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ROI – 411 for Measuring Human Capital

Written by: Jennifer Loftus

Article Overview: Looking for a quick lesson on ROI? This article explains what exactly ROI is, how it relates to HR, and easy techniques to utilize within your organization.

ROI – 411 for Measuring Human Capital

Human resource success can no longer be measured in the number of people hired. Effective organizations will focus on hiring the right people who can deliver innovation, change, and increased productivity. Because human resource professionals are constantly faced with urgent issues that crop up daily, from managing specific employee relation issues to keeping volumes of documentation current, do they really have time to measure employee productivity?

The answer is YES, but spelled ROI! Return on investment, or ROI, is a very popular performance measure used to evaluate the efficiency of a specific program because of its versatility and simplicity. Managers who utilize the ROI process can determine if a program or investment adds value to the organization against its cost or will instead be a drain on resources, before implementing the change. Here are some additional benefits of using ROI in human resource departments, according to ROI on a Shoestring by Holly Burkett:

• Using ROI transforms the role of programs in an organization
• Using ROI increases alignment of programs with business needs
• Using ROI improves the efficiency of program design, development, and delivery by:

o Reducing costs
o Preventing a program from being implemented after the pilot process shows that it has
no value
o Expanding programs when other areas need the program
o Discontinuing programs when they add no value

• Using ROI enhances the value of learning and development in the organization
• Using ROI builds respect, support, and commitment from internal groups, including senior executives and major program sponsors

Many organizations support their commitment to selecting, training, and developing the best employees for a winning edge. However, putting a measure on human capital may seem tricky. For many of these organizations, measuring investments put into employees is difficult. Here is the ROI-411 for measuring the investments you've made in your people, including recruiting, selection, training, compensation, and benefits. After determining your investment, divide that amount by the profit or revenue dollars that your employees bring into your organization to determine ROI.

Recruiting
What processes are in place to effectively attract and select candidates in an effective and time efficient manner?

o Is the application process too difficult and time consuming to accomplish, allowing good candidates to drop out?
o Is there a common database the recruiters can access easily?
o Do you have a clear understanding of how well your recruiting process is operating?

Selection
What employee selection process effectively places candidates in the right position while making a good fit for the organization’s culture?

o What is the turnover rate?
o Are there instances in which employees don’t fit into the organizational culture?
o Do position descriptions match employee expectations?

Training
How does your department measure the success of employee training programs?

o Are employee training programs flexible enough to accommodate short-term initiatives while still maintaining long-term focuses?
o Are programs continuously improved?
o What are the indirect and direct costs of a program — time off, salaries, materials, travel, etc.?
o Are employees who complete the program evaluated before and after training for increased learning and changes in behavior?
o What were the performance and behavior changes after the program finished?

Compensation
How does your organization reward employees?

o Are long-term rewards tied to long-term accomplishments, such as improving skills, competencies, and responsibilities? What about short-term accomplishments?
o Are you paying competitively while maintaining profitability?
o Are performance reviews tied to base pay and incentives?
o Is there compensation related turnover?
o Is the compensation system planned and equal for all employees?

Benefits
How does your organization communicate benefit packages and information?

o Are employees able to utilize benefits efficiently?
o Have benefit plans prevented employee absences?
o Are candidates attracted to benefits programs?

Here are some additional tips for managers to know when considering using ROI in the HR environment:

Resistance – Some staff will have resistance to ROI unless the program is communicated such that it will bring value to the employees’ work and positive changes will be made. Your ROI program should be used as a tool to improve a program, not used as a performance evaluation. Make sure to communicate the data and make improvements when necessary.

Interference – Keep in mind that an ROI measurement can be affected by variables such as the work environment, the economy, and organizational culture. Examine ROI while keeping in mind the reality of the current environment.

Long Term Results – ROI primarily focuses on results over a short period of time. Long-term effects of investments can be far different. Combine ROI with other measurement programs for the broadest possible picture.

With the ability to understand and measure the effectiveness of human capital programs, organizations can adapt, change and optimize their activities to improve the overall performance of their business.

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Article Tags: 411, alignment, effective organizations, efficiency, employee productivity, employee relation, holly, human resource departments, human resource professionals, increased productivity, internal groups, investments, performance measure, return on investment, roi return on investment, senior executives, shoestring, simplicity, versatility, winning edge



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