Human Capital return on investment (ROI), or People ROI, is a way of quantifying the value of the experience, knowledge, skills, abilities, personality, skills, and insights of the people in a company. Businesses use People ROI to understand the importance of investing in their people.
For many companies, labor costs are the largest operating expense. However, this expense is well justified. Studies show that 90 percent of the S&P500 market value is due to intangible assets, essentially the innovations, intellectual property, patents, and trademarks that businesses have—all thanks to their employees.
Why Should Companies Track People ROI?
The employees in your company are a valuable resource. Your staff has education, abilities, ambition, and creative resources that can fuel your organization’s success when well-utilized. At the same time, some corporate structures and cultures stifle instead of nurture employee potential.
Measuring Human Capital ROI is one way to identify areas of untapped potential. If there are underperforming departments or teams, your People ROI calculations will identify them. Then you can make any needed changes and invest in the team to improve their performance.
What Does People ROI Measure?
The People ROI calculation measures the financial value your company gets from its workforce as a result of payroll and the benefits it gives to employees. It is a cost-based metric that describes the return your business would generate from each additional $1 workforce investment.
For example, if a company has a Human Capital ROI of 3.5, you should expect an additional $350,000 of revenue for each $100,000 invested. You can use this calculation more granularly to measure the ROI from specific recruiting, training, or mentoring programs.
People ROI helps companies understand, measure, and track the financial link between employment costs and revenue.
The Four Stages of Identifying People ROI
The value of your employees’ input, or the revenue generated by investments in your human capital, is not always a simple one-to-one measurement. Many variables can impact revenues during a period. For example, the economy, global events, or the payoff of a team’s long-term efforts. As a general rule, with the understanding that it is a nuanced process, People ROI is calculated by dividing earnings by investment.
There are four stages to identifying your People ROI. They include:
- Evaluation planning
- Data collection
- Data evaluation
As with any metrics, the first steps are identifying the program you will be measuring, its goals, and key performance indicators to measure its progress.
People ROI Grows with Investment
Suppose you have been part of a motivated, engaged team in which each member feels empowered to contribute according to their skills and abilities. In that case, you know that people can accomplish amazing things under the right circumstances.
Unlike many types of investments, your people can have vast potential. By developing their skills and confidence, as well as nurturing their engagement, your business can grow, sometimes even in surprising ways.
Strategies for Improving People ROI
Human Capital Management (HCM) is distinct from Human Resources. The aim of HCM is to help employees grow in their professional careers and to provide opportunities within the company for career advancement. With an understanding of career management, leadership development, and reward management, an HCM team drives employee satisfaction and engagement by investing in people.
Here are strategies that companies can use to improve their People ROI.
Education can be a vital component of developing a capable workforce. This may include industry-relevant training, sponsorship for college or master’s degrees, professional development training, and leadership training.
Education can also include upskilling and reskilling your employees.
Helping them develop their potential can drive engagement, productivity, and profitability.
Many intangible assets result from the creativity of individuals or a group. Companies that stifle creativity and leave no room for the trial-and-error process are inhibiting the potential of one of their most valuable resources.
Support Specialized Skill Development
Where there is aptitude and interest, encouraging specialized skill development cultivates employees who operate within their “zone of genius.” While some people thrive as generalists or are born to lead, specialists can bring unparalleled excellence to their area of expertise.
A diverse workforce brings robust products and services to the market.
Imagine a development team with similar backgrounds and experiences. Most likely, they will be experts at developing for people like themselves. However, they will be limited in their ability to create something that appeals to a wide audience.
On the other hand, a diverse development team brings their different life experiences, competencies, comforts, ideas, and assumptions to the process. Studies show diverse development teams outperform homogeneous ones.
Diversity breathes new life and creativity into every level of an organization. A 2019 McKinsey study found that companies with diverse executive teams were 25 percent more likely to outperform their peers.
Embedding diversity, equity, and inclusion programs into every level of your organization, including hiring, cultivates the human potential of your workforce.
Provide Coaching and Mentoring
Sometimes the best education and training is one-on-one time with a more experienced professional. Coaching helps employees recognize their strengths, celebrate their progress, and develop leadership skills.
Are You Maximizing Your People ROI?
Whether through upskilling and reskilling, training, education, or mentoring, developing your people drives business success. In addition to growing profits and market share, your commitment to improving People ROI can make you an agent of positive change in people’s lives. Few individuals know what they can do until they are challenged or encouraged to realize it.
As a people-first recruiting firm, we know the power of a great employee. Whether you need to hire a single person or staff an entirely new location, we’re here to help.