Definition of ROI
“Return on Investment,” or ROI, is the term given to a mathematical calculation used in the finance industry and business in general. The ROI measures the financial return on an investment made, or it can be applied to a business measuring the performance of the firm by assessing the net profit compared with the overall net worth of the company. In more recent years, the ROI concept has been adopted by other industries to evaluate projects and programs on a smaller scale.
Importance of ROI to HR
Using quantifiable metrics improves the credibility of HR as a profession, and allows upper management to identify specific, measurable ways that HR services benefit the organization. It’s no longer enough to state that a certain program is believed to be beneficial — you need to be able to prove the worth of your actions. In difficult economic times, the value of support services — often seen as tangential to the organization’s core mission or product — comes under increasing scrutiny. Consequently it becomes even more important for HR professionals to show how HR services directly impact the bottom line, while identifying and eliminating programs that are not financially efficient.
Examples of ROI in HR
HR can use ROI metrics to analyze the value of almost any of its services, as long as an EGP cost can be determined. For example, if HR introduces a new health and safety program, its effectiveness can be measured by the associated reduction in costs of work-related injuries. The value of a new employee orientation program can be measured in terms of an ROI by assessing the costs saved by correlated reductions in turnover. Diversity programs, HR information systems, training, development and mentoring initiatives are additional examples of HR programs that can be measured by the ROI calculation.
Calculating ROI in HR
To calculate the ROI of human capital, divide the organization’s net revenue — gross revenue after deducting operating expenses, salaries and benefits — by the cost of salaries and benefits. To calculate the ROI of a particular program, you must first calculate the value of the specific program itself, and then divide it by the costs of implementing the program. For example, if a training program to speed production of a factory line results in an increased amount of product, calculate the value of the additional product and divide that by the costs of providing the training and materials. In some cases — a general increase in productivity, for example — you will need to isolate the portion of the increase that was because of an HR measure before calculating ROI. Conduct an analysis of groups that underwent a training class, versus groups that did not, to estimate the effect. Alternatively, use an expert to estimate the percentage increase that was because of the training.
Simple ROI metrics can be calculated using the following formulas:
- Absence Rate: The # of days employees are absent in a month ÷ (average # of employees during a month times the # of workdays) times 100.
- Engagement or Satisfaction Rating: The percentage of employees who are engaged or satisfied with the workplace overall, or with a given aspect of it.
- Cost Per Hire: Recruitment costs (external + internal) ÷ total number of hires in a given period.
- Turnover (Annual): The # of employees exiting their jobs during a 12-month period ÷ average actual # of employees during the same period.
- Turnover Costs: The total costs of separation + vacancy + replacement + training the new person.
Southeast Corridor Bank
Program Title: Managing Retention
Target Group: Bank Tellers
Solution: Skills Based Pay System to Reduce Employee Turnover
|Level 1: Reaction||Level 2: Learning||Level 3: Application||Level 4: Impact||Level 5: ROI||Intangible Benefits|