Strategic Human Resource Metrics: Human Capital

Strategic Human Resource Metrics: Human Capital
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  • 0:02 Metrics Matter
  • 0:45 Human Resources Metrics
  • 1:44 Examples of Human…
  • 5:04 What to Do With the Results?
  • 5:28 Lesson Summary
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Lesson Transcript
Instructor: Anelia Ras
This lesson dives into some strategic metrics and how these can impact the bottom line. The metrics discussed include human capital ROI, human capital value added, percent of performance goals, and appraisal rating-to-salary ratio.

Metrics Matter

Businesses exist for a reason. Some businesses want to make as much money as possible for shareholders. Others, such as non-profits, focus on adding to the greater good. But all businesses need to measure their success.

Business success is measured with metrics, which are methods of measuring, or the results you get from the measurements. Different departments use different metrics; a manufacturing department may measure quality against the standard, and a sales department could measure sales this year versus last year. Human capital is a measure of the economic value of an employee's skill set. This is one of the ways to view people, or human resources, in a business.

Human Resources Metrics

Let's take a look at some examples. Human resources have their own set of metrics. Let's say someone retired from your department. You, as the manager, now need to hire someone new to fill this position. You advertise for it, interview, and fill the position. The successful candidate, Fred, joins your department. You both agree on goals, you measure his performance, and he provides you with feedback on your management style. Down the line he gets a pay increase and gets promoted. Along this route there are many metrics that could be measured:

  • How long it took to fill the vacant position
  • Internal versus external appointments
  • Performance against goals
  • Management feedback
  • Increase to performance ratio
  • Position turnover
  • Internal promotions

Metrics have a direct impact on the bottom line of a business, or how profitable or successful the business is. Human capital metrics help managers understand what the impact of their decisions about people has on the bottom line.

Examples of Human Capital Metrics

Human capital metrics are important because businesses use 20% to 40% of all revenue on employees (salaries, bonuses, benefits etc.) and in some industries this number can go up to 60%. With an investment in people as high as this, you need to know if you are getting a return. So, let's look at some of them.

Human capital return on investment (ROI) measures the ratio of income to employment cost. In general, ROI measures the return on an investment made. It answers the question: Does the way we invest in our people provide positive returns? You can calculate it by dividing the net revenue (gross revenue minus operating expenses, salaries and benefits) by the cost of salaries and benefits.

Human Capital ROI = Net Revenue / Cost of Salaries & Benefits

This metric is used to demonstrate the actual dollar amount returned for every $1 spent on employees. The ROI should be positive. The ratio is helpful to benchmark with against other businesses in the same industry and to determine the progress year after year.

Human capital value added is similar to the ROI of human capital but it measures it per person. The measure determines if employees are indeed profitable and answers the question: Are we getting the value we need from our people? The calculation divides the net revenue by the number of full time equivalent people (FTE).

Human Capital Value Added = Net Revenue / Number of FTEs

The result is a profit per FTE and should be positive.

In the percent of performance goals metric, a business sets goals regularly and then measures performance against it. These goals are marked as met, exceeded, or not met. This can be rolled up into a business-wide measure. This metric answer the questions: are we measuring the right things? and are we making progress toward our goals? This is a simple percentage calculation of number of goals met divided by total number of goals times 100.

% of Performance Goals Met or Exceeded = (Number of Goals Met or Exceeded / Total Number of Goals) x 100

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