The assessment of the returns on investment (ROI) of human capital can get you into a tricky territory. Unlike other resources, you cannot have an absolute objective assessment of human resources. I would not suggest you to do so either. People should not be judged solely based on some metrics on a dashboard. Contribution of employees go beyond numbers reflected in performance reports. However, as a business owner, it is important you measure the ROI of human capital.
It helps you establish salary and performance benchmarks. I have used the cost vs. revenue comparison on a couple of instances. When employees who have been in the system for a relatively longer duration without much change in their role in the organization, their performance usually represents an inverted L curve (chart 2). The results were encouraging when I presented this data to a couple of such employees. It helped to nudge them to take over more responsibilities.
Example: ROI of Human Capital
We will take a relatively easy example to understand returns on investment of human capital. Mark joined Acme Media Pvt. Ltd. in early January 2018. He joined as a sales executive. His total compensation when he joined was $1000 a month. He got a raise of 13% in January 2019 and another raise of 9% in January 2020. Hence, his compensation at present is about $1231 a month. That is an increase of approx. 23% compared to his joining salary.
The charts below represent his quarterly salary and sales trends:
Mark has been with Acme Media for 30 months now. He is due for another raise in January 2021 (as represented in the last data point of Chart 1). For the first 7 quarters, there was a consistent increase in quarterly sales for Mark. This is usual for most new employees. As they join and learn the sales process, techniques and improve their product knowledge and understanding of customer requirements, they make steady progress. From the 8th quarter onwards, the sales curve for Mark is somewhat flat. A simple moving averages forecast for the next three quarters also forecast a flat curve.
What is the ROI of human capital for Acme Media?
The chart below plots the trend of Mark’s salary as a percentage of total sales achieved.
In Chart 3, you could notice the impact of increasing salary and stagnant sales in the second half of his employment with Acme Media.
When Acme Media prepares a similar data for all sales executives, it will give them a range for salary cost as a percentage of total sales. This range would serve as a benchmark.
How to avoid an inverted L curve?
The example of Mark is a rather simplistic view of measuring ROI of human capital. However, as stated earlier, this measurement should not be the sole basis of evaluating employee contribution. This measurement, along with establishing cost benchmarks, is to serve as an assessment to help employees add on to their repertoire of skills to be more valuable to the organization. This should serve as a tool for skill and career development.
- Invest in training: Inverted L curve like in the example above usually happen when employee skills remain stagnant. They perform the same role over a period of time. Identifying and investing in skill development programs help employees upgrade their skills and be more productive. In the example above, periodical sales trainings may help Mark improve his objection handling and sales closing skills. That would help him close deals in fewer interactions allowing him to simultaneously work on more number of deals.
- Identify cross functional opportunities: As employees master their skills for respective domains, they would need less time for the same work. Could there be an opportunity to train and use their experience for other functions? Could Acme Media use Mark for developing content for their blog and social media? He understands what customers need and could provide valuable inputs for content development.
- Leverage technology and automation: use of technology can help automate processes. This would help cut down cycle times and eliminate repetitive manual tasks. Employees would have more time on hand leading to productivity gains and better ROI.
Hope you find this article helpful. Do share your views in the comments section or you could connect with me on Twitter. Thank you for visiting Business Management Blog.
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I have never thought about the points you have mentioned above with such detail, truly like the article.
Thank you Rahul.