HR as a Business: Insights Derived From the Size of the HR to Employee Ratio

Is there a best practice HR employee to total employee ratio against which you can benchmark your organization's ratio? What are the business implications of a high or a low ratio? What business considerations impact the size of this ratio? Does this ratio say something about the role of HR in the organization?

To start with, how is this ratio calculated? Simply, apply the below formula:

HR to employee ratio = # of FTE HR staff / # of FTE staff

where FTE stands for full time equivalent (8 hours per day)

Analytically, a high HR to employee ratio implies several business facts:

1. The number of HR employees is relatively high compared to the total number of employees in the organization.
2. The HR function is primarily operational and administrative.
3. The HR function is not a high performing function in terms of value creation and business results.
4. Little investments have been made in the past in modern digital HR.
5. HR is costly as a function contributing much more to overheads than to the bottom line.
6. The perception that the HR function is a velvety function that is isolated from the rest of the business; an ivory tower.
7. Labor unions are active and participate heavily in employee related decisions.

A low HR to employee ratio implies just the opposite:

1. HR headcount is low compared to total staff headcount.
2. HR is not just a service provider. Rather, it is a more strategic function, aligned to business goals and objectives. HR is a value adding function.
3. Important investments have been made in digital HR.
4. HR is not a cost burden to reduce or to get rid of.
5. Labor unions are either weak or non-existent.
6. HR 'means business' where the HR manager is a business manager with an HR specialization.

Is there an ideal or optimum HR to employee ratio? To answer this question we will have to consider five organizational factors:

First, technology. In organizations that have heavily invested in digital HR or e-HR, most typical and traditional HR processes can be self-managed by managers and other employees. Consequently, HR's operational role is weakened in favor of a more strategic role that aims at aligning HR strategy with the organization's goals and objectives. In such organizations, the ratio of HR staff to total staff will be smaller.

In organizations where HR is highly administrative and operational, the ratio of HR staff to total staff is typically high. Consequently, the cost of maintaining the HR function is also very high.

Second, role of the HR function in the organization. An HR function that is more strategic will lead to a lower ratio. The opposite is true; the more administrative the HR role, the higher the ratio. This has a direct impact on the role of the HR business partners. Where the ratio of business partners to total employees is high, it follows clearly that HR business partners play a typically traditional HR role. Conversely, where the ratio of HR staff to total staff is low, the HR business role is definitely strategic.

Third, degree of HR latitude over staffing budget and budget control. Where HR has high latitude in hiring people, one would expect HR to always find justifications to expand HR personnel, which increases the HR staff to total staff. This trend has been observed in many governmental and private sector organizations.

Fourth, size of the organization. According to the Society of Human Resource Management (SHRM), the size of the HR staffing ratio is smaller as the organization gets bigger in size. This is due to economies of scale enjoyed through digitization and automation that allow one single HR staff to serve a much larger number of internal customers. Smaller organizations demonstrate a larger HR staffing ratio. Below is summary of the SHRM study conducted in 2015.

Organization Size (FTEs) HR Staffing Ratio

Fifth, degree of unionization. Where unions are strong and active, they will get heavily involved in major decisions regarding employees, increasing the HR staffing ratio. This is because unions’ involvement is usually regarded as part of the HR function. A lower degree of unionization is expected to be associated with a lower HR staffing ratio.

The conclusion is clear. There is no optimal or ideal HR staff to total employee ratio. Several factors will have to be taken into consideration before benchmarking your organization's ratio with other organizations. However, ideally, the ratio should be as low as possible reflecting the business effectiveness of HR.

The lower the HR staffing to total employee ratio means that:

• HR is more effective.
• HR is less costly.
• HR is more strategic.
• HR is more IT driven.
• HR is more aligned with organizational strategy.
• The role of HR business partners is more strategic.
• HR is more results oriented.