At some point, most business leaders have looked at their Human Resources department and wondered, “It would be really great for budgeting, planning, or defining our business strategy if we could measure and optimize the value of the initiatives undertaken by HR.”
But how can HR leaders quantifiably assess the impact of people processes on the bottom line in a way that can be compared with competitors?
To tackle this challenge, organizations use HR metrics. These are sets of measurements that help businesses understand the value of HR initiatives in the areas of employee turnover, training, cost of labor, expense per employee, and so forth.
In this article, we take a closer look at HR metrics, their types, importance, and ways to enhance organizational performance using these measurements.
HR metrics are a set of KPIs used by HR professionals and managers to determine the effectiveness of an organization’s HR activities.
For instance, let’s say you want to get an idea of how productive employees are when it comes to the bottom line, rather than hours worked. You could measure how much your business is earning you per employee. This is the Revenue Per Employee metric.
Or let’s say you need to allocate a specific budget to a new set of hires. How do you even know how much to budget? That’s what the Cost Per Hire calculation is for.
These metrics allow organizations to attribute HR’s work to business outcomes with the help of HR analytics and improve their business strategy.
Human Resources metrics are categorized depending on the HR topics that they address, for instance:
Regardless of the HR model your company follows, the importance of HR metrics cannot be understated. The value of these metrics lies in:
Here’s a list of the most important HR metrics used by businesses worldwide.
Revenue per employee is a measure of how much revenue a company is generating on average for each full-time worker it employs.
The metric is often used to compare employment efficiency among companies operating within the same industry. Companies with higher revenue per employee are utilizing their workforce in a more productive manner than companies with lower revenue per employee.
For example, company A’s revenue per employee is $100,000 annually, while company B’s revenue per employee is $50,000 in the same industry. This means company B’s employees are generating only half the value being produced by company A’s employees. Accordingly, Company B may have to review their hiring practices to address the issue.
Other names for the revenue per employee metric are sales per employee and revenue per employee ratio.
Tracking revenue per employee can provide valuable insight into the growth or decline in the overall efficiency of an organization. If your revenue per employee metric is lower than industry benchmarks, you may be overstaffed and would likely benefit from reviewing your hiring policies.
On the other hand, a higher-than-average revenue per employee could point to understaffing and overworked employees. To avoid that, it’s best to couple it with other metrics such as the Employee Satisfaction Index and turnover.
Revenue per employee is calculated by dividing the total revenue by the total number of employees.
Revenue per employee = Total revenue/Total number of employees
This metric is best measured quarterly, bearing in mind seasonal cycles. It allows you to spot efficiency fluctuation trends so you can plan your hiring accordingly.
Cost per hire is the average cost a company is expected to incur when hiring a new employee. These costs can be internal (such as the cost of running a career page on your own website) and external (paid to a recruitment agency).
This is a core metric for recruitment because it helps HR advise departments on budgets, measure the effectiveness of the corporate brand as an employer, and calculate their return on effort.
Knowing how much to spend on hiring a new employee is vital for any business. HR associations such as SHRM and AIHR consider the metric helpful for organizations in preparing and tracking their recruitment budgets.
If a company’s cost per hire metric is higher than the industry average, there may be a problem with their brand as an employer. Competitors might be offering better compensation, or something else might be amiss that HR would have to investigate.
Cost per hire can be measured by dividing the sum of all recruitment costs by the total number of hires in that period.
Cost per hire = Total internal recruiting costs + external recruiting costs / Total number of hires
The Employee Satisfaction Index (ESI) is a survey-based metric that measures how satisfied employees are with what their workplace offers. The metric can help HR managers gain more insight into employee attitudes towards their jobs. The metric consists of a score between 0 to 100 based on ratings given by all employees.
Knowing how employees perceive your company compared to their ideal workplace can help companies motivate and retain their top talent.
Showing an improvement in ESI year on year also helps HR demonstrate the effectiveness of its programs to improve employee motivation and satisfaction.
The Employee Satisfaction Index is measured through a survey. As specified by Hubstaff, a workforce management company, the survey seeks answers to the following fundamental questions:
The questions are answered on a scale of 1 to 10, where 1 is the worst and 10 is the best score. These scores are added together to determine a total score out of 30.
The formula for measuring ESI is:
ESI = [((sum of 3 scores ÷ 3) – 1) ÷9]*100
The closer the index’s value is to 100, the higher the employee satisfaction. In a perfect hypothetical scenario where an employee's score for all 3 questions turns out to be 10, the calculation would be: ESI = [((30/3)-1)/9]*100 = 100.
To gain insight into why an ESI is particularly high or low, these questions can form part of a larger survey with specific goals in mind. For example, a company might want to understand what it would take for employees to be happier in the workplace. This may lead to questions about training, benefits, etc.
