Ratio Analysis in Human Resource Management Explained

published on 27 January 2024

Most organizations understand the value of analyzing workforce data to inform strategic HR decisions.

By leveraging key ratios and formulas, HR leaders can gain predictive insights to optimize budgets, productivity, retention, and more.

This article explains what ratio analysis is, why it matters for workforce planning, and how to apply essential HRM ratios for data-driven recruitment, compensation, training, and overall HR excellence.

Introduction to Ratio Analysis in HRM for Workforce Planning

Ratio analysis refers to using key metrics and ratios to analyze workforce data and identify trends over time. This provides valuable insights to inform strategic human resource management decisions around budgeting, recruiting, retention, training, and more.

Defining Ratio Analysis in HRM

Ratio analysis in human resource management examines metrics like:

  • Cost per hire: Recruiting spend divided by number of hires
  • Turnover rate: Percentage of employees that left voluntarily or involuntarily over a period
  • Absenteeism rate: Percentage of total work days lost due to absence
  • Training investment per employee
  • Revenue per employee: Total revenue generated divided by number of employees

Monitoring such ratios over time reveals workforce productivity, engagement, retention issues to address.

Goals of Ratio Analysis in Strategic HRM Decision-Making

Key goals of using ratio analysis in strategic human resource management include:

  • Benchmark metrics against industry standards
  • Identify positive and negative trends related to productivity, turnover, absenteeism
  • Forecast future hiring and training needs based on revenue growth forecasts and turnover trends
  • Reveal problem areas like high turnover segments to prioritize engagement initiatives
  • Inform strategic plans and budgets around compensation, training, recruiting, and culture

In summary, ratio analysis provides data-backed insights for workforce planning and strategic decision making to enhance human capital management.

What is ratio technique in HRM?

The ratio technique is a simple yet effective method for human resource forecasting and planning. It involves analyzing past ratios between HR metrics like number of employees and business metrics like revenue or sales. By studying these trends, organizations can forecast future workforce needs.

Here are some key things to know about ratio analysis in human resource management:

  • It looks at the relationship over time between HR numbers (like staffing levels) and business numbers (like sales or production volumes). For example, examining the revenue generated per employee over previous years.

  • Common ratios analyzed include:

    • Revenue or sales per employee
    • Number of employees per bed in a hospital
    • Students per teacher in schools
    • Production output per employee in manufacturing
  • The historic ratios are used to predict future HR needs. For example, if revenue per employee was $200,000 last year, and next year's revenue forecast is 20% higher, then the estimated number of employees needed can be calculated.

  • Adjustments may be made to the forecasted ratio to account for anticipated productivity improvements, technological changes, or strategic shifts.

  • It is a simple and fast technique compared to more complex statistical forecasting methods. However, it relies heavily on the accuracy of the business forecasts.

In summary, ratio analysis examines the relationship between HR and business metrics over time. It enables organizations to efficiently forecast future HR needs based on expected business performance. The technique is easy to apply but rests on the quality of the business projections.

What is the HR ratio?

The HR-to-employee ratio refers to the number of HR professionals needed to support 100 full-time employees at a company. This ratio provides guidance on when organizations should scale their HR teams proportionately as their workforce grows.

A commonly recommended starting point is to have 2.5 HR employees for every 100 full-time workers. However, the optimal ratio depends on factors like:

  • Company size and growth stage
  • Degree of HR automation and outsourcing
  • Complexity of HR processes and programs

For example, rapidly scaling startups may need a higher HR ratio early on to build critical people infrastructure. Mature enterprises with advanced HRIS systems may require fewer HR staff per 100 employees.

Tracking this ratio over time shows if HR capacity is expanding appropriately with headcount. A low and decreasing ratio could indicate an under-resourced function struggling to provide needed services.

Conducting periodic ratio analysis ensures strategic HR planning as organizations evolve. It helps set budgets for HR expansion and technology investments to support business goals.

What is the HR finance ratio?

The HR finance ratio, also known as the revenue per employee ratio, is a key metric used in human resource management to evaluate workforce productivity and efficiency.

It is calculated by dividing a company's total revenue by the number of employees. For example, if a company had $10 million in revenue last year and employed 100 people, their revenue per employee would be $100,000 ($10 million/100 employees).

This ratio enables companies to:

  • Benchmark productivity and set targets for improvement
  • Identify opportunities to streamline operations
  • Assess the impact of HR initiatives like training programs
  • Forecast personnel budget needs based on growth plans
  • Compare efficiency across departments, locations or business units

A low revenue per employee ratio signals an opportunity to optimize staffing levels, reduce overhead costs or invest in automation. It may indicate that employees are not being fully utilized.

