Most traditional talent acquisition and human resources performance metrics, such as cost per hire and turnover rate, don’t predict organizational performance. So, what metrics should you track to truly quantify the impact of your talent initiatives?
There’s an interesting conundrum developing in the recruitment, retention, and development of talent. Companies have been actively promoting the idea that “people are their greatest asset.” Yet beneath the rhetoric, people—and their acquisition, development, and structural support—are managed as a cost center.
Is that the wrong framing? The Securities and Exchange Commission believes so. They recently said that human capital (HC) is not an expense, but an investment in an intangible asset. Like physical assets and intellectual property, the value of human capital is directly related to how profitable a company can be.
Yet, despite a growing recognition of human capital as a valuable performance driver, few organizations are focused on measuring the bottom-line contributions of their investments in human capital. In part, that’s due to the lack of metrics for measuring the profit value of things like candidate experience, talent development, and retention.
But there’s an easy way to connect what’s going on in human capital management with how the business is performing—and it starts with a high-level metric called the Human Capital Return on Investment (HCROI).
People as Profit Drivers, Not Cost Centers
Does your company look at investments in human capital and physical assets through the same lens? Most likely not.
When a company buys a physical asset like a new server, it does so with the understanding that it’s not just spending money but buying an asset whose performance can be tracked and measured over time. The decision to invest is based on some calculation of expected return.
With people, it’s different. The company is spending money to bring talent into the company and keep them there, but it doesn’t own those people in the way it owns a server. Employees may underperform, have their productivity derailed by poor managers, tools, or processes, or quit before they generate any kind of return. But in reality, that is no different than the server. It might not work as intended, may unknowingly be poorly configured, or simply have the wrong operator—all contributing to a less-than-stellar investment return.
Dr. Solange Charas, author, professor at Columbia, and CEO of HC Moneyball, a company focused on human capital consulting, sees this divergence in action every day. “Business operators don’t think in terms of investing in people as investing in an asset. They think of it as a sunk cost, a necessary evil. The mindset is completely different.”
That’s exactly what the SEC is trying to change. When we talk about human capital as an investment in an intangible asset, not an expense, it signals two impacts to employers:
- That human capital is arguably the most important investment you make in your business. Research shows that a staggering 90% of the S&P 500’s long-term market value is driven by intangible assets, up from just 15% in 1975. When you frame human capital as an intangible asset, you acknowledge that people are your main drivers of sustainable success—especially in people-intensive service industries, which now make up 87% of the U.S. GDP.
- That human capital is an “investment,” which means you must assess the return. No company invests in something without an expectation of return, right? When you reclassify human capital as an investment, you must quantify and show a return on that investment for the company’s stakeholders. So, it becomes a financial exercise to optimize investments to generate the best return.
While the SEC is focused on public companies, it’s not a stretch to say that this shift in mindset will soon affect all public and private companies. Human capital practitioners will be at the forefront of this shift, tasked with demonstrating that the dollars being invested in talent acquisition (TA) and human resource (HR) programs are generating a positive return for the organization as a whole.
Hear more from Dr. Solange Charas by watching our on-demand roundtable recording about maximizing human capital investment for the ultimate ROI and what employers need to know to drive business growth.
What is Human Capital ROI?
HCROI = (Revenue – Human Capital Cost) / Human Capital Cost
Human capital cost is the total cost of your workforce, including things like salaries, benefits, onboarding, training, tools, etc.
For example, let’s say your company’s revenue is $800,000, and your total workforce expenses are $300,000. The HC ROI would be ($800,000 – $300,000) / $300,000 = 1.67 or a return of 67%.
This means that for every single dollar spent on human capital, you received $1.67 back.
Human Capital Return on Investment (HCROI) is a metric that represents the dollar value employees contributed to the enterprise compared to the resources employers spent on them, including recruiting, compensation, benefits, and training. Dr. Charas calls it “the mother of all metrics that helps organizations show the return on investment in human capital.” It’s like getting a clear report card on how well a business manages its most important assets—its people.
This isn’t just about tracking costs like conventional TA KPIs tend to do—it’s about seeing the real value those costs bring back. When you focus on improving HCROI, you’re finding ways to get more bang for your buck. Whether through better training, more innovative hiring, or refining processes, every improvement can lead to a healthier bottom line.
