Financial and Managerial Aspects of
HRM
Two modules:
• Financial HRM - gaining insight in the financial and economic aspects of the most
important HR decisions; financial literacy
• Personnel Economics - application of economic theory and principles to firms’ human
resource problems; economic thinking
Slides and notes = most important
, Lecture 1 - Why numbers matter to HR?
I. Numbers and HRM:
(Almost) everything HRM does has financial implications:
• Recruitment and selection - transportation, job advertisement, assessment center
• Compensation and benefits - fringe benefits, bonuses
• Performance management - rewards, promotions, ...
• Sickness and absence - deferred performance, medical costs
• Learning and development - training costs, deferred performance during training
• Restructuring - severance pays for lay-offs
Financial knowledge is important for HR managers to understand financial constraints and possibilities in
the organization especially since organizations are directed based on financial metrics and especially
since accounting and HRM share responsibilities (‘people costs’)
• Payroll • Insurance • Pensions • Tax information • Performance management
II. This course will help us:
1. Learn to speak / understand the language of business
2. Economists have a dominant ‘gatekeeper’ position because others take economic / financial arguments
for granted (which are often based on assumptions).
3. Financial analysis is an important part of a more fact- or evidence-based HRM
4. Don’t walk away from numbers, because this will lead to a disadvantageous position during
discussions.
5. If your ambition goes beyond recruitment/payroll.
III. People are not listed in assets sheets. Why? People:
• Not assets: human capital investments pay off, but treated as costs (liability)
= 60-70% of expenses, that’s why organizations quickly resort to lay-offs in difficult times.
• Intangible: matters dealt with in HR function hard to express in money, not owned by the organization
• Unpredictable: Timescale, Bias
Solve measurement problems in HR decisions: How to value people?
• Directly: tracking and reporting: tracking key performance indicators (KPI): turnover/retention,
satisfaction, cost per hire, net promoter score (NPS); reported in HRM scorecards for communication to
senior management/other organizational stakeholders
• Indirectly: based on financial derivatives: E.g. interview lasts 43 minutes, we pay HR generalist 35
euro/hr = (43/60)*35 = 25.08 euro.
IV. Evaluating HR decisions:
• Four main ways (Phillips, 2017)
1. Benefit-cost ratio (BCR) BCR = 𝑩𝒆𝒏𝒆𝒇𝒊𝒕𝒔 / 𝑪𝒐𝒔𝒕 (x 100%)
• ‘oldest’ way to calculate return on investment BCR = program benefits/ program costs
(x100)
• Used as post-investment measure • Roots in welfare economics/public finance
• Expressed in % annual benefits (BCR of 1,5 means: investment €1 -> €1,5 return)
2. Return on investment (ROI) 𝑹𝑶𝑰 = (𝑩𝒆𝒏𝒆𝒇𝒊𝒕−𝑪𝒐𝒔𝒕)/𝑪𝒐𝒔𝒕 (x 100%)
ROI = net program benefits / program costs
• Most basic way to evaluate effectiveness HR initiatives, to evaluate profitability
, • Pros: Used For Future Benefits; Expressed in % that indicates initiative attractiveness (> +/-
10%)
• Cons: Every euro the same (inflation); Assessment Based On Percentage
Example: outsource or not outsource ?
• The Death Star inc. offers inhouse training. Vader, the CEO, asks you as the HR generalist to calculate
whether it is cheaper to outsource this. Only requirement is that quality should not decline. After some
casual googling, you find that this could save €600,000 in salary costs. However, the company will have
to buy €400,000 worth of course material annually and a one-time start-up cost of €150,000.
• What is the ROI? ROI= (600 000 - 400 000 +150 000) / (400 000 + 150 000) = 0,09 = 9%
• Based on the ROI, what is your advice? - don’t invest, don’t outsource
3. Payback period (PP) PP = 𝑪𝒐𝒔𝒕𝒔/ Benefits x (12) month
PP = program benefits / program costs
• Reverse of BCR! • Expressed in number of months/years (usually >1y)
• Doesn’t account for spreading investments
Same example: outsource or not outsource? What is the PP?
