www.mranet.

org

HR Metrics:
ROI for HR Initiatives

MRA-The Management Association

By Lynell Meeth, MSHR, SPHR
WI SHRM Conference 2014

Conducted by:
Lynell Meeth, HR Director
262.696.3446  lynell.meeth@mranet.org
Fun With Numbers…
Objectives

• Identify best practices in HR ROI

measurement
• Determine the cost and benefits of
HR initiatives in business terms
• Use a model to demonstrate HR
solutions to business problems
The Saying Goes….

What Matters
Gets Measured

What Gets Measured

Gets Attention
The Role Of HR

• Understand key business goals

• Identify how HR impacts those goals
• Align HR business plan with strategic
plan
• Measure results and communicate
the value/ROI
What’s the Bottom Line?

Solve business problems with HR

solutions!
Building the Business Case
Business Problem

Potential HR Solution/s

HR Metrics

Business Case
HR Value Proposition
How can HR help? Add value?
Contribute to overall success?
What Does It Come Down To?
How Would It Add Value to Do It . . .
Better—Faster—Cheaper

Outcome Impact/Value
Crawl Before You Jump

• Build upon every experience

• Little by little – analytics mindset
• Begin each project knowing what
business issue or challenge needs to
be addressed
Case Study Exercise
Case Study – Widgets Inc.
• Growing concern over 40% product return
rate ($500/day in shipping costs alone)
• Suggestion of 100% inspection before
shipment (would require more QA techs)
• Production is short-staffed with high
turnover
• CEO wants a solution now!
Case Study – Widgets Inc.

• What will you do first?

• What are you curious about?
• What questions do you need to
ask and why?
Business Model
Identify HR Solutions to
Business Problems
1) What is the business problem?
2) What does it cost?
3) What is a human resource
based solution?
Identify HR Solutions to
Business Problems
4) What is the cost of the solution?
5) What savings does the solution
generate?
6) What is the cost/benefit ratio or
return on investment?
ROI

• Compares value to costs

• Demonstrates efficiency of
resources used
Identify HR Solutions to
Business Problems

7) Obtain approval and implement

8) Report measurable results!
Practical Tips on Using Model
Best Practices

• Organization goals should guide

HR initiatives
• Determine which initiatives would
provide the most value
–Keep asking: how can this
activity translate into something
measurable?
Best Practices

• Get input and data from others

• Focus on increasing productivity,
instead of cutting costs
• Identify the metrics that matter
Where To Start
• What are you currently measuring in your
organization? What is done with the
information gathered?
• How do you know what the C-suite
values? Do you know what your CEO is
looking for in the HR function?
• Where do HR initiatives come from? Who
drives it – culture, CEO? Is it proactive or
reactive?
Where To Start
• What successes have you had with ROI?
How is success attributed to HR rather
than other areas?
• What is communicated to the C-suite that
demonstrates impact, value, ROI and
alignment to goals of your organization?
How well is that working?
Where To Start
• Do you have key dashboard outcomes?
What are they? Are they different for
recruiting, training, learning and
development, succession planning? Are
you measuring efficiency or effectiveness
or both?
• What do you feel you could do better in
terms of measurement and why?
Key HR Measurements

• Efficiency
• Effectiveness
• Predictive (advanced!)
Thought Leaders
• Jac Fitz-enz - How to Measure Human
Resource Management, The ROI of
Human Capital, The New HR Analytics
• Jack Phillips - Proving the Value of HR:
How and Why to Measure ROI, Show Me
the Money: How to Determine ROI in
People, Projects, and Programs
Thought Leaders
• Michael Mercer - Turning Your Human
Resources Department into a Profit Center
• John Sullivan – Articles in HR Metrics &
Analytics on drjohnsullivan.com
• David Ulrich – The HR Value Proposition
Wrap Up

• Focus on what is important to your

organization (i.e. alignment)
• Determine what to measure and how
to measure
• Communicate HR’s success
= HR IMPACT and VALUE
 – Call (866) HR – Hotline - available 24/7
(866) 474-6854
– Email your request to InfoNow@mranet.org
 Six-Part Planning Model

Source: Adapted from Michael Mercer’s book Turning Your Human Resources Department into a Profit Center
 Six-Part Planning Model
Business Challenge. First, a business challenge needs to be clearly stated. It could
be an issue with productivity, turnover, managerial effectiveness, sales or a myriad of
other business challenges that every business must successfully handle in order to
enhance profitability.

