HR Ratio versus HR Contribution

“The real payoff is when we add a new hospital or other operating unit, we don’t have to add an accountant or HR professional.” Dennis Dahlen, Vice President of Finance, Banner Health

As HR is required to bring value, the HR ratio (number of HR professionals for every 100 employees) is used in many companies as an efficiency indicator. This ratio is helpful for benchmarking purposes against industry standards. However, due to limitations of benchmarking, the results are not always conclusive.

In SMEs, a typical HR ratio is 1:100 because HR processes are not usually fully automated and HR is still an evolving function. In larger organizations with added stability, mature processes, and higher degree of automation, a typical HR ratio is 1:250. Regarding China; the HR ratio is moving from 1:100 to 1:200 or 1:300*. Nonetheless, research aimed at specifying policies and practices of HR management systems for high performance shows that firms with high HR management quality have roughly double the number of HR professionals per employee (1:139.51) as compared to companies with low HR management quality (1:253.88)**.

I recently met a HR director from a global company with 1,200 staff in China. This international company employs 50 people in the HR & Admin department leading to a HR ratio of around 1:25 (or 4 HR employees for 100 employees) while payroll, recruitment, and training are outsourced to HR service providers. Their HR ratio shows a major deviation for the benchmarks above but as long as the value addition of each HR employee is greater than the cost incurred to the company, there should be no issues.

After all, the HR ratio is a tactical metric only and focuses on the relationship between quantitative measures (HR’s department size and the company’s size). Size of the HR department can vary considerably and depends on several factors:
• Nature of organization,
• Size,
• Age and phase of growth,
• Management approach,
• Employee profile,
• Centralization or decentralization of the HR function,
• The number of office locations and geographic distribution of employees,
• Expected level of service and support,
• The amount of automation utilized,
• The amount of HR functions outsourced (recruitment, training, payroll, benefits, etc.), and
• The relative complexity of the strategic mission and objectives for the HR function.

Importantly however, there is no clear causal relationship between size and strategic value-added HR.

Therefore, HR should focus on measuring contributions made by HR staff. Three possible measures to consider are:
• “Profit per HR employee” placing the emphasis on the return on HR talent,
• “Number of HR employees” indicating growth, and
• “HR leadership bench strength” (Number of employees who are promotable “ready replacements” for each of the key jobs in the HR function) indicating sustainability.

Once all three measures are tracked and translated into HR practices geared towards HR staff, adding a HR employee will mean “improving the company’s profits”.

Thus, from the strategic angle, companies should ask:
• Does the HR staff have competencies and abilities to deliver results?
• To what extent is HR staff effective in strategic partnering with line managers?
• To what extent is HR staff effective in facilitating change?
• To what extent is HR staff effective in advocating employees?
• To what extent is HR staff effective in providing HR operational excellence?

The ideal HR department size or being concerned with another HR hire would not be an issue then.

* Powell, Jonathan (2007, November 17). ”Fast-changing world of HR”. In Classified Post. p. 42.
** Becker, Brain E., Huselid, Mark A, and Ulrich, Dave (2001). The HR Scorecard: Linking People, Strategy, and Performance. Boston, MA: Harvard Business School Press.