It’s a pivotal metric because, once you have the HCROI baseline, it’s possible to play with the numbers and see:
- What would be the value impact of investing an additional $100,000, $500,000, or $1 million into the workforce?
- If improving the HCROI by just 2% would generate $10 million more in profit, how much of that $10 million would the company be willing to invest in improving HCROI?
- What is the comparative HCROI between different departments or teams within an organization? Or between individual programs?
“What we found is that, for organizations that spend more than 50% of their expense on people, understanding HCROI really moves the needle on profitability performance,” Dr. Charas says. “When HCROI goes up, when you are better able to manage human capital performance, it has a direct impact on profitability. That gives HR people a lot of power.”
Pro Tip: HC Moneyball’s free HCROI calculator will calculate your company’s HCROI and provide a sensitivity analysis, showing the profit impact of improving human capital efficiencies by just 5%.
Why HC ROI Matters to Your Business
As Dave Ulrich once tweeted, “HR is not about HR – it’s about what value we create from doing HR.” Here are just some of the ways that HCROI can help drive value creation in your human capital functions:
#1: Supports data-driven decision making
HCROI provides the data and evidence for making informed decisions around resource allocation by demonstrating the tangible financial impact of your human capital initiatives. For example, suppose a wellness initiative costs $250,000 but reduces absenteeism to the tune of $1,000,000 in savings. In that case, the organization will know that investing more resources into that program can yield even better results.
“Human capital practitioners have good intuition, but you have to back up the intuition with facts and data,” Dr. Charas says. “Then you can go to executive management and say, I’ve got this recommendation, and here’s the data that will support it.”
#2: Secures stakeholder buy-in
Fundamentally, HCROI is a measure of profitability. It allows human capital practitioners to translate what’s happening in the human capital function into the financial performance case using metrics the C-suite will quickly understand.
“HCROI shows that, for every dollar we invest in our workforce, what is the adjusted profitability that returns to the company? It’s a profitability measure, and it’s not going to be hard for your CEO and CFO to get this metric. It enables human capital professionals to speak a language that financial people can understand.”
#3: Removes the perception of human capital as a ‘soft’ area of the business
Human capital functions have long been undervalued, underfunded, and barely given a seat at the executive table. But as Dr. Charas explains, “When you use data analytics to understand human capital performance, it’s like following a treasure map and where the X is a double treasure chest. One is for the company, and the other is for the brand of human capital. All of a sudden, human capital is showing that they’re contributing to the company’s financial success.”
#4: Optimizes your human capital investments
Understanding the HCROI for different programs and initiatives can help organizations pull the right levers and reallocate resources where they will have the greatest impact. It’s not just about cutting costs but also investing in areas that will generate the most value for the company.
Dr. Charas shares the story of a company in the fast food industry. “They had 27,000 employees with a 30% attrition rate, which is actually low. However, the problem was that they only had a 10% candidate hire rate. To keep the organization at a level in terms of headcount that is not even growing, they would have to get to 81,000 offers to replace the 8,100 people that would be leaving the company. I told the client to imagine increasing the hire rate to 20% by having a more effective screening process. Imagine reducing attrition by 2% from 30 to 28%. The cost savings could be north of $3 million.”
“How much are you willing to spend to get the $3 million? And the rational thinker would say, I’m willing to spend up to the weighted average cost of capital of $3 million dollars because I have an opportunity cost. I can either invest it in this, or I can pay down my debt.”
HCROI lays the groundwork for unlocking these optimization opportunities in your organization. If there’s inefficiency, HCROI will pick it up, which is why it’s such a powerful tool for driving long-term business performance.
From Metrics to Action
In today’s service-based economy, the one true path to profitability for firms is not through mass production or the commoditization of goods but through basing their competitive strategy on exceptional human capital management and treating employees like their assets. HCROI is the mother metric for maximizing the value of your people investments and driving profitability.
Once you’ve baselined the HCROI for your organization or initiative, it’s up to human capital practitioners to determine what they need to do to improve the number.
In part two of this series, we’ll discuss optimizing plans based on this metric insight. That’s the endgame, turning human capital data into needle-moving talent initiatives–the kind that finance leaders can’t just nod at but actually invest in.
