Human capital ROI
The formula for Human Capital ROI is revenue less operating expenses less compensation and benefit costs divided by compensation and benefit costs.
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So what is Human capital ROI?
Human Capital ROI describes the profit return to the organisation per unit of expenditure on employees. In its purest form, it’s the relationship between the workforce cost and company profitability. It combines all of the primary business drivers where opportunities for improvement can be explored and targeted. Positive impact on the ratio is achieved through:
• revenue improvement,
• efficiencies in non-people cost arenas,
• better controlling the number of Full Time Employees (FTEs) employed,
• managing people costs and/or improving the alignment of remuneration structures to desired business performance goals.
In reality, all of these factors move in combination, but it is exactly these interdependencies that are overlooked when using metrics such as revenue per employee. Revenue growth, cost reduction and actions around workforce size and cost alone cannot result in higher Human Capital ROI unless other factors are also moving positively or being controlled.
One KPI to rule them all?
We wouldn’t go so far to say that Human Capital ROI is the only measure to use. As with all things, it needs to be used alongside other data and metrics in a balanced way. It isn't the measure to end all measure, but it surely is important. It has wider application than other metrics and should be a people KPI for any commercial enterprise. It has a role to play in understanding and driving individual company performance and workforce productivity, understanding industry performance, and even at the macro-level it applies across markets in describing differences in productivity between countries and undeveloped, emerging and mature markets.