How to Use HR Metrics to Improve Your Bottom Line
As the business landscape constantly evolves, the role of finance is also expanding. Some finance departments are now required to manage more than just financial operations, playing a significant role in overall business strategy. And, creating a successful business strategy requires a deep understanding of your workforce.
To achieve this, finance and HR must work together to harness the full power of HR data and inform strategies that impact business outcomes — including your company's bottom line.
How? Workforce intelligence can equip finance professionals with powerful insights regarding inefficiencies and how to better manage labor costs within the business. It can also help reveal how HR initiatives may impact company financials.
But, to achieve this, companies may need to change the way they view HR data — including recruiting, time and attendance, payroll, benefits, and more — to establish a clear connection between the workforce and business strategy.
How to Leverage HR Metrics to Improve the Bottom Line
Data is the fuel behind better decision-making. HR metrics can drive business success by providing strategic insights into how effective your talent management strategy is in meeting your overall business goals. More specifically, HR data can help:
- Identify steps to optimize the cost of recruiting, assigning, and engaging a productive talent pool;
- Ensure that compensation, benefits, and other forms of remuneration are aligned with performance;
- Reveal and tackle signs of declining productivity;
- Identify and implement improvements across a variety of inefficient workplace processes;
- Create a more productive, diverse, and profitable work environment.
In short, by collecting and monitoring HR data, you may be able to assess workforce costs and productivity more easily, as well as how employees are hired, developed, and managed for greater business success.
For example, armed with these insights you can uncover who the top performers are and who is contributing most to the bottom line, as well as who is falling behind. You can also track how their performance evolves over time. Are they compensated adequately for what they contribute? Are they getting better at what they do? Or is their performance on the decline? Are employees staying with the company, or is retention becoming a challenge? What’s the average revenue or profit per employee? How much does it cost your business to hire a new employee?
For greater insight, see where your company stands against your peers by measuring your metrics against industry data, using benchmarking reports published by industry associations, HR associations, or private research firms. You can also use these benchmarks to monitor your business' own development by setting targets and tracking your progress when it comes to achieving them.
10 HR Metrics to Know
You can use many HR metrics to conduct a health check on your business, get a comprehensive view of your workforce, interpret historical trends, and develop predictive models to make data-driven decisions.
Here are ten HR metrics that can help your financial decision-makers improve financial success using insights from HR.
1. Cost Per Hire
Cost per hire reflects the average costs — both internal and external — incurred during the hiring process. These will include all the costs associated with searching for qualified candidates, conducting interviews, and hiring those who best fit your business needs.
According to theSociety of Human Resource Management, to calculate cost per hire (CPH), you need to divide total costs associated with hiring by the total number of hires:
CPH = (internal recruiting costs + external recruiting costs) / total number of hires in a time period
Essentially, this metric serves as the foundation for the creation of your company's recruitment budget. When creating and tracking this budget, you want to keep the quality of talent as a top objective, giving you more insight into how best to optimize your hiring costs.
2. Revenue Per Employee
Revenue per employee is a performance metric that measures how much money each employee generates for the company. It can be expressed through the following equation:
Revenue per employee = total revenue / total number of employees
A higher revenue per employee is usually linked to a more productive company. This is one of the most critical performance metrics, as it measures how efficiently your company is utilizing employees.
Keep in mind that this metric is very industry-specific, so it's important to compare using a like-for-like basis. Some industries are very labor-intensive, so the typical revenue per employee may tend to be lower. Others require much less labor input for the same amount of income, so it may have a much higher revenue per employee result.
3. Profit Per Employee
Although revenue per employee is a critical metric, it still doesn't provide the whole picture. For example, significant revenue is generally an indication of a healthy business. Still, if a hefty revenue is generated by deploying a disproportionate number of resources, including human resources, the positive impact on your bottom line could be hindered.
This is where profit per employee can help. It's calculated by dividing the net income of your business over the past twelve months by the current number of your full-time employees.
Profit per employee = net income over 12 months / total number of full-time employees
4. Retention Rate
Retention rate reflects how effective your company is at retaining talent. You can calculate this metric by dividing the number of employees who stayed employed with your company over a certain period by the number of total employees at the start.
Retention rate = (number of employees who stayed by the end of the time period) / (number of employees at the start) x 100
You can also track your talent retention rate by analyzing how many of your high-performing and high-potential employees have stayed with your company over a certain period. In this case, you'll see how good your company is at keeping the best talent, further identifying whether or not there are areas for improvement.
5. Training Return on Investment
Training ROI will help you evaluate learning and development programs and see what your company is getting back in return for money spent on professional development and training.
Training ROI = net monetary benefits of training / (total costs of training) x 100
While total training costs may seem like a straightforward metric to track, net monetary benefits associated with these costs can be challenging to calculate. Start by assessing the training goals for your company and what business outcomes — or KPIs (key performance indicators) — you expect to see from your investment. You then collect data, tracking the success measured by the difference in the pre- and post-training KPIs.
