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What’s the Correct HR-to-Employee Ratio?

Used in HR Weekly — July 24, 2007. Posted online for a week the same day.

Issue: It can be easy to misuse or misinterpret the controversial HR-to-employee ratio.

Benefit: That metric can help measure HR effectiveness, but only if interpreted and used correctly.

Action: Recalculate your ratio using the advice below, then use the number as a guide for future staffing.

HR-to-employee ratios are a somewhat controversial metric that can help establish HR staffing and determine how well HR delivers services. But you should calculate and use the number correctly, or don’t use it at all.

“The ratio is very helpful if you know what you’re doing,” says James Hatch, a partner with PricewaterhouseCoopers’ Saratoga Institute, which specializes in HR metrics. “But it can be very dangerous if you don’t know what you’re doing.”

One key danger: Executives may use ratios as a reason to cut HR staff.

Many HR professionals don’t calculate the ratio correctly. Here’s how to do it right: Divide the number of HR full-time equivalent (FTE) positions by the total number of employees (FTEs), then multiply the outcome by 100.

Example of a six-employee HR department at a 250-employee company:

                   6     ×   100   =   2.4 ratio     

But HR professionals often include or exclude the wrong HR jobs in the formula. The ratio should include HR professionals who work as generalists and those in areas such as benefits, compensation, labor relations and organizational effectiveness, says Hatch. The ratio should exclude payroll and training-and-development employees.

High HR-to-employee ratios in smaller organizations (see chart below) may mean that it takes a minimum HR baseline to deliver primary HR services. But once that baseline is met, the incremental amount of HR staff required to support more employees doesn’t increase at the same rate.

If your ratio is higher than average, examine your HR department’s role.

If the role is primarily organizational asset preservation—preventing litigation by overseeing policies, cutting HR costs and outsourcing—then a ratio of 1.00 (1 per 100 employees) for large employers is the standard benchmark. If your department’s goal is asset creation—an ongoing alignment with business strategy—then the ratio could be near .60 (1 per 166 employees).

High HR ratios aren’t necessarily bad for departments that are strategic partners, have mature self-service technology and decentralized HR departments. Example: A hotel chain with a core strategy to provide intimate customer service maintains a .80 ratio compared to 1.3 for competitors.

Suppose your HR department has a high ratio, but isn’t a strategic partner and has few automated HR services. Look to streamline services and possibly outsource.

Low HR-to-employee ratios can be misleading. “A low ratio might mean you get things done quickly, but if you’re getting the wrong thing done quickly, it has no value,” says Claudia Schwartz, principal of HR Results consulting firm.

Schwartz once used a high ratio to ask for more employees when she headed the HR department at a 10,000-employee company. However, she used the ratio as only one piece of the information to make her case, and she made sure to measure the number accurately.