Human Resources Costs: Measuring and Classifying

Human resources tend to have a major impact on overall organizational costs. However, not all HR expenses tend to be predictable. In this post, we will help you unravel some of the common drivers of Human Resources costs and how to classify as well as measure them at the same time. As per a recent study in 2016, it was observed that any time an employee would leave the organization, it is known to cost the company around €6000 per employee on the overall recruitment costs. 

There have been several factors that increase the overall need for monitoring HR costs thoroughly and accurately. Every HR manager should be aware of how much money is going to be spent on Human Resources. The measurement of HR costs –also referred to as Human Resource costing, serves to be a major aspect of HR accounting. 

HR staff of the organization should be aware of the relative cost of the respective HR programs as well as their components. The monitoring of costs by the staff or HR manager would allow the organization to determine how the overall costs might be changing. The HR staff might also compare particular aspects of the given costs with those of other areas or companies. 

Why Measure HR Costs?

Conventionally, the HR department of the organization was regarded as the cost center. This is the reason why there was great focus on ensuring cost reduction within the HR department of the organization. This is wherein the role of Human Resource cost calculation comes in.

As an HR manager, you would like to monitor or measure the HR costing due to the following reasons:

• Monitoring departmental costs
• Measuring the overall impact as well as success
• Predicting future costs
• Calculating the overall ROI (Return On Investment)

Classification of Human Resources Management & Costing

Depending on the need for managing human resources costs within an organization, HR costing can be classified into the following categories:

• Fixed & Variable costs: Fixed HR costs are the ones that remain constant throughout, irrespective of the activities in the given project. On the other hand, variable costs are known to change upon changing activities. 

• Opportunity Costs: These are potential gains that apply when resources are directed to other ends. 

• Value of Money Over Time: Due to inflation, money is not able to retain its overall value. Value of money might fluctuate due to interest and inflation with changing time. It is important to ensure the same while calculating the ROI (Return on Investment). 

How to Measure HR Costs?

Initially, you should start with managing departmental costs. It is one of the most important aspects of measuring HR costs. 

In the modern era, it is imperative for every organization out there to analyze the respective costs. For instance, the same can be required for budgeting specifications. During the start of the year, a particular department might receive a specific budget and towards the end, the department is expected to report how the given budget was utilized. 

The given budget helps in answering specific questions like:

• Was the amount utilized for specific departmental goals?
• Did the overall money allocation equal the initial budget?
• Why was more or less money allocated?

Through the process of monitoring HR costs, it becomes easier to know how costs are changing. 

Measuring HR Efficiency with Human Resources Costs

In case the HR costs are increasing with a decrease in the overall effectiveness, then there is a problem. This implies that the overall HR efficiency is going down. 

Efficiency can be referred to as the number of relevant resources that are required for achieving a specific goal. If too many resources are utilized for reaching the given goal, the overall efficiency tends to be low. On the other hand, if only fewer resources are utilized, then the overall efficiency is considered higher. 

Predicting Future Costs

Another major reason to calculate the HR costs is to predict future costs. 

While analyzing HR costs, there are two major considerations:

• Outlay Costs (materials) + the total cost time
• Fixed Cost + Opportunity Cost + Variable Cost

Upon hiring new people, the costs for a larger population can be estimated. If the total number of employees tends to increase by around 25 percent, then the supporting costs of the HR department are also going to increase by approximately the same percentage.

At the same time, CPH (Cost Per Hire) can be calculated with a simple formula as:

CPH = (Internal Recruiting Costs + External Recruiting Costs) / Total Number of Hires

HR Costing for Calculating the ROI

 The calculation of the ROI (Return on Investment) can be regarded as another vital reason for monitoring HR costing. Cost remains the vital aspect of the overall ROI formula within an organization.

ROI (Return on Investment) = (Net Benefit) / (Total Costs) = (Total Benefit –Total Costs) / (Total Costs)

The top section of the given formula for calculating ROI is referred to as the net benefit. When the value of ROI turns out to be larger than one (equal to 100 percent), then it is regarded as positive. However, if the value turns out to be lower than one, the same is negative. If the company recoups only 50 %of the overall costs, then it is regarded as a bad investment.

How does HR Influence the Overall Costs?

There are two major ways in which HR can look forward to saving costs –minimizing fluctuations or employee disengagement and streamlining day-to-day administrative processes. 

Reducing Fluctuation & Employee Disengagement:

• Employee disengagement and resignation rates are regarded as two major determinants of HR costs. If you wish to control the same, it is required that the HR should promote employee loyalty.

• The HR staff can ensure personnel development of the employees for minimizing fluctuations. Personnel development can take up several forms –coaching, seminars, continuous education & training, and more. Managers can also play a vital role in influencing personnel development. As per a recent study, it was revealed that around 67% of the employees tend to feel slight loyalty towards their respective organizations. The common reason for the same was associated with poor leadership skills of management of the company.

Reducing Inefficiencies

• It is observed that around 39 % of HR employees is known to spend time on administrative duties within the organization. As per a Kienbaum study, HR’s administrative efforts should not be more than 15 to 25%. When you make use of the right HR costing software, it allows you to streamline processes like payroll, accounting, and leave applications. 

Onboarding

• The setting up of equipment, ensuring induction meetings & events, sending proper welcome emails, and so more –the preparation of the onboarding process is known to involve a lot of effort. Moreover, you are also expected to be prepared for the overall costs of carrying out the necessary onboarding process. This is the reason why it is important to analyze the overall HR costs in advance.

Cost Guidelines

There are some organizations that would want to detail the policy as well as philosophy on costs in the respective guidelines for HR staff as well as others responsible for monitoring and reporting costs. Cost guidelines are known to specify the particular costs that are included within the given HR program and how cost is going to be analyzed and calculated. When the ROI is being calculated, costs tend to be included in the summary format.

Are you looking for a simpler solution to calculate the overall HR costs? Reach out to our experts now!