A key indicator of how successful your organization may be down the road is knowing how strongly your HR department impacts your company. By measuring how effective your HR department is you can set new paths for continuous business growth.

There are ample things to measure in HR, from headcount to benefits. But one needs to elicit data that will give insights into organizational needs to grow and succeed. The main purpose of HR metrics is to help your organization make better and more informed decisions. Therefore, calculating any metric that does not lead to action is not worth the time and effort.

You must have a specific reporting strategy which will largely depend on your organization’s values, size, priorities, HR team, and many such factors. However, we have listed down the 10 most essential factors that impact HR effectiveness to guide you in structuring an evaluation process.

1. Employee satisfaction

The employee experience should be an important part of the HR measuring process as HR serves the people of the organization. By measuring employee satisfaction, one understands how employees feel about your organization and what may be hurting their overall experiences. Make sure that these surveys are anonymous so that you can count on receiving honest feedback. HR initiatives must be taken to boost employee satisfaction and engagement based on this report. Leave space for subjective answers to understand what policies are helping or harming their overall well-being. Ask about what types of flexibilities or structures can make for employee welfare programs. Having tie-ups with mental health organizations, giving paid family and vacation days, and organizing accommodative work timings can help improve employee satisfaction and retention.

2. Turnover Rates

The total number of employees who left the company within a given timeframe (quarterly or yearly), divided by the total number of employees will give you turnover rates. Usually, replacing top performers employees turns out to be very costly, so it is crucial to know which departments experience the most turnover, and which departments have the highest retention rates. Also, calculating early turnover rates that are the percentage of employees who left the company or were terminated within their first 6-12 months usually indicates a failure within the recruiting and hiring process. Replacing a new employee causes a setback in an already extended and expensive process and results in additional costs in productivity during new hire training.

3. Time to Hire

Time to hire is the total time that it takes the HR team to fill a position. It is calculated from the date an employee leaves the company to the date that a new employee starts. It is vital to track and compare the time-to-hire across numerous positions to determine why a specific role was harder or easier to fill. It directs future resource-building processes for the HR team.

4. Cost Per Hire

Cost per hire includes the total cost of hiring a new employee where you factor in the entire recruitment process including posting job advertisements. It also includes aspects of lost revenue due to position vacancies. This section will outline every penny put toward hiring a new employee like training, gathering materials and resources, and spending time screening candidates and conducting interviews. This is important to track as it will be a comparison metric for the value an employee adds to your organization. The expenditure in this HR metric can help you to set a recruiting budget, which is extremely essential. It also helps you identify inefficiencies in training programs, and hence effective training schedules and programs can be made to increase the Return on Investment.

5. Revenue per employee

For measuring the revenue per employee, calculate your total revenue divided by the total employees. It gives you a bird’s eye view of your organization’s workforce instead of focusing on an individual. As much as we love evaluating and appraising employees individually (based on their individual contributions), looking at revenue per employee is necessary to assess the company’s success. Finding this average can help us determine if revenue grows as you grow your workforce. It really makes one ponder whether the company really needs so many people or if is it just that the team is mindlessly growing without receiving adequate and desired outcomes.

6. Absenteeism

Absenteeism affects employee engagement and productivity directly. Employees who start taking an excessive amount of unexpected time off may be less engaged and might not stick around for long. This can be charted out separately for each department or manager. Absenteeism can also negatively influence the work culture. But hold on, do not indiscriminately fire or lash out at employees who have not shown up as regularly as expected. Keep in mind to look at various important variables such as their mental health or flu season when assessing these numbers. Also, remember that taking vacations is not the same as absenteeism. In fact, taking vacations must be encouraged to enhance productivity.

According to Erik Valpun, usually, 1.5% is regarded as a healthy absenteeism rate. It can go up to 4% due to unavoidable health issues, or circumstantial unfortunate events like COVID-19. An absenteeism rate higher than 1.5% might indicate that the absence is due to something more serious such as stress or burnout, lack of engagement, or conflict with team members. And on the other end, anything significantly lower than 1.5% can also be a cause for concern as to whether employees are afraid to call in sick, so they come into work unwell. This can lead to a drop in productivity, poor health, and even exhaustion in the long run, which again leads to more absenteeism. Flexible work-from-home policies or hybrid working can help reduce absenteeism as employees may be better able to tend to themselves while working.

7. Labour Cost Percentage

The labor cost percentage is the overall payroll amount relative to its gross sales. Payroll is a significant expense for most companies. For calculating the annual employee labor percentage, use gross sales from an annual income statement. Payroll is defined as the list that contains a company’s employees and the amount of money they are to be paid. When calculating payroll, it is worth remembering that it includes more than just the hourly wages of employees like freelancers.

