It is said that a company is usually only as good as it’s leadership, from the employer’s perspective, the company is only as good as the people that run it. With that being said, finding the right talent for your team is an incredible responsibility and vitally important to the success of your business. It is senseless to spend thousands of dollars bringing in a new employee unless they will be a significant boost to the bottom line of your company. If you want to know the value an employee will bring to your business, understanding human capital metrics is the way to do it.
The Value of Human Investment
When you are a business owner, every decision you make presents an investment into your company. The goal of each investment should lead to an increase in revenue and the development of faster, more efficient processes. Some decisions are more difficult to assess the long-term potential, and making a wrong decision could lead to more trouble than the investment was worth. The value of human capital is the advantage that an employee’s knowledge, skills, and experience will bring to your business. The initial costs of onboarding and training can be offset by the long-term return that the employee brings to the company, but you can’t evaluate the value like you can an investment into a piece of equipment. Quantifying employee performance and analyzing hiring costs are all a part of the way you manage your books and potential investment. This considered the act of measuring human capital. You will assess the value through questions like “Is my employee bringing in more money than what I am currently paying them?”
What You Should Track
Deciding on the valuation model you will use with human capital will help influence your decision-making with hiring, onboarding, and employee promotions. There are three areas that you should include in your metrics.
- Return on Investment (ROI). The human capital ROI is how you will measure the value of the employee against their expenses. This ration will show what your company earns in comparison to what the employee costs the company. This is the big picture return on the dollars invested, whether they are used for salary, health insurance premiums, education assistance, and retirement plan contributions.
- Training Investment. Every company has an onboarding process for new employees, but some extend beyond a simple orientation and include on-the-job training. If you want an overall assessment of how much you are investing in this area of human capital, you take the total number of training dollars and divide them by how many people went through the training.
- The expense of hiring and training new employees is a waste if the employee doesn’t stay with the company. The investment into a new hire could be significant and losing those funds through turnover can start to add up. For calculating the turnover rate, or voluntary separations, divide the number of separations from the average number of employees, and then multiply that answer by one hundred. In addition to the lost funds on training, you now need to spend more money trying to replace any positions that have been vacated. If this number is excessively high, perhaps you need to revisit the reasons that might have been listed for the turnover. Employees who haven’t been thoroughly trained or acclimated to the company might feel overwhelmed and more prone to leaving rather than sticking it out until they are comfortable. It could be that you need to invest more in the training process as a way to improve your turnover costs.
Human capital adds value to a business and provides stability for a company’s success. By having a greater understanding of the impact your employees can have on your financials, you can make more informed and strategic decisions when it comes to investing in assets.