Cost of Business Challenge. Here is where basic cost accounting comes into play. It
is not enough merely to specify a business challenge that needs to be handled. That
would be a passive and not profit-oriented approach. Instead, the human resources
profit center must determine how much the challenge costs. Only by having such cost
figures can a human resources or OD manager measure the cost-beneficial
effectiveness of solutions to the business challenge being tackled.

Solution to Business Challenge. Now the human resources or OD manager gets to

show his or her ingenuity. The question arises: What specific human resources-OD
oriented solution would overcome the business problem? For instance, if productivity is
the business challenge, then some solutions might be better selection methods, quality
circles or productivity improvement programs, incentive pay systems, an engagement
survey, employee assistance programs, suggestion boxes, teambuilding or many other
solutions.

Cost of Solution. Cost accounting again comes into use here to determine the dollars
that need to be spent to implement the solution. This step also provides an important
check in that almost all of the time the solution should cost less than the challenge.

Improvement/Benefit Stemming from Solution. This part of the planning model

enumerates the dollar improvement value resulting from the solution. To create a
worthwhile, cost-beneficial solution, the dollar improvement stemming from the solution
should be more than the cost of the problem and the cost of the solution. If it is not,
then the solution was not worthwhile from a cost-benefit standpoint.

Cost-benefit ratio. This final step provides the crucial bottom line measure of how
successful the solution proved. The cost-benefit ratio is similar to a return on
investment figure. It tells how much money was earned compared to how much money
was spent on the solution. Actually, this should be referred to as the benefit-cost ratio
since the ratio is calculated by weighing the benefit stemming from the solution. For
example, if a $100,000 improvement results from a $10,000 solution, then the cost-
benefit ratio was 10:1. That is, for every one dollar spent on the solution, the
organization reaped $10 in benefits. Such a cost-benefit ratio surely would be a great
return on investment in any business venture.
Source: Turning Your Human Resources Department into a Profit Center by Michael Mercer
 Fact Sheet
From the HR Resource Center

HR Metric Descriptions and Definitions

Revenue Per Employee

What is It?
Revenue per Employee, also known in its more advanced form as the Human Capital Revenue Factor, quantifies
the value of labor as a revenue generator to an organization. The simple form of this calculation provides a
measurement to determine human productivity as a per employee sum of the revenue generated in a fiscal year.
How is it Calculated?
The Revenue per Employee Calculator uses Revenue for an organization and an average number of employees
as represented by the calculation of Full Time Equivalents (FTE's) that takes into consideration various work
schedules.
Revenue Per Employee = Revenue
Total Number of FTE's
Profit Per Employee

What is It?
Profit (or Loss) per Employee quantifies what value, as reflected by profit or loss, employees contribute to the
organization. This calculation removes all expenses to provide a measurement that demonstrates what profit (or
loss) human productivity generated over a period of time or in a fiscal year.
How is it Calculated?
Profit (or Loss) is calculated by taking Total Revenue and subtracting out all operational expenses (Direct and Non-
direct non-personnel costs) and human cost expenses (Direct Personnel Costs) This is divided by the number of
Full Time Equivalents (FTE's)
Profit per Employee = Revenue - Total Operating Expenses (before taxes and interest)
Total Number of Full Time Equivalents (FTE's)
HR Expense Factor

What is It?
The Human Resource Expense factor is a measurement that demonstrates a cost of the human resource function
as a percentage of an organization's total expense. This measurement permits an analysis of the value delivered
by the human resource department during a period of time against other functional cost centers.
How is it Calculated?
The Human Resource Expense factor percentage is calculated by dividing the total expense (actual or budgeted)
by the organization's total operating expense (actual or budgeted). Total operating expense does not include
interest, depreciation and tax expense.
HR Expense Factor = HR Expense
Total Operating Expense