Training cost per employee is the total amount spent annually on employee training. This includes the cost of training materials, hiring trainers, travel, lodging, meals and refreshments, venue rentals, etc.
A company is as good as its employees. So whether your business is big or small, training your employees should be a top priority for human resources.
Equipping your team with the latest industry knowledge and best practices allows your company to grow and innovate. It also serves to attract and retain top talent.
Training cost per employee is an important metric to track and compare with competitors. It allows your organization to understand whether it’s investing in its employees sufficiently. If the number is too low, your team may feel demotivated, leading to higher employee turnover.
If the number is too high, the training calendar may need to be re-aligned with organizational goals to prevent employees from losing focus.
The formula for training cost per employee is:
Total training budget/Number of employees undergoing training = Training cost per employee
Employee turnover rate is the number of employees leaving an organization within a defined time period, typically a year, expressed as a percentage.
When calculating this metric, it’s essential to distinguish between voluntary and involuntary exits. Both the numbers are going to provide insights of their own.
Employee turnover rate is a crucial metric for human resource management. Studying this number in combination with other metrics can give you great insight into company policies and issues that may require review.
You may ask who’s leaving and why? Is there a particular time of the year when more people leave? Is the retention rate high when the training cost per employee is high? What is the Employee Satisfaction Index score of the employees who leave?
Digging deeper into the reasons for voluntary turnover can help organizations boost employee engagement and retention. It can also provide deeper insight into the impact of management practices and policies on employee turnover.
With the help of historical data on employee turnover rates, organizations can forecast their staffing needs in advance and maintain the headcount they need.
The formula for employee turnover rate is:
((Total number of employees who have left / (beginning + ending number of employees) / 2)
The time to hire metric measures the average time it takes the Human Resources team to hire a new employee. This metric directly highlights the speed, efficiency, and cost of HR in an organization. Carefully analyzing this metric can also indicate the competition for hiring in the market.
Time to hire is a crucial metric for the HR function. Knowing how quickly they can execute the recruitment process is an important KPI for the management to know. In addition, by keeping track of the time to hire metric, the HR department can compare its speed and efficiency with competitors in the same industry.
In addition, time to hire can affect revenue. If, for example, the HR team’s goal is to increase the number of salespeople, their objective should also be to fill these roles in as few days as possible. The sooner the company has more sales people on board, the sooner their increased capacity can generate more sales.
If the time to hire metric is low for your HR team, there may be bottlenecks in the recruitment process that need to be addressed. This metric can help your team understand these shortcomings and improve upon them for better results.
The formula to calculate the time to hire is:
Total number of days to hire selected candidates / Number of roles hired
Typically, less than 10 days is considered a good benchmark for time to hire.
As the name suggests, the ghost rate measures the number of hired candidates who did not show up on their first day at work despite accepting the job offer.
According to a survey conducted by PWC which polled nearly 10,000 US respondents, “Nearly half of US job seekers in high-demand industries like technology, energy, and banking say they’ve turned down an offer because of a bad recruiting experience.”
Examples of a bad recruiting experience, according to the survey respondents, include failure to communicate with the candidates in a timely manner and ceasing all communication suddenly without an explanation.
Some common reasons for higher ghost rates are:
Analyzing historical data on ghost rates in conjunction with other people analytics may reveal seasonal spikes in ghosting. Insights like these can help you optimize your hiring process and line up backup candidates accordingly.
The formula for measuring ghost rate is:
Ghost Rate = Number of candidates who don’t show up on the first day / Total number of new hires
Every HR department should strive to reach a ghost rate of zero.
Early turnover or new hire turnover is a vital recruitment metric that measures the number of employees who part ways with a company within their first year, or another period defined by the company.
Just like the employee turnover rate metric, early turnover considers voluntary and involuntary exits.
Tracking early turnover is helpful for HR teams in multiple ways. First, it tells you whether your recruitment process needs to be reviewed. It also draws a question mark on your employee onboarding process. Perhaps the expectations weren’t set correctly during the interview stage. Or maybe the employee just doesn’t feel engaged or valued. Training can also be a factor.
Hiring a new candidate is an expensive and time-consuming process. Early turnover represents a significant challenge to HR in the form of detailed budgets, lower team morale, and a tainted employer brand. The early turnover metric helps HR professionals tackle these challenges.
The best performance management systems may help lower early turnover by engaging new employees right from the onboarding stage and setting expectations from the beginning.
The formula for early turnover is:
(Number of employees who leave within their first year /Total number of separations during the same period) x 100
Absenteeism rate, a time-tracking HR metric, is the rate of unexpected absences due to health issues or other causes. The absenteeism rate can be measured for individuals, teams, or entire organizations in one go.
