hiring new employees can be a lengthy and costly exercise with no guarantee of success (after all, however rigorous your assessment process, it’s only after a probationary period – or maybe the first 100 days – that you know whether your judgment was accurate or not). Measuring performance in relation to recruitment makes good sense and the following are the standard metrics:
- Time to hire – the time from initiating the hiring process via your HRMS to the successful candidate accepting your offer of employment. This can indicate whether you have any bottlenecks in your recruitment process.
- Source of hire – having hired good people, it’s only sensible to see if there are any patterns to the sources of successful new hires; i.e. where are you finding your best recruits – job boards, employee referrals, recruitment agencies, careers fairs?
- Offer acceptance rate – not everyone you offer a position to will accept but if the level of refusals becomes notable, you need to know why. Is it something about your brand or reputation as an employer? Perhaps some element of your recruitment process is off-putting? Maybe your compensation or benefits package? These can be hard messages to take, but they are essential to listen to.
While you don’t need every employee to be an evangelist for the organization (that would be a rather unrealistic goal) the business will not perform at its best if the workforce is broadly unsatisfied and disengaged. Hence exercises such as staff surveys and questionnaires.
While turnover and absenteeism can give you some broad insights here, more specific issues to explore include cultural fit (the match between personal and organizational values), personal growth (are people acquiring the new skills and experience they want and need, and are they seeing their career develop positively), and employee recommendations (would people recommend your organization as a good place to work).
As HR metrics go, employee satisfaction measures are often qualitative rather than quantitative.
This is the big one: measuring the return on your entire workforce. Just what is the value of your employees compared to what they cost you?
For a basic approach to measuring your human capital, simply calculate the cost of employing your staff, including salaries and remuneration, benefits packages, retirement contributions, etc. for a given period, then subtract that figure from your revenue in the same period; then divide by the staffing costs figure and you have a percentage that shows your return for every dollar you’ve invested in the workforce.
For more granular insights, the following specific metrics dig a little deeper:
- The ratio of compensation and benefits costs to revenue/profit – this is an indicator of compensation effectiveness, measuring it year on year allows you to get a long-term picture.
- The turnover rate of new hires within the first year – as mentioned above, recruitment can be a costly and time-consuming process. By cross-referencing this turnover with personal data, role and function, and immediate colleagues you can identify factors that may be causing you to lose good new recruits.
- Compare the percentage of new hires that cited excellent training opportunities as among the top three reasons they accepted the job and compare it with the percentage who rate the actual training opportunities as excellent after 12 months in the job.
- An entry point into exploring the effectiveness of your performance management procedures (specifically, how you manage poor performance) would be to look at the turnover percentage of low-performing employees within one year of receiving a low-performance rating.
- Likewise, an initial step in analyzing the correlation between reward and performance would be to compare the percentage of employees with top-level performance ratings against those receiving the top salary levels.
If you’re just getting started on measuring human capital, even the baseline figure above is a reflection of business viability. After all, if your staffing costs outweigh the benefit received, your business may well be on borrowed time.
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