Human Capital ROI: Making the Most of Your Workforce

Today, a staggering 72% of companies are looking to invest in HR technology that enhances engagement and the employee experience. What's driving this demand?

Is it the shift in generational workforce dynamics demanding new engagement strategies? Or, is it a more humane approach toward employee welfare? While both play a role, there’s likely a more compelling reason — that investments in the needs of employees are proving to pay dividends.

While labor costs are some of the most significant expenses for any organization, companies often delay or downplay investing in their workforce. This results in a constant cycle of spending with minimal returns.

Part of the reason is a lack of insight. Quantifying the direct impact of HR initiatives against a company's profitability can be a challenge. Without this clarity, workforce investments create tensions between HR and financial departments and strain company-wide collaboration.

Human Capital ROI (HCROI) is a formula developed specifically to solve this problem. It provides a consistent method for demonstrating how strategic investments in your workforce pay off. As a metric, it helps you measure the effectiveness of your programs and take better action toward more profitable HR investments.

However, the HCROI formula isn’t always straightforward. You’ll need to account for several intricacies to gain accurate measurements. Let’s break down the HCROI formula to see how thoughtful investment in your employees can yield a substantial return on investment.

What Is Human Capital?

At first glance, the term “human capital” might seem cold or mechanical — after all, HR is about people, not just spreadsheets. However, it’s important to recognize what it really means.

While employees are indeed the lifeblood of a company, they also represent its most significant financial investment. This doesn't detract from their humanity; rather, it emphasizes the importance of optimizing this investment for mutual benefit. When the costs associated with labor spiral out of control, they can lead to downsizing and layoffs — outcomes no company (or employee) wants to face.

As a concept, human capital demands a nuanced approach. It's not about reducing people to mere numbers or outputs but recognizing the vast potential that lies within a well-supported, engaged, and strategically deployed workforce.

This is where HR teams come in. HR professionals are tasked with the complex, nuanced decision-making that no algorithm can replicate. These professionals strike a balance between meeting organizational objectives and nurturing the growth and satisfaction of their workforce. The HCROI formula gives teams a clearer picture of how HR impacts the company at large, helping teams utilize their skills at scale, and ensuring their decisions are both thoughtful and effective.

What is a Human Capital Management Platform? 

Bringing all the pieces of workforce management together is not easy. It requires a platform to centralize and manage it all.  A Human Capital Management (HCM) platform is a comprehensive suite of software tools designed to manage and optimize an organization's workforce and HR processes. From recruiting, onboarding, payroll, performance management, to advanced analytics, it streamlines operations, enhances employee engagement, and drives strategic decision-making.

Choosing the right HCM platform is crucial for success as it directly impacts productivity, compliance, and overall employee satisfaction. It ensures businesses stay agile, competitive, and can adapt to changing workforce dynamics, making it an indispensable asset for any forward-thinking organization aiming for growth and efficiency.

What Is Human Capital ROI (HCROI)?

Human Capital ROI (HCROI) is a pivotal metric for businesses that quantifies the value derived from their most significant investment: their workforce.

At its core, HCROI employs the traditional ROI formula — a straightforward equation that compares the return of an investment to its cost. Broadly, one might calculate it like this:

HCROI = Net Revenue  ÷ Total Costs

In this case, total costs might include salaries, benefits, and potential capital costs and depreciation. However, applying this version of the formula to your workforce has limited reach. It does not consider the complexities and nuances inherent in human resources. It also doesn’t pinpoint the source of inefficiencies or successes within the workforce.

What’s more, net revenue may be heavily influenced by external factors such as market conditions and industry shifts, making it a less reliable indicator of HR effectiveness or workforce profitability.

A More Specific HCROI Formula

To truly leverage HCROI, organizations must look deeper, focusing on specific HR initiatives. With this in mind, here’s a better formula for HCROI:

HCROI = (Savings from Initiative − Cost of Initiative) ÷ Cost of Initiative

This formula aims to measure the effectiveness of specific actions taken by the HR department to influence workforce profitability. To calculate this, you’ll need a method for accurately measuring both tangible and intangible metrics related to human capital.

Tracking Quantitative and Qualitative Metrics

The challenge lies in measuring the many factors that influence your workforce, including productivity, employee engagement, and other KPIs. In that, you’ll need to account for a blend of quantitative and qualitative metrics.

