How To Use HR Metrics To Improve Your Bottom Line

As the business landscape constantly evolves, the role of finance is also expanding. Some finance departments must now manage more than just financial operations; they must play a significant role in overall business strategy and contribute to their company’s bottom line via cost management, forecasting, and labor optimization. And creating a successful business strategy requires a deep understanding of your workforce — typically an organization’s largest and most difficult expense to manage.

To achieve this, finance and HR must work together to harness the full power of HR data and inform strategies that affect business outcomes — including your company’s bottom line.

How? Workforce intelligence can equip you with powerful insights regarding inefficiencies and how to manage labor costs within the business better. Gathered using HR data and metrics through advanced analytics tools, workforce intelligence can also help reveal how HR initiatives may impact company financials regarding recruiting, pay practices, labor costs, employee performance, and career pathing through promotions.

To achieve this, companies may need to change the way they view HR data — including recruiting, time and attendance, payroll, benefits, and more — to establish a clear connection between the workforce and business strategy, as well as bottom-line results.

The Importance of HR Metrics

Data is the fuel behind better decision-making. HR metrics can drive business success by offering strategic insights into how effective your talent management strategy is in meeting your overall business goals. More specifically, HR data can help you:

• Identify steps to optimize the cost of recruiting and engaging a productive talent pool
• Confirm that compensation, benefits, and other forms of payment are aligned with performance
• Reveal and tackle signs of declining productivity
• Determine whether it is better to build talent or hire external talent
• Identify and implement improvements across potentially inefficient workplace processes
• Create a more diverse and profitable work environment
• Benchmark compensation to ensure you are competitive in the marketplace

In short, by collecting and monitoring HR data, you may be able to more effectively assess workforce costs and productivity, as well as how employees are hired, developed, and managed for greater business success.

For example, armed with these insights, you can uncover who the top performers are, who contributes most to the bottom line, and who is falling behind — and perhaps, most importantly, why. You can also track how their performance evolves and forecast future performance. Are employees compensated adequately for what they contribute? Are they getting better at what they do, or is their performance on the decline? Are employees staying with the company, or is retention becoming a challenge? Is overtime being used effectively? What’s the average return on your workforce investment? What is the revenue or profit per employee? How much does hiring a new employee or replacing someone who left cost your business?

For greater insight, see where your company stands against your peers by measuring your metrics against industry data, using benchmarking reports published by industry associations, HR associations, or private research firms. You can also use these benchmarks to monitor your business’s development by setting targets and tracking your progress toward achieving them.

9 HR Metrics to Know

You can use many HR metrics to conduct a health check on your business, get a comprehensive view of your workforce, interpret historical trends, and develop predictive models to make data-driven decisions.

Here are 9 HR metrics that can provide insights for your finance team to drive business success.

1. Cost Per Hire

Cost per hire reflects the average costs — both internal and external — incurred during the hiring process. These typically include the costs associated with searching for qualified candidates, conducting interviews, and hiring those who best fit your business needs.

To calculate cost per hire (CPH), you need to divide the total costs associated with hiring by the total number of hires:

CPH = (internal recruiting costs + external recruiting costs) / total number of hires in a time period

Essentially, this metric may be the foundation for your company’s recruitment budget. When creating and tracking this budget, you typically want to keep the quality of talent as a top objective, giving you more insight into how best to optimize your hiring costs.

2. Revenue Per Employee

Revenue per employee is a performance metric that measures how much money the average employee generates for the company. It can be expressed through the following equation:

Revenue per employee = total revenue / total number of employees

A higher average revenue per employee is usually linked to company-wide productivity. This is one of the most critical performance metrics, as it measures how efficiently your company uses employees.

Remember that this metric is very industry-specific, so using a like-for-like comparison is essential. Some industries are very labor-intensive, so the typical revenue per employee may tend to be lower. Others require much less labor input for the same amount of income, so it may have a much higher revenue per employee result.

3. Profit Per Full-Time Employee

Although revenue per employee is a critical metric, it doesn’t provide the whole picture. For example, significant revenue is generally a sign of a healthy business. Still, if a hefty revenue is generated by deploying a disproportionate number of resources, including human resources, the positive impact on your bottom line could be hindered.

This is where profit per employee can help. It’s calculated by dividing the net income of your business over the past twelve months by the current number of your full-time employees or their equivalent.

Profit per full-time employee = net income over 12 months / total number of full-time employees

4. Retention Rate

Retention rate reflects how effective your company is at retaining talent. You can calculate this metric by dividing the number of employees who stayed employed with your company over a certain period by the number of total employees at the start.