Information contained in this document should not be regarded as a substitute for legal counsel in specific areas. This document is copyrighted by MRA – The Management
Association, Inc. The document may be reprinted for internal use, but may not be republished without the prior permission of MRA.
For further assistance call or visit www.mranet.org, © MRA – The Management Association, Inc.
Iowa & Western Illinois: 888.516.6357 Northern Illinois: 800.679.7001 Wisconsin: 800.488.4845
HR Metric Descriptions and Definitions Page 1 of 4
 Fact Sheet Continued

From the HR Resource Center

Total Compensation As A Percentage Of Revenue

What is It?
The Total Compensation as a Percentage of Revenue factor is an indicator measurement that is used to monitor
labor costs. Tracking total compensation as a percent of total costs provides managers with valuable information
for use in managing the costs associated with human capital, including evaluating the use of fixed versus variable
compensation. Following this measurement will also permit an organization to determine if personnel cost (as
indicated by base pay, incentives and benefits) is in line with organization goals, industry benchmarks and
business plans.
How is it Calculated?
Total Compensation As a Percentage of Revenue = Compensation Cost + Benefit Cost (Workforce on Payroll)
Revenue
Absence Rate

What is It?
Calculating the absence rate helps an organization determine the number of days lost as a result of all absences
from work during a given period. This ratio will enable the organization to compare with others within their industry
through national surveys to determine whether the organization is in line with those averages or if further
investigation is needed. Calculating the absence rate is the first step in determining how absences affect an
organization in terms of productivity and actual cost. The absence rate can be calculated by organization,
department or job group.
How is it Calculated?
For purposes of this calculator, the Absence Rate ratio is calculated by dividing the worker days lost through
absence in a calendar, fiscal year or other 12 month reporting period by the average employee population in that
calendar, fiscal year or other 12 month reporting period multiplied by the number of work days available per
employee in that calendar, fiscal year or other 12 month reporting period.
Absence Rate = Workdays Lost Due to Absence
Average Employee Population x Number of Work Days Available per Employee
Turnover Rate

What is It?
Turnover is an area heavily studied by all organizations to determine movement out of an organization
(separations). Turnover is further categorized as either voluntary or involuntary. Voluntary turnover (resignations) is
most often studied, as voluntary turnover is typically greater than involuntary turnover (discharges) and
management's desire to reduce or maintain turnover at an acceptable level. Turnover can be further analyzed by
looking at specific causes for separations. The U.S. Bureau of Labor Statistics provides survey data on a quarterly
basis with regard to turnover.
How is it Calculated?
For purposes of this calculator, turnover is calculated by dividing the number of terminated employees in a
calendar, fiscal year or other 12 month reporting period by the average number of employees that calendar, fiscal
year or other 12 month reporting period.
Turnover Rate = Total Number of Employees who Terminated During the Period
Number of Active Employees During the Period

HR Metric Descriptions and Definitions Page 2 of 4

 Fact Sheet Continued

From the HR Resource Center

Cost Per Hire

What is It?
Cost per hire calculates what the true cost of hiring a new employee through external avenues and or through
internal placement. While internal placements may not have all of the costs usually associated with recruitment
(e.g. advertising costs, agency fees, etc.), nevertheless there are some costs associated with internal placement.
The calculation includes advertising costs plus agency fees plus employee referral bonuses plus travel costs plus
relocation costs plus reference checking costs multiplied by 1.10 (which is a cost variable multiplier) divided by
number of hires.
How is it Calculated?
For purposes of this calculator, the cost per hire is calculated by first totaling the costs associated with advertising,
agency placement fees, employee referrals, travel and lodging costs, relocation and reference checking costs of
candidates and multiplying that total by 1.10 (which is a cost variable multiplier). This total in turn is divided by the
total number of hires. These figures are to be based upon a calendar year, fiscal year or other 12 month reporting
period basis.
(Note: for abbreviation purposes, the word "costs' in the formula is abbreviated using the letter "C")
Cost Per Hire =
(Advertising C + Agency C + Employee Referrals + Travel C +Relocation C + Reference Checking C) X 1.10
Number of Hires
Turnover/Replacement Cost

