HR Metrics I: HR Staff and Expense Metrics This module introduces a variety of HR Metrics including HR to Employee Ratio and four methods to calculate HR Expense Ratios. Author: Scott Freehafer, Ph.D., SPHR, SHRM-SCP Human Resource Management Metrics © 2018 Scott Freehafer, Stu James, and Management by the Numbers, Inc.

Human Resource Management – By the Numbers HRM – By the Numbers There is an old myth that if someone who wants to have a career in business is likable, good with people, but does not like accounting, finance, operations, or economics, then human resource management might be the right choice for them. This comes from the idea that HR does not deal with numbers…but that is just a myth! Today’s Human Resource professionals have to understand accounting, finance, operations, and economics, as well as many specific HR Metrics if they are going to understand the impact and possibilities in their own profession. Insight Human Resource professionals need to know their numbers if they are going to be taken seriously by other “numbers-oriented” business professionals! MBTN | Management by the Numbers

Human Resource Metrics Overview In this module, you will learn about HR Staff and Expense Metrics. Since the HR Department is not a revenue generating department, some people view it as a “cost” which must be managed and even minimized. While we recognize that HR is a cost to an organization, we believe the cost is worth it. Organizations must accomplish HR work. An organization may either have a formal HR function/department or the HR work may be done within other functions of the business. But hiring, compensation, setting personnel policies, etc. still must be done. The question about cost is really one of efficiency and effectiveness since an efficient and effective HR department will help the organization succeed! MBTN | Management by the Numbers

HR to Employee Ratio Definition Insight The first metric to consider is the HR to Employee Ratio Definition HR to Employee Ratio measures the ratio of total employees to HR professionals. Total Number of Employees HR to Employee Ratio = Total Number of HR Professionals Insight An organization may have full-time and part-time employees who are members of the organization and they may also use “temporary” employees who work for the organization, but who are recruited, managed, and paid through a staffing agency. We’ll address how to calculate that in one of the examples. MBTN | Management by the Numbers

HR to Employee Ratio: Example Example: If an organization has 600 employees and 5 employees in the HR department, then the HR to Employee Ratio would be: Total Number of Employees 600 Employees Total number of HR Employees 5 HR Employees = 120 Employees per HR Employee Insight There is no right or wrong ratio. Your ratio may be high if you use a lot of technology such as employee self-service portals or if you outsource functions like payroll or recruiting/staffing. The question is: What works for your organization? MBTN | Management by the Numbers

HR to Employee Ratio: Example Example: Acme Inc. has 1,800 employees in its workforce plus 300 “temporary” employees and it has a VP of HR, an HR Plant Manager, an HR Generalist, a Benefits Coordinator, and a Payroll Specialist. In addition, the Staffing Agency has one full-time person who is devoted to your account. Option One (with Agency): 1,800 + 300 2,100 1 + 1 + 2 + 1 + 1 6 = 350 Employees/HR Pro. Option Two (without Agency) 1,800 1,800 1 + 1 + 2 + 1 5 = 360 Employees/HR Pro. Insight Remember, including agency employees when calculating this ratio is not right or wrong. The important thing is to be consistent. MBTN | Management by the Numbers

HR Expense Ratios HR Expense Ratios The second set of metrics to consider are HR Expense Ratios This can be calculated in four different ways: By dividing total HR expenses by total departmental expenses. By dividing total HR expenses by total expenses. By dividing total HR expenses by total revenue. By dividing total HR expenses by the total number of employees. Insight Each of these methods will allow you compare Total HR Expenses relative to the context of company as a whole, creating important Key Performance Indicators for HR expenses. MBTN | Management by the Numbers

HR Expense Ratios: Method 1 The first HR expense metric to consider is the Department Expense Ratio which compares the HR expenses with total departmental expenses. Definition Total HR Dept. Expenses Department Expense Ratio = Total Departmental Expenses Example: If a company’s total HR Expenses are $1,200,000 and all departmental expenses are $10,000,000 then… 12% Total HR Dept. Expenses $1,200,000 Total Departmental Expenses $10,000,000 MBTN | Management by the Numbers