PP = 150 000 + 400 000/ 600 000
= 0.92 *12 = 11 months
4. Net present value (NPV) - shows how much money an investment will gain/lose in terms of today's
funds
• Difference between present value of cash inflow (CF) and its outflow over period of time (n)
• Future cash flow doesn’t always reflect current cash flow (e.g., inflation)→adjusted
with
pre-specified interest rate (r)
NPV = (Σ𝐶𝑎𝑠h𝑓𝑙𝑜𝑤/ (1+r)*n) - investments
• Especially for large investments that only have long-term future returns
• The higher the better <-> complex measure
Example:The Death Star wants to invest 100 000 in a new project that is expected to generate cash flows
of 25 00 in year 1, 30 000 in year 2, 40 000 in year 3 and 50 000 in year 4. Current inflation is 10%.
NPV=?
y1= 25 000/ (1+0.10)^1 y2= 30 000/ (1+0.10)^2 y3= 40 000/ (1+0.10)^3 y4 = 50 000/ (1+0.10)^4
NPV= 25 000/(1+0.10)^1+30 000/(1+0.10)^2+40 000/(1+0.10)^3+50 000/(1+0.10)^4-100 000 = 11 723,9
Concluding reflections:
Financial literacy can improve HR’s bargaining position (evidence-based,credibility, speaking the same
language). It is a skills gap in HR training (CIPD professional map), but benefits HR careers.
Putting HR to numbers can be difficult: Intangible, unpredictable, different timescales. HR is costs not
assets, Direct (HR analytics) and indirect measures (Financial HRM), BCR, ROI, PP, NPV.
, Lecture 2: The Business perspective on ROI
Statement 1: Most of
the HR interventions of
organizations are
waste.
Is Learning a Cost or an
Investment?
Statement 2:
Management rarely
receives HR reports about
results that are relevant to
them.
Sponsors and Funders
Want to see the Impact
and Monetary Value
Top 10 challenges facing C-level executives: Developing “Next Gen” leaders, Failure to attract/retain
talent, New competitors globally, Cyber-security, Slowing economic growth in emerging markets, Labor
relations, Global recession, Income inequality/disparity, Outdated/insufficient national infrastructure,
Global political uncertainty.
If you want to get a seat at the management table, then look at those questions.
6 Questions to show Business Impact and ROI from HR programs:
1. Why?
Start with Impact - What is the opportunity/ problem/ problem to avoid?
The pyramid of learning and performance
HRM
Two modules:
• Financial HRM - gaining insight in the financial and economic aspects of the most
important HR decisions; financial literacy
• Personnel Economics - application of economic theory and principles to firms’ human
resource problems; economic thinking
Slides and notes = most important
, Lecture 1 - Why numbers matter to HR?
I. Numbers and HRM:
(Almost) everything HRM does has financial implications:
• Recruitment and selection - transportation, job advertisement, assessment center
• Compensation and benefits - fringe benefits, bonuses
• Performance management - rewards, promotions, ...
• Sickness and absence - deferred performance, medical costs
• Learning and development - training costs, deferred performance during training
• Restructuring - severance pays for lay-offs
Financial knowledge is important for HR managers to understand financial constraints and possibilities in
the organization especially since organizations are directed based on financial metrics and especially
since accounting and HRM share responsibilities (‘people costs’)
• Payroll • Insurance • Pensions • Tax information • Performance management
II. This course will help us:
1. Learn to speak / understand the language of business
2. Economists have a dominant ‘gatekeeper’ position because others take economic / financial arguments
for granted (which are often based on assumptions).
3. Financial analysis is an important part of a more fact- or evidence-based HRM
4. Don’t walk away from numbers, because this will lead to a disadvantageous position during
discussions.
5. If your ambition goes beyond recruitment/payroll.
III. People are not listed in assets sheets. Why? People:
• Not assets: human capital investments pay off, but treated as costs (liability)
= 60-70% of expenses, that’s why organizations quickly resort to lay-offs in difficult times.
• Intangible: matters dealt with in HR function hard to express in money, not owned by the organization
• Unpredictable: Timescale, Bias
Solve measurement problems in HR decisions: How to value people?
• Directly: tracking and reporting: tracking key performance indicators (KPI): turnover/retention,
satisfaction, cost per hire, net promoter score (NPS); reported in HRM scorecards for communication to
senior management/other organizational stakeholders
• Indirectly: based on financial derivatives: E.g. interview lasts 43 minutes, we pay HR generalist 35
euro/hr = (43/60)*35 = 25.08 euro.