What is It?
Turnover/Replacement Cost measures the cost of turnover and looks at the cost of replacing the exiting
employees. The expenses associated with the turnover/replacement calculation generally fall into categories such
as separation costs, replacement costs, training and orientation costs and lost productivity.
How is it Calculated?
Turnover/Replacement Cost is calculated by adding separation costs plus replacement costs plus training and
orientation costs plus performance differential in a calendar, fiscal year or other 12 month reporting period divided
by the number of hires for that calendar, fiscal year or other 12 month reporting period:
(Note: for abbreviation purposes, the word 'costs" in the formula is abbreviated using the letter "C")
Turnover/Replacement Cost = Separation C + Replacement C + Training C + Performance Differential
Number of Hires
Benefit Cost As A Percentage Of Revenue

What is It?
The Benefit Cost as a Percentage of Revenue factor is an indicator measurement that is used to monitor non-
taxable/non­cash labor costs. Tracking benefit cost as a percent of revenue provides managers with valuable
information for use in managing the costs associated with human capital. Total financial impact of new programs
such as wellness efforts or insurance plan design can be evaluated in relationship to revenue. Trends up or down
in this factor will reveal costs that need attention or value that has been added. Following this measurement will
also permit an organization to determine if the benefit labor cost (as indicated by non-taxable/non-cash benefits) is
in line with organization goals, industry benchmarks, and business plans.
How is it Calculated?
Benefit costs are totaled and then divided by either period actual or budgeted revenue for a calendar, fiscal year or
other 12 month reporting period.
Benefit Cost As a Percentage of Revenue = Benefit Cost
Revenue

HR Metric Descriptions and Definitions Page 3 of 4

 Fact Sheet Continued

From the HR Resource Center

Benefit Cost As A Percentage Of Total Compensation

What is It?
The Benefit Cost as a Percentage of Total Compensation is an indicator measurement that is used to monitor
non­taxable/non-cash labor costs. Tracking benefit cost as a percent of total compensation provides management
with valuable information for use in managing the costs associated with benefits. This information can be useful
when looking at hire versus lease or outsource decisions. Trends up or down in this factor will reveal costs that
need attention or value that has been added with increasing relative costs.
How is it Calculated?
Benefit costs are totaled and then divided by total costs for a calendar, fiscal year or other 12 month reporting
period.
Benefit Cost As a Percentage of Total Compensation = Benefit Cost
Total Compensation Cost
Variable Compensation As A Percentage Of Total Compensation

What is It?
Variable compensation as a percentage of total compensation is a measurement that demonstrates how much of
an organization's total compensation can vary with the revenues of the organization. Recent compensation trends
have focused on increasing the amount of variable compensation. High levels of variable compensation can be
correlated to high performing organization and organizations that attract and retain high performing employees.
This measurement permits an organization to look at the success of variable compensation programs and fixed
and variable compensation as it relates to revenue.
How is it Calculated?
Variable compensation as a percentage of total compensation is calculated by adding up all variable compensation
and dividing that sum by total compensation.
Variable Compensation As a Percentage of Total Compensation = Variable Compensation
Total Compensation
Time To Fill Jobs

What is It?
Time to fill is a measurement of how long it takes an organization to fill a position once the opening has been
approved. It is an indicator of hiring efficiency but should be balanced with cost and quality hiring measures. Time
to fill can provide valuable feedback in determining which sourcing methods and recruitment strategies can most
quickly produce the needed candidates. Cost of vacancies in jobs can be significantly reduced by driving down the
time it takes to fill a job.
How is it Calculated?
Time-to-fill is measured by calculating the number of days from when the job requisition was received (RR) until
the offer was accepted by the candidate (AD) for each job filled during the measurement period. Positions filled
both with internal and external candidates should be included.
The number of days open is calculated using calendar days, including weekends and holidays. Aggregate the total
number of calendar days that your total number of vacant jobs were open and then divide by the number of
positions filled during the measurement period thus providing an average which balances seasonal and other
fluctuations.
Time to Fill = Total Number of Day of Opened Jobs
Total Number of Jobs

HR Metric Descriptions and Definitions Page 4 of 4