Quantitative metrics may include tracked time, deal closures, emails sent, etc. Qualitative assessments can be gleaned from surveys and feedback, capturing employee engagement, satisfaction levels, and other indicators. Organizational-wide metrics such as turnover rate and company culture assessments can also offer valuable insights into the overall health of the workforce. The more data collected, the more precise the HCROI calculation.

How To Calculate HCROI (With Examples)

To calculate Human Capital ROI (HCROI) correctly, we first need to understand the specific variables at play:

• Cost of Initiative: The direct expenses associated with implementing a specific HR initiative. It includes both the upfront costs and any ongoing expenses during the measurement period.
• Savings From Initiative: Alternatively referred to as the profit from the initiative, this variable quantifies the financial gains or revenue boosts resulting from the initiative. With this, it’s essential to consider both direct savings and indirect benefits that contribute to increased revenue.

How To Read HCROI Results

Like the traditional ROI formula, HCROI is expressed as a ratio indicating the financial return on every dollar invested in the workforce.

For instance, a 2:1 HCROI indicates that for every $1 invested, the company should gain $2 in return. Expanded, that’s $2,000 for every  $1,000 invested. Similarly, a 3.7:1 HCROI suggests a return of $3,700 for every $1,000 invested.

However, companies must recognize that the value driven by human capital investments may not always directly translate to immediate financial gains. Certain initiatives may significantly boost employee engagement or skill levels without a direct, quantifiable impact on profits. Yet, these improvements contribute to the organization's success and competitive advantage over time. Again, the more data, the more demonstrable the results. The real task is to measure the right investments along with one another to get as close as possible to an initiative’s true impact on profits.

Example A: Improved Skills and Productivity

Consider an organization that introduces additional training sessions into its onboarding workflow. The aim of this initiative is to enhance employee performance and improve productivity for each employee once they are fully ramped up.

Cost of Initiative: Assume the cost of developing and implementing the new training sessions is $5,000 total.

Savings From Initiative: Through improved performance and efficiency, let’s say the initiative leads to $20,000 in savings as a direct result of more efficient labor. An example might be that you have 100 employees, and the training you implement saves $3.85 per week per employee over the course of one year. If each employee makes $20 per hour, that’s saving about 12 minutes per day per employee.

Calculation

HCROI = (20,000 in savings − 5,000 in cost of initiative) / 5,000

HCROI = 3x

This yields an HCROI of 3:1, indicating a 300% return on investment for this training initiative. While this isn’t all direct profit, it is real money saved in the form of wages and productivity, which can amount to more work produced. With this metric, you can learn how that saved labor cost directly impacts revenue.

Example B: Rewards Program To Boost Engagement

Now, let’s say an organization implements a new rewards and recognition program for employees to boost engagement. While the HR team can measure engagement qualitatively on a scale or spectrum, it can also be broken down into specific metrics which indicate the level of engagement. This makes it a bit more complex. Here’s how you might calculate the HCROI:

Cost of Initiative: This includes all expenses related to implementing and maintaining the rewards and recognition program. Let's assume the total cost is $20,000 per year ($200 per employee per year for 100 employees). This encompasses software subscriptions, administrative costs, and the rewards themselves (plus any other related expenses).

Savings From Initiative: The financial benefits from the initiative can come in various forms, such as increased productivity, reduced turnover rates, and decreased absenteeism. To quantify these savings, let’s consider:

• Increased Productivity: Let’s say, due to higher engagement, the overall productivity of the workforce has increased, leading to additional revenue of $10,000.
• Reduced Turnover: Engaged employees are less likely to leave, saving the company on recruitment and training costs for new hires. If the average cost of replacing an employee is $20,000 (a low estimate) and the program has led to 10 fewer exits, that’s a saving of $200,000.
• Decreased Absenteeism: With more engaged employees, absenteeism rates may also drop, saving on lost productivity costs. Let's assume this results in a $10,000 savings.

Total savings from the initiative are thus $10,000 (productivity) + $200,000 (reduced turnover) + $10,000 (decreased absenteeism) = $220,000 in total savings from this initiative.

Calculation

HCROI = (220,000 − 20,000)/20,000

HCROI = 10x

The HCROI here is 10:1, or a 1000% return on investment. There are obviously many variables here, and costs may not be entirely consistent, but the result of this calculation is clear: rewards and recognition programs like this are likely to produce an incredible ROI.

