By Ian J. Cook

Productivity is an area of HR measurement that is seeing increased time in the spotlight. The link between talent and organizational success is becoming more established and therefore organizations are striving to capture, monitor and improve their capabilities in this core area.

Profit Per FTE
The first metric to focus on is called Profit per FTE. Profit per FTE is a calculation of the number of pre-tax profit dollars generated for every Full-Time Equivalent (FTE).

The formula is as follows:

Profit per FTE  = (Revenue-Operating Cost)/Total FTE

For example, if an organization has:

Revenue of              $4.5million

Operating Costs of    $3.75million

FTE of                              25

then Profit per FTE = ($4,5000,000 – $3,750,000)/ 25 =  $30,000

In calculating this measure, there are two key aspects to be aware of. The first is calculating revenue correctly. Revenue is better described as revenue from operations. This is all of the income generated by all of the organization’s business activities. It does not include items outside of operations such as income from the sale of a portion of the business or income from investments, etc.

The second is how you calculate your FTE. In this area, it is important to match like with like. Our recommended way to calculate FTE is to add all of the hours worked by permanent employees and divide the total number by your organization’s standard work week. This covers all of the issues concerning how to handle part-time employees, overtime, or organizations with work weeks of differing lengths.

In terms of understanding this metric, the larger the number the better. Any change either shows an increase or decrease in the combined productive capacity of the organization’s talent.

Human Capital Return on Investment
The second aspect related to measuring productivity is a metric called Human Capital Return on Investment (HCROI). The measure puts a people lens on the traditional ROI metric. The metric is a measure of the pre-tax dollars generated for every dollar invested in people. The metric is shown as a percentage in the same way as the interest on a savings account shows the percentage return for each dollar invested.

The formula is as follows:

HCROI = {(Revenue – (Operating Cost – Labour Cost*))/Labour Cost}-1

For example, if an organization has:

Revenue of              $4.5million

Operating Costs of    $3.75million

Labour costs of        $1.5million

then the HCROI = {(4,500,000-[3,750,000 – 1,500,000]) / 1,500,000} – 1 = 0.5 = 50%

Or, for every dollar invested, the organization receives back the original dollar and 50 cents of pre-tax profit. This is described as a 50% return.

This metric shows how effectively the investment in human capital is supporting the organization’s goals. The larger the percentage return the more effectively your investment in people is working. Given that organizational labour costs can be anywhere from 25% to 60% of overall costs, this measure will gain increasing focus for determining how well this investment is being utilized.

Calculating and recording both of these measures starts to give a good picture of the value being generated by the people in your organization, both in straight dollar terms and from the perspective of an investment.

Note: * Total operating costs typically includes labour costs. For this reason labour costs are deducted from operating costs in order to not dilute the calculation.

Ian J Cook is the director of HR knowledge and research at BC HRMA. Ian is using his global HR consulting experience and business knowledge to grow a function which delivers informative, relevant and timely comment.