Primary navigation:

QFINANCE Quick Links
QFINANCE Topics
QFINANCE Reference

Home > Operations Management Checklists > Calculating Return on Investment in Human Resources

Operations Management Checklists

Calculating Return on Investment in Human Resources


Checklist Description

This checklist looks at how to calculate return on investment in human resources and the benefits of such an assessment for a company.

Back to top

Definition

In today’s competitive labour market, the human resource (HR) department has been transformed from a stuffy old necessary evil into an active department that has risk management functions.

In general, in order to calculate a return on investment (ROI), the total profit generated must be divided by the total value of the assets used in creating that profit. However, HR is usually nonprofit generating, and from this stems the difficulty in assessing its ROI within a company. So, to assess the value that HR can bring, one must look at the role that HR plays in increasing a company’s profits.

One of the most important roles of HR is the recruitment and training of a company’s employees. The more sensitive and active an HR department is in promoting, training, and in general being open and listening to the needs of employees, the greater the value the company will receive from its workforce. Contented, happy employees directly influence a company’s productivity. Therefore, to calculate the return on investment in HR, one should look at the relationship between the sales value derived from each training day and the total number of the training days involved, and dividing the result by the total cost of training. Basically, one is assessing the investment in human capital by considering the cost of training programs per employee, and trying to determine how much more revenue this has brought to the company.

Very few companies measure the correlation between staff training and employee turnover. There are also other elements, such as morale and job satisfaction, that are too subjective to assess with accuracy. What HR should focus on is the direct relationship between investment in the company’s workforce and the success of its business, along with an assessment of the relation between the cost of staff training and development with the productivity and longevity of stay of employees within the company.

It is also important to emphasize that a relatively correct assessment of ROI can only be done after an HR department has accumulated the necessary data over a number of years.

Back to top

Advantages

  • Calculating the return on investment in its staff will help a company to improve its recruitment and training process, and determine how efficient its HR department is.

  • Putting in place a good selection process for employees will enhance a company’s performance.

Back to top

Disadvantages

  • Calculating the ROI in human resources involves a long and tedious process of accumulating data before it can be done.

  • Some subjective aspects of HR work, such as staff morale and satisfaction, are difficult to assess with certainty.

Back to top

Action Checklist

  • Appoint efficient HR managers.

  • Highlight the need to keep as many records as possible on the movement of staff in and out of the company.

  • Assess whether training programs have any relation to staff turnover and try to determine the contribution they make to the productivity of the company.

Back to top

Dos and Don’ts

Do

  • Select employees through a thorough process of interviews and evaluation.

  • Obtain relevant information on the experience and skills of a potential employee before hiring them.

  • As a manager, communicate at all times with your HR department to understand the movement of employees in and out of the company.

  • Provided that they are cost-effective, be prepared to use specialist recruitment consultants, who will be able to help you find the right employees for your company.

Don’t

  • Don’t underestimate the importance of HR in providing the company with feedback on its investment in staff.

  • Don’t ignore the need for proper research and professional advice when selecting employees.

Back to top

Further reading

Book:

  • Phillips, Jack J. Return on Investment in Training and Performance Improvement Programs. 2nd ed. Burlington, MA: Butterworth-Heinemann, 2003.

Articles:

  • Harris, Kimberly J. “Calculating ROI for training in the lodging industry: Where is the bottom line?” International Journal of Hospitality Management 26:2 (June 2007): 485–498. Online at: dx.doi.org/10.1016/j.ijhm.2005.12.001
  • Wells, Susan J. “Finding wellness’s return on investment: Calculating wellness programs’ ROI is sometimes complex, but it can be done.” HR Magazine (June 2008).

Website:

Back to top

Share this page

  • Facebook
  • Twitter
  • LinkedIn
  • Bookmark and Share