Retention rate = (number of employees who stayed by the end of the time period) / (number of employees at the start) x 100

You can also evaluate your talent retention rate by analyzing how many of your high-performing and high-potential employees have stayed with your company over a certain period. In this case, you’ll see how good your company is at keeping the best talent, further identifying whether there are areas for improvement.

5. Training Return on Investment (ROI)

Training ROI will help you evaluate learning and development programs and see what your company is getting back in return for money spent on professional development and training.

Training ROI = net monetary benefits of training / (total costs of training) x 100

While total training costs may seem straightforward to track, net monetary benefits associated with these costs can be challenging to calculate. Start by assessing the training goals for your company and what business outcomes — or KPIs (key performance indicators) — you expect to see from your investment. You then collect data, tracking the success measured by the difference in the pre- and post-training HR KPIs.

For example, perhaps you expect to see an increase in sales after investing in a training session for your sales team. While an increase in sales can’t necessarily be attributed entirely to the training, you can estimate how much of the improvement could be associated with it by comparing the performance of employees who have taken the training and those who haven’t. This way, it is likely that your estimate is a more accurate reflection of the training’s impact.

6. Total Cost of Workforce

One of the most powerful predictive (and benchmarkable) metrics that come from HR data is the total cost of workforce (TCOW). This is the sum of all workforce costs — including compensation and benefits for employees, payments to contract workers, and expenses associated with using temporary workers such as those from a staffing company — for a given period (such as a month, quarter, or year). For public companies, the TCOW may also include equity and deferred compensation costs.

The larger the percentage of total expenses represented by the total cost of your workforce, the more impact that changes in your workforce may have on your company’s productivity and performance.

This metric can be optimized when analyzed by key job segments and groups, such as direct versus indirect labor, total number of customer-facing jobs, performance level, profitability, employee engagement, tenure, and mobility. When used and benchmarked with these measures, the total cost of the workforce is a powerful financial predictor of increasing or decreasing employee performance, employee turnover, engagement, culture, and leadership. This metric can also be correlated based on organizational structure among job roles and workforce groups.

TCOW can also be aggregated per department, which may provide clarity on specific labor costs incurred by each department. If you have targeted costs for each department, this type of report can help you identify which departments may be falling short.

7. Human Capital ROI Ratio

Human Capital Return on Investment (HCROI) is a measure that is increasingly gaining favor among institutional investors and high-performing companies, as it is a strong predictor of future company performance.

HCROI is calculated as:

Total Revenues - expenses (excluding staff costs) / Total Cost of Workforce (TCOW)

8. Diversity and Inclusion

A more diverse team has proven to provide value to companies in many ways. It can help to generate new perspectives and ideas that can fuel innovation, and research shows diversity in leadership directly correlates with better business outcomes.

To measure how diverse your workplace is, review your workforce across demographic indicators. These indicators may include race, ethnicity, age, gender, disability, and others. By embracing diversity and inclusion, businesses can earn deeper trust and better engage with different audiences — from customers to prospects to current employees.

9. Job Costing

Empowered with HR data, you can also better assess job costing, labor distribution reports, and timekeeping activities. For example, HR data can help you determine the cost of specific jobs within your organization (job costing) by multiplying your pay owed for an entire workday by the number of workdays needed to complete a job.

Job costing = Daily payroll rate (or hourly average wage rate) x Number of days (or hours) to complete a job

How Human Capital Management Software Can Help

Workforce expenses, including wages, benefits, and related taxes, can significantly add to business costs. To make tracking these HR metrics easier and analyzing their impact on your business’s financial success, you should consider using a single platform that will help you turn critical HR metrics into concrete, actionable insights for your business.

Integrated human capital management (HCM) software can help automate tedious workforce processes and allow you to store your HR and payroll data in one place, which enables workforce intelligence via integrated data sets and can provide access to powerful analytics that can help drive better business decisions. In short, HCM software can help finance professionals and HR departments create a strong alliance, helping both departments implement combined strategies that drive growth and meet business objectives.

HCM software not only benefits businesses by providing a unified platform that offers on-demand access to HR data but can also help streamline business processes, including recruiting, hiring, performance management, and professional development, making it easier to analyze workforce trends that align with business goals — while optimizing where needed. Having access to all your HR data in one place enables you to uncover trends, compare your data against industry benchmarks, and build business cases for setting overall business strategy goals. It also enhances your HR data handling efficiency and accuracy, allowing your HR department to work smarter, not harder.

Paychex Flex®, our all-in-one payroll, HR, and benefits solution, provides a single platform where you can manage your payroll, track time and attendance, maintain and oversee benefits, and more, giving you the people insights you need to strategize with confidence.