The absenteeism rate metric gives you information about the vitality of the organization. For example, if the rate of absences is high due to sickness, it’s a sign you need to focus on the health and well-being of your employees.
According to a study published in the Journal of International Business Research and Marketing, there may be other reasons for high absenteeism as well such as:
Managers would have to pay close attention to such employees and may have to speak to them to get to the root cause.
Collecting reliable data is vital to measuring any HR metric accurately. For absenteeism rate, you’d need the expected employee attendance data along with the number of days and dates each team member was absent. For this calculation, you’d also require the number of available workdays in the defined period.
The formula for absenteeism rate is as follows:
Number of days absent / Number of available workdays in the defined period
The absenteeism rate can be calculated for any time period, but according to the SHRM absenteeism rate sheet, the metric is typically measured monthly and annually.
Work time or overtime is a record of how long somebody’s at work. Of course, it’s traditionally tracked where compensation is based on hours worked, typical of factories or restaurants, for instance.
Nowadays, however, it’s also useful for businesses with remote employees. Some companies like to keep track of how long their employees stay logged in on their devices for work.
Work time is an important KPI workers for several reasons. First off, work-from-home often blurs the line between work and personal time. Consequently, many people end up working extra hours per week. This can lead to burnout.
On the other hand, if their work time is too low, they may be underutilized and need to be engaged better.
Work time can be measured using an employee timesheet application. Ideally, get a tool that supports screen capture to know exactly what the employee was doing at a given time. Here are some of the best remote team management tools for 2022.
Work time = Total number of hours logged.
Active time is the number of hours a remote employee works with their keyboard and mouse on a specific application. To put it into context, Active Time is related to Focus Time and Total Time.
Focus Time is the amount of time an application is in the foreground without receiving any input from the user. Total Time is the total running time of an application on the remote employee’s system.
The scrutiny of remote employees is on the rise. According to a recent survey, around 60% of businesses are tracking the activities of their remote employees.
Tracking Active Time is important for roles that are expected to provide a lot of input to a designated app. This could be valid for employees like customer service representatives, data capturers, and community managers.
Remote employee monitoring is typically done via software. Active Time is a metric deeply focused on active work. It tells employers the exact duration the employee was interacting with the desired application. Employers would have to be careful with such metrics, though.
Depending on the nature of the job, an employee may spend a lot of time simply reading from the screen. This would be counted as Focus Time instead of Active Time.
Active Time may also not be the best way to track the productivity of creative professionals, such as writers and designers, who might spend a big chunk of their time away from their workstations simply thinking about how to solve a certain problem.
However, when you think about how to measure employee engagement in this situation, metrics such as employee retention rate and voluntary employee turnover rate would still apply.
Making decisions based on HR metrics is a scientific approach to business. “The benefit of using metrics is that the decisions are better-informed and backed by facts—rather than hunches—and thus make key people decisions far more ‘sellable’ to the business,” says Cecile Alper-Leroux, vice president of human capital management innovation for Ultimate Software in Weston, Florida.
When you’re able to demonstrate the effectiveness of an initiative using numbers, it becomes easy for the top management to review and approve it.
In terms of enhancing business performance, your HR metrics don’t solve a problem for you, but the insight you gain from looking at these metrics can point you in the right direction. For example, if the absenteeism rate is high, you can check to see if the training cost per employee is too low or overtime is too high. For more context, you can also look at the Employee Satisfaction Index.
Moreover, HR metrics, when put together the right way, multiply in strength and help you see the big picture. The art of combining HR metrics to connect them to business problems and outcomes is called HR analytics or People Analytics.
People analytics software makes it possible to crunch large data sets and present actionable insights to business leaders.
“The goal is to turn data into information and information into insight,'' said Carly Fiorina, former CEO of HP.
HR metrics enhance business performance by helping you ask the right questions. They give context and meaning to an otherwise endless supply of raw data. Not only do they allow you to run comparisons within the organization, but they also help you match yourself with competitors to see where you stand in the context of your business environment.
For a business to grow sustainably, it has to continuously measure the value of its human capital. HR metrics make this possible. But it’s important to remember that data without analytics is meaningless.
It’s also important to view quantitative data in light of the qualitative information you collect. For example, you know what your employee turnover rate is, but how do you put that into context with what you learn through conversations with your staff? This way of thinking can reveal insights that looking at numbers alone wouldn’t.
Individual metrics need to be combined and viewed together to connect them with business outcomes. This is now easier than ever before with some of the best HR analytics software available today.
According to The State of HR Analytics 2021 by HR.com, only 36% of respondents agreed that their people analytics platform delivers actionable insights. Don’t let your organization be left behind.
You need to be a member of RecruitingBlogs to add comments!