What is Human Capital ROI? Definition, Formula and Purpose

Human Capital ROI (HCROI) – Definition

Human Capital ROI or HCROI is an HR Metric that evaluates the financial value added by your the workforce against the money spent on them in terms of salaries and other benefits.

In layman terms, it is the amount of profit obtained by a company against every dollar invested in their human capital compensation. The HCROI shows the ratio of income derived against the total employment costs.

This compensation includes salaries, compensations, extra monetary benefits, etc spent on FTEs and contingent(temporary or part-time) employees of any organization.

Human Capital ROI shows the financial value individually or collectively contributed by your employees. Basically, it provides a true measure of the productivity of human resources.

Formula To Calculate Human Capital ROI

The formula to calculate the Human Capital ROI is very simple. Human Capital RIO is the Revenue minus non-human capital expenses divided by Human Capital Expenses.

Where:

Non-Human Capital Expenses = Operating Expenses  – Human Capital Expenses

Human Capital Expenses = Fixed compensation(salaries) + Variable compensation + Benefits + Indirect cost

Revenue = The adjusted revenue after deducting the cost of capital, depreciation, etc

Let us understand it with a simple example.

Example

Company ABC’s revenue after deducting the cost of capital, depreciation, etc is $ 240,000. Operating Expenses are $ 150,000. Human Capital Expenses are $ 92,000.

By applying the above formula:

HCROI = [$ 240,000 – {$ 150,000 – $ 92,000)]
$ 92,000

= [$ 240,000 – {$ 58,000}]
$ 92,000

= $ 182, 000
 $ 92,000

= $ 1.97

This means that for every single dollar spent you receive $ 1.97.

This is your Human Capital Return on Investment (HCROI).

Purpose of Calculating Human Capital ROI

Human Capital ROI helps to analyze which factors help or hinder the profitability and productivity of the organization. It can be either organizational and personal factors.

Furthermore, It also enables the organization to create or provide the right atmosphere to its employees. This will eventually result in relatively fast and more productivity.

MNCs measures HCROI on a short-term and long-term basis. This helps them to find which external or internal factors influence the productivity of their workforce.

It helps to know whether the right candidates have been hired or retained. It further helps to know whether or not the proper level of training and skills are developed in employees.

In addition to the above, it enables the organization to know that the environment provided for employees to flourish is right or not.

It will identify whether right leadership and managerial support are available to the employees. This enables them to accomplish and align with the company’s business objectives.

Knowledge of all the above things helps us implement proper initiatives that help us to improve the ROI.

You can find definitions of other HR-related terms in our HR Glossary Section like Full-TIme Equivalent (FTE), Revenue Per Employee (RPE), Employee Retention, etc.

How To Calculate Human Capital ROI using Excel?

We have created a simple and ready-to-use excel template for Human capital ROI Calculator with predefined formulas.

Click on the link below to download:

Human capital ROI Calculator Excel Template

You can also download other useful HR metrics templates like Revenue Per Employee Calculator, Monthly Attrition Report, Cost Per Hire Calculator, Employee Resignation Schedule and many more from our website.

We thank our readers for liking, sharing and following us on different social media platforms.

If you have any queries or suggestions please share in the comment section below. I will be more than happy to assist you.