Return on Investment (ROI) is a critical financial metric used to evaluate the profitability and effectiveness of an investment. While it is often associated with financial gains from marketing strategies or capital expenditures, HR professionals must also measure ROI to justify investments in training, recruitment, employee engagement, and compliance initiatives. Without demonstrating ROI, HR may struggle to secure budgets and executive support for strategic programs.
The formula for calculating ROI is straightforward:
ROI=(Gain on InvestmentāCost of Investment) / Cost of Investment Ć100
Like I like to refer to it as: G C C which means G – C / C X 100 which equals to Gain – Cost / Cost
This formula provides a percentage that indicates the financial return of an investment relative to its cost. A positive ROI means the investment generated more value than it cost, while a negative ROI signals a loss. In HR, determining the āGain on Investmentā requires measuring benefits such as increased productivity, lower turnover, improved compliance, and reduced hiring costs.
HR leaders must consistently demonstrate ROI across all HR functions to establish credibility and financial impact. For example, a company investing $50,000 in a leadership development program may see a $200,000 increase in productivity, calculated by improvements in employee performance and revenue growth. The ROI calculation would be:
ROI = (200,000ā50,000) / 50,000 Ć 100= 300%
This means that for every dollar spent on training, the company gained $3 in return, making it a high-value investment.
Another example is recruitment technology. If an organization spends $20,000 on an applicant tracking system (ATS) and saves $80,000 in recruitment costs due to improved efficiency and faster hiring, the ROI would be:
ROI = (80,000ā20,000) / 20,000 Ć 100 = 300%
Again, this demonstrates a significant return, validating the decision to invest in an ATS.
What Is Considered a Bad ROI?
A bad ROI is any percentage that is significantly low or negative. A negative ROI means the investment did not generate enough gains to cover its cost, leading to a financial loss. For example, if a company spends $50,000 on a new employee engagement platform but only sees $30,000 in measurable benefits (such as reduced turnover savings or increased productivity), the ROI would be:
ROI = (30,000ā50,000) / 50,000 Ć 100 = ā40%
This negative ROI indicates that the company lost 40% of its investment. Such a scenario suggests the program may need adjustments, such as better implementation strategies, improved employee adoption, or a more cost-effective alternative.
Understanding the Break-Even Point
The break-even point in ROI occurs when the gains equal the costs, meaning the investment neither produces a profit nor a loss. This happens when ROI is 0%, calculated as:
ROI = (50,000ā50,000) / 50,000 Ć 100 = 0%
At this stage, the company recovers its costs but does not generate additional financial value. While a break-even ROI is not necessarily a failure, businesses generally aim for a positive ROI to ensure a return on their investments.
Ultimately, HR professionals must analyze ROI to optimize spending, eliminate inefficiencies, and drive business impact. By tracking ROI in HR initiatives, organizations can make informed decisions, ensuring that HR functions contribute to long-term profitability and success.
Breaking Down ROI Categories:
- Negative ROI (< 0%)Ā ā Bad investment; the company loses money.
- Break-even ROI (0%)Ā ā The company recovers its costs but gains nothing extra.
- Low ROI (1%ā9%)Ā ā Barely profitable; may not justify the investment.
- First Good ROI (10%ā30%)Ā ā A positive return, but still modest.
- Strong ROI (30%ā100%)Ā ā A highly profitable investment.
- Exceptional ROI (100%+)Ā ā The investment doubles its cost or more, considered a huge success.
Why HR Must Know How to Calculate ROI
Understanding and calculating ROI is essential for HR professionals to make informed, data-driven decisions that impact the organizationās bottom line. In many cases, HR leaders must justify their budgets and strategic initiatives to executives who prioritize measurable results. By presenting a clear ROI analysis, HR can secure funding, enhance credibility, and demonstrate how HR functions contribute directly to business success. Additionally, tracking ROI ensures HR investments remain cost-effective and aligned with organizational goals, allowing HR to transition from being perceived as a cost center to a strategic business driver.
As a business owner, ensuring a positive return on investment (ROI) is not just a goalāitās a necessity for sustainable growth and success. Every decision, whether in HR, training, or operations, must contribute measurable value to the organization. By consistently evaluating ROI, we can make informed, strategic choices that drive efficiency, profitability, and long-term business impact.
Elga Lejarza
Founder & CEO
Lejarza Workforce Solutions