HR Expense Ratios: Method 2 The second HR expense metric to consider is the Total Expense Ratio which compares HR department expenses to total company expenses. Definition Total HR Dept. Expenses Total Expense Ratio = Total Company Expenses Example: If a company’s total HR Expenses are $1,200,000 and the total expenses for a company are $100,000,000 then… 1.2% Total HR Dept. Expenses $1,200,000 Total Company Expenses $100,000,000 MBTN | Management by the Numbers

HR Expense Ratios: Method 3 The third HR expense metric to consider is the Total Revenue Ratio which compares the HR expenses with total company revenues (sales). Definition Total HR Dept. Expenses Total Revenue Ratio = Total Company Revenues Example: If a company’s total HR Expenses are $1,200,000 and a company’s revenues are $200,000,000 then… 0.6% Total HR Dept. Expenses $1,200,000 Total Company Revenues $200,000,000 MBTN | Management by the Numbers

HR Expense Ratios: Method 4 The fourth HR expense metric to consider is the HR Expense per Employee which compares the HR expenses with the total number of employees at a company. Definition Total HR Dept. Expenses HR Expense per Employee = Total Company Employees Example: If a company’s total HR Expenses are $1,200,000 and a company has 500 employees then… $2,400 / Employee Total HR Dept. Expenses $1,200,000 Total Company Employees 500 MBTN | Management by the Numbers

HR Staff and Expense Metrics Insight It is important to be able to track the HR department’s expenses relative to the organization as a whole. Depending on the HR department’s performance and/or impact, one may find that the department’s budget should be decreased or increased. Especially as a company grows, it is insightful to see if the HR function is keeping pace with the rest of the organization. You may also find that comparing these metrics with other companies in your industry a helpful benchmark. Question 1: D’Brickshaw Homebuilders (DBH) is a real estate development company that employs 600 people full-time including 6 HR staff. They also subcontract an additional 400 temporary and part-time workers through a company that dedicates 2 HR specialists to DBH’s account. Calculate the HR to Employee ratio with and without the temporary and part-time staff. MBTN | Management by the Numbers

HR Staff and Expense Metrics Answer HR to Employee Ratio = Total Employees / HR Staff For DBH’s full-time staff of 600 employees and 6 HR Staff the ratio is: = 600 / 6 = 100 employees per HR Employee When DBH’s temporary and part-time employees are included the ratio is: = 1000 / 8 = 125 employees per HR Employee Question 2: DBH has an HR departmental budget of $1.5 million compared to total departmental expenses of $60 million. Overall expenses for the company are $300 million. Calculate the Department Expense Ratio (method 1) and the Total Expense Ratio (method 2) for DBH. MBTN | Management by the Numbers

HR Staff and Expense Metrics Answer(s) Department Expense Ratio = HR Dept. Exp. / Total Dept. Exp. = 1.5 million / 60 million = 2.5% Total Expense Ratio = HR Dept. Exp / Total Company Exp. = 1.5 million / 300 million = 0.5% Question 3: DBH has an HR departmental budget of $1.5 million. The company brought in $600 million in revenues in the most recent year. Recall that DBH has 600 employees and 1,000 employees including temporary and part-time employees. Calculate the Total Revenue Ratio (method 3) and the HR Expense per Employee (method 4) for DBH. MBTN | Management by the Numbers

HR Staff and Expense Metrics Answer(s) Total Revenue Ratio = HR Dept. Exp. / Total Company Revenues = 1.5 million / 600 million = 0.25% HR Expense per Employee = HR Dept. Exp / Total Employees = 1.5 million / 600 = $2,500 per employee (for full time) = 1.5 million / 1000 = $1,500 per employee (including temp & P/T) Insight While we haven’t explicitly stated whether or not the $1.5 million included the cost of the dedicated subcontractor HR staff, it might be more accurate to include this value (if it isn’t) in methods 2-4 and especially when temp and part time employees are included in last calculation. But again, what is probably most important is to be consistent in the approach. MBTN | Management by the Numbers

Further Reference For Further Reference: MBTN Modules: HR Metrics 2-6. MBTN | Management by the Numbers