For example, perhaps you expect to see an increase in sales after investing in a training session for your sales team. While an increase in sales can't necessarily be attributed entirely to the training, you can estimate how much of the improvement is associated with it by comparing the performance between employees who have taken the training and those that haven't. This way, you can ensure that your estimate is a more accurate reflection of the training's impact.
6. Employee Productivity Rate
Your employee productivity rate refers to the ratio between the amount of output and the amount of time it takes to create the output.
Employee productivity is an essential metric because it directly impacts the bottom line. With widespread remote work arrangements likely to remain long-term, this may easily be one of the more valuable HR metrics for your business to track today.
Employee productivity rate = total output / total input in labor hours
When you compare these rates among your employees, it can give you a clear sense of who generates output in less time or effort, and who requires more time or effort to produce the same output. Tracking this metric over time, or comparing it to a benchmark, can be a powerful diagnostic test for your business. Further, this metric can help you identify problems, allowing you to take corrective measures before waning productivity becomes a more significant problem.
7. Productivity Gains from New Equipment and Tools
This metric measures the impact that a newly purchased technology or a piece of equipment has on workflow. It's becoming increasingly important as more and more businesses employ the latest technology to automate processes within their organizations.
Perhaps, though, given the current environment where some companies adjusted to work-from-home arrangements, basically overnight, this metric has become even more critical. With companies investing in more technology to adjust to new hybrid or remote work environments, companies must track the value of these investments.
To ensure your new technology or equipment investments are actually effective in helping you reach your business goals, you'll need to track whether or not they positively affect your employees' productivity. You can do this by comparing the level of employee productivity before the introduction of the new tools with the levels after the introduction.
Productivity gains = productivity before new tool / productivity after new tool
If productivity has improved, it's a strong indication that your investment is starting to pay off. Otherwise, without tracking this metric, it will be difficult to know whether your investment in new technology or equipment generates meaningful benefits for your company or if it's just another expense.
8. Diversity and Inclusion
Having a more diverse team has proven to provide value to companies in more ways than one. Not only does it make room for new perspectives and ideas that can fuel innovation, but research shows diversity in leadership directly correlates with better business outcomes. In fact, the Harvard Business Review recently stated that "[n]umerous studies have shown the benefits of a diverse, equitable workplace for business performance, innovation, customer loyalty, and employee trust. Diverse teams better represent the customers they serve, make decisions with fewer blind spots, and bring more varied and innovative thinking to problem-solving."
To measure how diverse your workplace is, review your workforce across demographic indicators. These indicators include race, ethnicity, age, gender, religion, sexual orientation, and disability. By embracing diversity and inclusion, businesses can earn deeper trust and better engage with different audiences--from customers to prospects to current employees.
9. Job Costing
Empowered with HR data, you can also better assess job costing, labor distribution reports, and timekeeping activities. For example, HR data can help you determine the cost of specific jobs within your organization (job costing) by multiplying your daily payroll rate by the number of days required to complete the job.
Job costing = daily payroll rate x # of days to complete the job
10. Labor Cost Distribution
Labor cost distribution helps you determine your company's productivity. For example, a labor cost distribution report will detail hours, wages, benefits, and deductions per each of your employees. They can also be aggregated per department, in which case, they may provide clarity into specific labor costs incurred by each department. If you have targeted costs for each department, this type of report can help you identify which departments are falling short.
How Human Capital Management Software Can Help
Workforce expenses, including salaries, benefits, payroll, and related taxes, can significantly add to business costs. To make it easier to track these HR metrics and analyze their impact on your business' financial success, you should consider using a single platform that will give you access to critical HR metrics.
Integrated human capital management (HCM) software can help automate tedious workforce processes, allow you to store your HR and payroll data in one place, and provide access to powerful analytics that can help drive business decisions. In short, HCM software can help finance professionals and HR departments create a strong alliance, helping both departments implement combined strategies that drive growth and meet business objectives.
HCM software not only benefits businesses by providing a unified platform that offers on-demand access to HR data, but can also help streamline business processes including recruiting, hiring, performance management, and professional development, making it easier to analyze workforce trends that align with business goals — while optimizing where needed. Having access to all of your HR data in one place enables you to uncover trends, compare your data against industry benchmarks, and build business cases for setting overall business strategy goals.& It also enhances your HR data handling efficiency and accuracy, allowing your HR department to work smarter, not harder.
Paychex Flex®, our all-in-one HCM solution, provides a single platform where you can manage your payroll, track time and attendance, maintain and oversee benefits, and more. By empowering you with access to HR data and analytics, Paychex Flex helps you to establish a direct connection between the workforce and business strategy, providing a tangible impact on your bottom line.
Learn more about how Paychex Flex can help you utilize HR data to positively impact the bottom line of your business.