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 contributing to their company's bottom line via cost management, forecasting and labor optimization. And, creating a successful business strategy requires a deep understanding of your workforce — which is typically an organization’s largest and most difficult expense to manage.
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. Gathered using HR data and metrics, workforce intelligence can also help reveal how HR initiatives may impact company financials with regards to recruiting, pay practices, overtime, career pathing through promotions.
But, to achieve this, companies may need to change the way they view HR data — including recruiting, time and attendance, payroll, benefits, recruiting, and more — to establish a clear connection between the workforce and business strategy, as well as bottom-line results.
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;
- Determine whether it is better to build talent, or hire contractors or temporary workers;
- Identify and implement improvements across a variety of inefficient workplace processes;
- Create a more 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 — and perhaps, most importantly, why. You can also track how their performance evolves over time, and forecast future performance. 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? Is overtime an assumed part of every workday? What’s the average return on your workforce investment? What is the revenue or profit per employee? How much does it cost your business to hire a new employee, or replace someone who left?
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 provide insights for your finance team drive business success.
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
Or, in certain industries where employee turnover is higher, an alternate metric calculation can be used, which is more accurate and normalizes the impact of new hires and new hire terminations:
(Start of Period Employee Headcount - Total Terminations + New Hire Terminations) / Start of Period Employee Headcount
You can also evaluate 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. Human Capital ROI Ratio
Human Capital Return on Investment (HCROI) is a measure which is increasingly gaining favor among institutional investors and high performing companies, as it has been shown to be a strong predictor of future company performance.
HCROI is calculated as:
Total Revenues - Expenses (excluding staff costs) / Total Cost of Workforce (TCoW).
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 be one of the more valuable HR metrics for your business to track today.
7. High Performer Productivity Differential
Productivity differentials measure the overall difference in productivity for high performing employees as compared to all other workers. Typically, this measure can be quantified for positions with clear or measurable productivity targets, goals and metrics such as sales, production, operations, customer-facing services, or billable employees.
Normally, statistical analysis and validation is conducted to determine the exact difference in productivity between high performers as compared to other workers.
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 (or hourly average wage rate) X # of days (or hours) to complete the job
10. Total Cost of Workforce
One of the most powerful predictive (and benchmarkable) metrics that come from payroll data is the total cost of workforce (TCoW). This is the sum of all workforce costs including —wages, salaries, overtime, bonus, incentives and benefits for employees, contract, and temporary workers — for a given period of time (such as a month, quarter or year). For public companies, the TCoW may also include equity and deferred compensation costs.
The larger the percentage of total expenses represented by total cost of your workforce, the greater the impact that changes in key employee and workforce cost drivers have on your company’s productivity and performance.
This metric is optimized when analyzed by key job segments and groups, such as direct versus indirect labor, total customer facing jobs, performance level, profitability, employee engagement, tenure, and mobility. When used and benchmarked with these measures, total cost of workforce is a powerful financial predictor of increasing or decreasing employee performance, employee turnover, engagement, culture, and leadership. This metric can also be correlated based on organizational structure among job roles and workforce groups.
TCoW 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, which enables workforce intelligence via integrated data sets and can provide access to powerful analytics that can help drive better 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.