You should be accounting for salaried employee wages, hourly services wages, and bonuses. Along with commute facilities, service apartments and payroll taxes, health care benefits, and overtime payments increase labor costs by the multitude. You must also include paid leaves like sick leaves, vacation leaves, and maternity leaves. Revenue is cash generated by gross sales. Now, divide the payroll by the gross revenue and multiply it by a hundred. Cutting labor costs is a balancing act where finding ways to streamline labor costs is rooted in reducing costs without sacrificing workforce morale or productivity. Usually, it is not hiring more people but paying overtime that leads to higher labor costs therefore make sure your company is adequately staffed to reduce overtime costs.

8. Employee Net Promoter Score (eNPS):

eNPS is a metric that allows you to measure how likely your employees are to recommend your organization to others as a great place to work. It is measured and calculated simply by asking “How likely are you to recommend our company as a place to work?” Employees rate it on a scale from 0 to 10 in a survey, 0 being ‘would never recommend anyone’ and 10 being ‘highly recommend anyone who is seeking a job’. People who rate the company 9 to 10 are “Promoters” who are happy and motivated employees. While 0 to 6 raters are “Detractors” and these are dissatisfied employees. 7 to 8 raters are “Passives” who are content but not passionate about the company. To calculate the eNPS, subtract the percentage of Detractors from Promoters.

Generally, a good score is between 10 and 30, while anything over 30 is considered excellent. An eNPS survey can help you gauge how satisfied or dissatisfied your employees are, and helps identify the steps the HR team can take to improve these results. A great advantage is that the survey is quick for employees to answer so more employees are likely to participate. It can be distributed via your preferred communication channel with relatively low costs.

9. HR tech ROI

Human Resources (HR) technology Return Of Investment (ROI), as the name suggests, measures the return on investment of various HR software and technology. This software has been hugely invested in and potentially rolled out across the HR departments and probably throughout the organization at large. This includes the cost of implementation (staff time, user training, expert fees, and storage costs), and the cost of ongoing maintenance and upgrades.

It is important to start by understanding the reason why you invested in HR technology in the first place. It could be for improving your recruiting process, boosting employee engagement, reducing paperwork, and managing time. Figure out some metrics that you wanted to improve. Compare current metrics with metrics before you rolled out the technology. For example, has there been a boost in HR performance KPIs, increased employee retention or turnover rate, fewer compliance issues, or increased engagement due to the use of these technologies

The final step of HR of ROI is to determine whether you have saved more than you spent overall. And the worth of these investments. Measuring HR tech ROI is important because it helps to determine whether your old system was working or not, provides a benchmark on the efficiency of your current HR processes, and helps you build your future HR tech strategy using existing evidence.

10. Exit Interviews

A recent study explains the measures to increase HR effectiveness in an organization. One of the key focuses is conducting Exit Interview Programs. It is suggested that the exit interview is done independently. Here you ask them what they liked the most and hated the most about their role. Communicate and understand the dissatisfaction of an employee leaving your organization. The employees are asked about what changes could benefit the company and steer the employees to a more fulfilling and satisfying work life.
Additionally, your company might benefit more from a Continuous Performance Management (CPM) approach of periodic feedback that fosters continuous conversations between managers and contains direct reports. It involves discussing the team’s goals, progress, and performance to date in the form of constructive feedback. It breaks away from traditional performance management using formal rating scales and feedback forms. The objective of CPM is goal centric and not review-centric.

Using the above pointers, you can customize and prepare your own quarterly or yearly metrics system for HR effectiveness. Keep in mind a few characteristics of a good metrics system includes but are not limited to the fact that it is actionable and predictive. It must be simple, consistent, understandable, and logical. It must be repeatable in a way that forging answers from the past is not possible and stands the test of time. The terms and the rubrics should be unambiguously defined. It must be capable of being tracked over time and should be capable of comparison (external benchmarks). Lastly but most importantly, it should drive appropriate action to enhance the organization’s success and outcome goals.

As competitors are fishing for talent in the same pond as you, so a keen awareness of how to measure success here can make a world of difference. Not only does frequency matter, but also what you measure is important in HR metrics. To make HR metrics valuable do not waste time with analytics that is not relevant to an employee’s responsibilities and decisions. For instance, some metrics like new-hire turnover or time-to-hire are irrelevant to middle managers. Therefore, design role-specific surveys. Finally, take caution to not overly rely on spreadsheets and take human-to-human interactions and feedback into serious consideration.

10 ways you can improve your HR effectiveness in 2023