Conversely, an extremely high ratio could mean employees are overburdened and at risk of burnout. Companies want to aim for the ideal balance between productivity, efficiency and work-life quality.

Regularly tracking this ratio allows organizations to make data-driven decisions about human capital management. When paired with other workforce metrics, it provides invaluable insight into the return on human resource investments.

How does ratio trend analysis work as a method of HR demand forecasting?

Ratio analysis is a useful forecasting technique in human resource management that examines trends in the relationship between HR inputs and business outputs over time.

The Basic Process

Here are the key steps in conducting ratio trend analysis for HR demand forecasting:

  1. Select a relevant business output metric like revenue, units produced, customers served, etc.

  2. Determine the associated HR inputs needed to support that business output, such as number of employees, labor hours, etc.

  3. Calculate ratios between those metrics over time, such as revenue per employee, labor hours per unit produced, etc.

  4. Identify trends in those ratios and use statistical methods like linear regression to forecast how the ratios may change in the future based on historical patterns.

  5. Convert the projected future ratios into estimates of specific HR demand, like number of employees needed.

An Example

Acme Company has seen the following revenue per employee over the past 5 years:

  • 2017: $200,000
  • 2018: $210,000
  • 2019: $190,000
  • 2020: $220,000
  • 2021: $240,000

Regression analysis of the historic data forecasts next year's revenue per employee could be $250,000. If leadership expects $50 million revenue next year, ratio analysis estimates Acme will need 200 employees.

Ratio analysis like this allows HR to tie staffing plans directly to business performance metrics. The forecasted ratios reflect how productivity and workforce utilization may change over time.


Core Ratios and Formulas in HRM Analysis

Ratios and metrics are essential for human resource management analysis, providing data-driven insights to inform strategic workforce planning and budgeting. By tracking key ratios over time, organizations can benchmark performance, set targets, and make evidence-based decisions.

Understanding Spending Ratios for Personnel Budgeting

Spending ratios help analyze the costs associated with managing an organization's human capital, including:

  • Employee Compensation as a Percentage of Revenue: This metric tracks total compensation costs as a percentage of total revenue generated. It indicates what proportion of revenue is spent on paying employees.
  • Cost Per Hire: Calculated by dividing total recruiting costs by number of hires. It measures the average expenditure to recruit and onboard each new employee.
  • Training Expenditures Per Employee: Derived by dividing total annual spending on training and development by the number of employees. It quantifies investment in upskilling the workforce.

Productivity Ratios: Measuring Outputs per Employee

Productivity ratios analyze the efficiency of a workforce by quantifying outputs generated relative to number of employees. Common examples include:

  • Revenue per Employee: Total annual revenue divided by the number of employees. It benchmarks the average sales productivity per employee.
  • Profit per FTE: Total annual profit divided by the number of full-time equivalent employees. It indicates profitability relative to workforce size.
  • Patients Seen per Medical Staffer Hourly: Calculated by dividing number of patients seen by total hours worked by medical staff. It measures employee efficiency in healthcare.

Turnover and Retention Ratios: Tracking Staff Stability

By monitoring turnover and retention metrics, organizations can gauge workforce stability and take proactive measures to reduce regrettable employee exits. Key ratios include:

  • Monthly or Annual Turnover Rate: Number of separations in a month or year divided by average number of employees, expressed as a percentage.
  • First Year Turnover Rate: Percentage of new hires in the past year that have left the organization.
  • Regrettable Turnover Rate: Percentage of valued talent that has voluntarily resigned, indicating preventable turnover.

In summary, ratio analysis provides data-driven insights for strategic human resource management spanning budgeting, productivity, and retention. Tracking trends over time is key for benchmarking, forecasting, and driving organizational success.

Executing Ratio Analysis in HRM with Precision

Ratio analysis provides valuable insights into an organization's human resources data. By collecting relevant metrics, calculating key ratios over time, and analyzing trends, HR leaders can make data-driven decisions to enhance workforce strategy.

Data Collection for HRM Ratio Analysis

The first step is gathering clean, accurate data. Relevant HR metrics to collect include:

  • Headcount numbers by department/level
  • Turnover and retention rates
  • Recruitment costs
  • Payroll expenses
  • Training budget/hours

Data should cover several previous years and be extracted from payroll systems, budgets, and HRIS platforms. Organizing the datasets by time period facilitates calculation and comparison.

Calculating HRM Ratios: The Formula Breakdown

Common ratios calculated in HRM ratio analysis include:

  • Turnover rate = Number of separations / Average number of employees
  • Recruitment cost per hire = Total recruitment spending / Number of hires
  • Training investment rate = Training expenses / Payroll expenses

The formulas generate ratio metrics for each period. Presenting data visually in tables and charts highlights fluctuations over time.