IV. Evaluating HR decisions:
• Four main ways (Phillips, 2017)
1. Benefit-cost ratio (BCR) BCR = 𝑩𝒆𝒏𝒆𝒇𝒊𝒕𝒔 / 𝑪𝒐𝒔𝒕 (x 100%)
• ‘oldest’ way to calculate return on investment BCR = program benefits/ program costs
(x100)
• Used as post-investment measure • Roots in welfare economics/public finance
• Expressed in % annual benefits (BCR of 1,5 means: investment €1 -> €1,5 return)
2. Return on investment (ROI) 𝑹𝑶𝑰 = (𝑩𝒆𝒏𝒆𝒇𝒊𝒕−𝑪𝒐𝒔𝒕)/𝑪𝒐𝒔𝒕 (x 100%)
ROI = net program benefits / program costs
• Most basic way to evaluate effectiveness HR initiatives, to evaluate profitability
, • Pros: Used For Future Benefits; Expressed in % that indicates initiative attractiveness (> +/-
10%)
• Cons: Every euro the same (inflation); Assessment Based On Percentage
Example: outsource or not outsource ?
• The Death Star inc. offers inhouse training. Vader, the CEO, asks you as the HR generalist to calculate
whether it is cheaper to outsource this. Only requirement is that quality should not decline. After some
casual googling, you find that this could save €600,000 in salary costs. However, the company will have
to buy €400,000 worth of course material annually and a one-time start-up cost of €150,000.
• What is the ROI? ROI= (600 000 - 400 000 +150 000) / (400 000 + 150 000) = 0,09 = 9%
• Based on the ROI, what is your advice? - don’t invest, don’t outsource
3. Payback period (PP) PP = 𝑪𝒐𝒔𝒕𝒔/ Benefits x (12) month
PP = program benefits / program costs
• Reverse of BCR! • Expressed in number of months/years (usually >1y)
• Doesn’t account for spreading investments
Same example: outsource or not outsource? What is the PP?
PP = 150 000 + 400 000/ 600 000
= 0.92 *12 = 11 months
4. Net present value (NPV) - shows how much money an investment will gain/lose in terms of today's
funds
• Difference between present value of cash inflow (CF) and its outflow over period of time (n)
• Future cash flow doesn’t always reflect current cash flow (e.g., inflation)→adjusted
with
pre-specified interest rate (r)
NPV = (Σ𝐶𝑎𝑠h𝑓𝑙𝑜𝑤/ (1+r)*n) - investments
• Especially for large investments that only have long-term future returns
• The higher the better <-> complex measure
Example:The Death Star wants to invest 100 000 in a new project that is expected to generate cash flows
of 25 00 in year 1, 30 000 in year 2, 40 000 in year 3 and 50 000 in year 4. Current inflation is 10%.
NPV=?
y1= 25 000/ (1+0.10)^1 y2= 30 000/ (1+0.10)^2 y3= 40 000/ (1+0.10)^3 y4 = 50 000/ (1+0.10)^4
NPV= 25 000/(1+0.10)^1+30 000/(1+0.10)^2+40 000/(1+0.10)^3+50 000/(1+0.10)^4-100 000 = 11 723,9
Concluding reflections:
Financial literacy can improve HR’s bargaining position (evidence-based,credibility, speaking the same
language). It is a skills gap in HR training (CIPD professional map), but benefits HR careers.
Putting HR to numbers can be difficult: Intangible, unpredictable, different timescales. HR is costs not
assets, Direct (HR analytics) and indirect measures (Financial HRM), BCR, ROI, PP, NPV.
, Lecture 2: The Business perspective on ROI
Statement 1: Most of
the HR interventions of
organizations are
waste.
Is Learning a Cost or an
Investment?
Statement 2:
Management rarely
receives HR reports about
results that are relevant to
them.
Sponsors and Funders
Want to see the Impact
and Monetary Value
Top 10 challenges facing C-level executives: Developing “Next Gen” leaders, Failure to attract/retain
talent, New competitors globally, Cyber-security, Slowing economic growth in emerging markets, Labor
relations, Global recession, Income inequality/disparity, Outdated/insufficient national infrastructure,
Global political uncertainty.
If you want to get a seat at the management table, then look at those questions.
6 Questions to show Business Impact and ROI from HR programs:
1. Why?
Start with Impact - What is the opportunity/ problem/ problem to avoid?
The pyramid of learning and performance