Remember that the result is a ratio, meaning you don’t need to invest the full $20,000. It works on a scale — for every $1 you invest in this initiative, you stand to get $10 in return.

Benefits of Using Human Capital ROI

The calculation and analysis of Human Capital ROI (HCROI) enable organizations to analyze the efficacy of their HR practices and deploy their resources more intelligently for better organizational impact. Here are the key benefits of leveraging HCROI in your business strategy:

• Tangible Results From HR Efforts - HCROI provides concrete data on the effectiveness of your HR initiatives. This allows you to see the direct impact of your strategies on the organization's bottom line. With this data, your HR department can more effectively communicate the value of your initiatives, securing the necessary buy-in and support from key decision-makers.
• Isolate Areas for Improvement - HCROI helps identify underperforming areas within your HR strategies, guiding you towards necessary adjustments that enhance efficiency and productivity. This allows you to understand how specific HR initiatives evolve to improve your approach over time.
• Compound Improvement Over Time - By analyzing past HCROI, you can forecast the potential financial implications of future workforce investments. This aids in more strategic planning and budget allocation.
• Improve Engagement Naturally - Successful HR strategies reflected in positive HCROI scores contribute to a culture of achievement and satisfaction, fostering higher engagement levels across the organization.

What To Do With HCROI Data?

Once you've calculated the HCROI for a given initiative, the next step is leveraging this data to make informed decisions and strategic improvements across your organization. HCROI data is more than a set of numbers to admire or lament. It's a compass to help you learn what strategies work, so your HR team can continue providing value to the entire company.

Predict the Effectiveness of New Initiatives

You can use the insights from HCROI calculations to identify and reinforce the efficiency of your HR processes. This might involve streamlining recruitment strategies, optimizing onboarding procedures, or enhancing performance. All can increase overall productivity and engagement while reducing costs.

Cut Initiatives That Don’t Work

You can also use these insights to eliminate ineffective practices. HCROI data allows you to pinpoint areas where investments are not yielding adequate returns. If you discover that a particular engagement initiative is only yielding a 50% HCROI (0.5:1), that’s good cause to discontinue the initiative in favor of a more promising one.

Invest in More Promising Initiatives

HCROI data helps identify high-potential areas for investment, ensuring that every dollar spent contributes more to organizational success. Here are some areas you might consider investing in:

• Employee Engagement: Engaged employees are more productive, contribute to a positive workplace culture, and are less likely to leave. Investments in initiatives that boost engagement often cause significant returns, as evidenced by HCROI data and the fact that many companies are already placing big investments here.
• Training: Targeted training programs can enhance skills, improve job performance, and spur innovations that drive revenue growth. HCROI calculations can help justify the costs associated with these programs by demonstrating their long-term benefits.
• DEIB Initiatives: Diversity, Equity, Inclusion, and Belonging (DEIB) are critical areas for fostering a supportive and innovative workplace. Investments in DEIB can enhance company reputation, attract top talent, and improve employee satisfaction — all contributing to a higher HCROI.
• Rewards and Recognition: Recognizing and rewarding employees for their contributions can significantly boost morale and productivity. HCROI data can help quantify the impact of these programs and support further investment in them.
• Internal Mobility: Encouraging internal career growth and mobility not only helps retain top talent but also saves costs associated with external hiring and onboarding. Analyzing HCROI data can provide insights into the effectiveness of internal mobility initiatives.

Final Thoughts

Human capital ROI is a valuable formula that can help you demonstrate the true impact of HR investments to your organization’s financial teams, executives, and other key stakeholders. By measuring the return on these investments, you can make intelligent, data-driven decisions that impact your business.

To do so, you not only need a solution that helps you track the right metrics and calculate this complex ROI formula. You also need technology that enables you to implement new initiatives at scale — all while remaining flexible enough to help you adapt where necessary.

You can improve all areas of your business with Criterion, a Human Capital Management platform made for HR professionals. Criterion HCM provides enterprise-level functionality in a user-friendly platform, designed to help organizations get the most from their workforce. We offer solutions for payroll, HR management, and talent engagement — all connected on a single, unified database.

You can even integrate Criterion with any third-party solution. Instead of hunting for something that works with your HCM, you can build your ideal tech stack around your most important asset: people.

Book a Criterion demo today to learn more.