Interpreting HRM Data Through Trend Analysis

Statistical methods assess whether shifts in ratios are significant or abnormal compared to historical trends. If turnover spiked 10% above average, what factors drove that change? How might it impact long-term retention and hiring plans?

Ratio analysis provides data-backed insights for strategically managing human capital. Tracking trends over time is key for workforce planning and budgeting.

Applying Ratio Analysis to Strategic HR Decisions

Ratio analysis provides data-driven insights to guide key workforce planning and management decisions. By tracking metrics over time and benchmarking against industry standards, organizations can optimize budgets, processes, and strategies.

Recruitment and Selection Theories Informed by Ratio Analysis

Key ratios like cost per hire, time to fill open positions, turnover rates and recruiting spend help HR leaders shape strategic staffing decisions. For example:

  • High cost per hire and long time to fill could indicate the need to hire more recruiters or increase referral bonuses to tap into employee networks.

  • Spiking turnover rates may require boosting retention incentives like spot bonuses.

  • Outsized recruiting spend as a percentage of HR budget could justify outsourcing certain stages to specialized agencies.

Optimizing Compensation Packages via Compa-Ratios

Compa-ratios compare an employee's pay to the median pay of similar positions in the market. Coupled with metrics on compensation as a percentage of operating expenses, these ratios help determine optimal pay increase budgets and bonus structures.

For instance, low compa-ratios and compensation expenses may allow larger pay raises without substantially impacting the bottom line.

Directing Training Investments Through Ratio Analysis

The training expenditure per employee ratio quantifies the average investment in developing talent. Tracking productivity growth pre- and post-training helps assess return on that investment.

For example, if functions receiving above-average training funds deliver below-average productivity gains, next year's training budget could be reallocated to departments generating the highest ROI.

In this way, ratio analysis guides data-backed workforce decisions to promote organizational success.

Advanced HRM Analysis: Regression and Trend Analysis

Regression Analysis in HRM for Predictive Insights

Regression analysis is a statistical technique that examines the relationship between two or more variables, allowing HR professionals to make predictions based on historical data. By inputting various workforce metrics into a regression model, HR can forecast future outcomes related to staffing needs, employee retention, compensation planning, and more.

For example, regression analysis can determine the connection between employee engagement survey scores and voluntary turnover rates. If the analysis shows higher engagement correlates with lower turnover, HR may decide to invest more in engagement initiatives to proactively reduce attrition.

HR can also leverage regression analysis to set equitable pay ranges. By analyzing how compensation has historically aligned with performance ratings, experience levels, and other factors, regression models can predict appropriate salary bands that reward top talent. This ensures internal pay equity and external market competitiveness.

Overall, regression empowers HR to base strategic plans and budgets on data-driven forecasts versus guesses. It transforms reactive decision-making into proactive planning grounded in statistical evidence.

Trend Analysis in HRM: A Real-World Example

Trend analysis uncovers patterns in historical HR data to detect shifts over time. Monitoring trends allows HR to spot emerging workforce dynamics early so they can realign strategies accordingly.

For instance, say a retail company performs trend analysis on frontline employee turnover month-over-month. They notice attrition spikes each November and December. Upon further analysis, HR identifies inadequate holiday staffing as the turnover driver.

Armed with these insights, HR can now predict next year's holiday staffing gap using trend analysis. By accounting for projected sales growth, they determine they will need to hire 15% more seasonal staff to meet demand. HR gets ahead of the issue by launching expanded college recruiting partnerships and seasonal hiring bonuses. As a result, the company achieves full holiday staffing levels, delivering excellent customer service that drives revenue.

This example illustrates how trend analysis in HRM removes guesswork from workforce planning. Identifying patterns and projecting future needs enables data-backed talent strategies tightly aligned with organizational goals.

Conclusion: Synthesizing Ratio Analysis for HRM Excellence

In closing, ratio analysis is crucial for leveraging workforce analytics to formulate data-driven HR strategies. Key takeaways include:

  • Benchmarking spending and productivity over time
  • Identifying trends and outliers in turnover rates
  • Determining root causes through statistical analysis
  • Applying insights to optimize recruiting, compensation, training and other areas of human capital management

Summarizing the Strategic Value of HRM Ratio Analysis

Ratio analysis provides HR metrics to:

  • Track workforce costs, productivity, and turnover over time
  • Reveal red flags
  • Enable evidence-based strategic planning
  • Improve recruiting, retention and training ROI

The Critical Role of Ratio Analysis in Workforce Planning

Ratio analysis is vital for using workforce analytics to:

  • Forecast talent needs
  • Control personnel budgets
  • Increase employee productivity
  • Drive overall organizational success

Related posts

Read more