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Assessment & Evaluation

Published April 2007

The ROI of HR

Patrick Kulesa

"The people component of a business" is a popular phrase in today's organizational lexicon. But to what extent do an organization's people contribute to its success? What is it about people that matters?

For many years, business leaders have recognized that the human capital of an organization is a vital competitive advantage. But just how the people contribution is analyzed, quantified and used to achieve business goals varies substantially from one company to the next.

Studying the specific steps companies take to understand human capital provides guidance for any organization that seeks to maximize its return on the talent in its ranks. Recently, global employee research and consulting firm ISR surveyed 100 senior executives, managers and human resource professionals. Ninety-one percent of respondents said their company uses some measurement related to human capital.

Figure 1 shows the frequency with which specific human capital measures are reported in use. More than half of those surveyed said they track employee head count as human capital metric. Although a very limited measure, increases in head count presumably reflect greater value obtained from human capital, and decreases in head count reflect less value obtained.

After head count, respondents indicated an index derived from employee opinion surveys is the next-most popular technique for assessing human capital. The assumption in this case is that more engaged and satisfied people contribute a greater amount to bottom-line performance. Other traditional human resource metrics round out the list, including training hours, absence, retention and work overtime.

These results suggest there is no strong consensus on the best approach to measuring human capital. The high frequency of metrics from employee opinion surveys suggests this method can provide especially useful feedback and is worth a closer examination.

The indexes developed from employee surveys include measures that reflect the extent of employees' engagement, commitment or satisfaction. Most popular are measures of engagement, which reflect the bond or attachment between the employee and the organization.

Engaged employees possess many potentially profitable characteristics, including support for the goals and values of the company, pride in being associated with the firm and strong intentions to stay with the company and exert extra effort to help it succeed.

Surveys can include a small set of questions, which in aggregate reflect the level of employees' engagement — both across the company overall and within important subgroups. How engaged do employees need to be to provide a return on human capital?

One approach is benchmarking. The most useful benchmarks for comparison include companies in the same industry sector or with operations in the same countries. An additional benchmark includes ISR's annual study, which tracks the engagement levels of U.S. companies that have above-average financial performance. This group of high-performance organizations consistently exceeds averages for U.S. employees on engagement questions.