An organization’s employees have long been referred to as “human resources” (HR). Another approach refers to this valuable asset as “human capital” instead. This may be a semantic difference, but the meaning is important. While “resource” implies something finite that can be used up, “capital” paints a picture of an investment.
In this view, human capital represents the value created by an organization’s workforce and its collective skills, knowledge and contributions. Funds spent on hiring, developing and keeping talent is not just an expense, it’s an investment in an intangible asset that can grow in value.
Calculating Your Human Capital ROI
If human capital is an investment, it follows that it can generate returns on investment (ROI). Human capital ROI is a metric reflecting the financial value that the workforce contributes to the enterprise. Expressed in a human capital ROI formula, it looks like:
HCROI = (revenue – human capital cost) / human capital cost
The revenue represents the entire revenue of the company, while human capital cost comprises the investment the company has made in human capital, including costs such as hiring, compensation, benefits, training and more. Human capital ROI captures the value that human capital brings to an organization. Integrating the concept of human capital ROI into your business provides several benefits:
Data to Drive Decisions
The concept of human capital ROI requires the value of human capital to be quantified and expressed in terms of human capital data that can be used for decision-making. Rather than guessing or assuming the value of human capital and how it should be managed, an organization can rely on data to guide its approach.
Optimizing Human Capital
Quantifying and measuring human capital also include human capital programs and initiatives. Human capital initiatives are designed to be measured and evaluated so that human capital strategies can be based on results. The organization can focus on initiatives that are proven to increase human capital ROI while eliminating those that don’t bring value.
Strategic Support
When human capital leaders can demonstrate the economic value of the workforce and of programs to increase its value, it can help others in the organization to see human capital investments with a new perspective. Instead of employees being seen as a cost center within the human resources department, human capital is treated like the valuable intangible asset it is, with strategies developed to protect and grow it.
HR Programs with the Highest Potential ROI
Not all human resources programs have the same impact in terms of human capital ROI. The most successful programs act as multipliers for key ROI metrics such as productivity, retention and engagement. To accomplish this, human capital initiatives must offer value to both the organization and the individual employee.
Human capital management initiatives should set the stage and encourage employees to continue to grow, improve and stay with the company to add the value of their expertise, knowledge, skills and loyalty to the enterprise.
Leadership Development
Developing leaders within the workforce is vital to the success of any organization, but leadership development often doesn’t get the strategic attention and resources it should. Leadership development is key for smooth day-to-day business, but it’s also critical for the future. Leadership development can include a range of programs, from mentoring and sponsorship to leadership skills training, job shadowing and more.
When enterprises neglect to continuously nurture leadership development, they will face leadership gaps that can be difficult and expensive to fill. On the other hand, cultivating high levels of leadership learning builds robust leadership pipelines, resulting in smooth leadership transitions and strong institutional knowledge.
Skill Development
Skills are one of the most obvious areas of value that human capital brings to the table, yet 87 percent of companies say they have skill gaps, or expect to within a few years, according to McKinsey. This means organizations need to take the initiative to provide skill development opportunities to their employees. This can take many forms, including classroom training, workshops, courses, cross-training, project-based training, mentorship and more.
Providing skill development benefits the company, of course, but it also gives a boost to employees by increasing their career prospects, while motivating them to stay with the organization that provides opportunities to grow.
Employee Resource Groups
Employee resource groups (ERGs) are networks for employees who have common identities or interests, offering them an opportunity to come together to build community at work. ERGs provide employees support and a sense of belonging, along with career-advancing benefits such as networking and learning opportunities. All of this serves to increase employees’ level of comfort within the workplace as well as building attachment and loyalty to co-workers and the organization. ERGs are also great resources for companies to find out about employees’ concerns and perspectives.
Mentoring
Mentoring is a time-tested way for companies to increase human capital performance. Mentoring increases employee retention, meaning the company reaps the benefit of the time and resources invested in the employee, rather than those resources benefiting another organization when the employee moves on. You can see exactly how mentoring can have an impact on the bottom line with this employee retention ROI calculator.
Mentorship also offers employees the opportunity to receive personal guidance to help them develop skills and leadership. Mentees are more likely to feel that they have good career development opportunities and higher rates of advancement. According to a Wharton study, 25% of employees in a test group who took part in a company’s mentoring program had a salary grade change within a five-year period, compared with 5% of employees in a control group who did not participate in the program.
Calculating the ROI of mentoring is an established process that can be streamlined even more with the help of mentoring software. Chronus mentoring software simplifies mentoring program measurement with customized metrics, dashboards and reports, including reports on metrics such as retention, advancement and matching success. Robust integrations with business systems make it easy to see outcomes in ways that are easy to understand to providea clear picture of ROI.
The Importance of Employee Engagement
HR programs with high potential human capital ROI have one key thing in common, they boost employee engagement ROI, which is how invested employees are in their work and the organization they work for. Highly engaged employees bring outsized value to an organization.
According to Gallup research, organizations with high employee engagement achieve earnings-per-share growth that is more than four times that of their competitors, as well as higher customer engagement, productivity, retention and profitability. Measuring employee engagement and supporting programs that increase engagement can have a direct impact on human capital ROI.
Invest in Your People and They Invest Right Back
In many organizations, human resources are treated as an expense center, with a focus on labor costs. But this misses the potential economic value that human capital can generate. Businesses that see the workforce as a source of business growth and make the right kinds of investments can realize improved engagement, retention, employee skill levels and more, all leading to tangible results including increased productivity and revenue growth. When organizations recognize and measure the value of human capital, they can use data to make informed decisions to increase human capital ROI.
Generating human capital ROI starts with providing employees meaningful value, whether through training, wellness programs or growth opportunities, empowering them to contribute even more in return. It’s a win-win strategy that helps enterprises maximize their most valuable asset: their people.
