How to Prove HR ROI to Your Financial Leaders

When HR leaders struggle to obtain budget approval, it's often due to a misalignment between their communication and the CFO's financial priorities. A simple five-step framework can transform human capital requests from delayed budget items into strategic investment approvals that drive profitability. Learn how quantifying HCROI can turn a 1% improvement into a potential 20% increase in profit.

"I have to ask my CFO for a quarter of a million dollars for this product, but I know they won't go for it unless I can prove the return on investment (ROI)."

This challenge — articulated by many seasoned HR leaders as HCROI¹ or human capital return on investment — captures the fundamental disconnect between how HR thinks about value and how finance leaders make investment decisions. While HR professionals excel at building programs that enhance employee experience and organizational culture, too many struggle to translate these initiatives into the quantitative business case that CFOs and other executive leaders demand to understand financial return expectations.

When HCROI is not quantified, budget requests can end up delayed or deferred, and organizations can miss opportunities to position human capital as the strategic investment it truly is.

Dr. Solange Charas is a full-time Professor of Professional Practice at Columbia University, and the CEO of HCMoneyball. She has served on public company boards and held CHRO roles. She is a thought-leader in human capital materiality and is well-versed in the complex challenge of making a business case for human capital investments. Dr. Charas is a published author and a regular contributor to Forbes Magazine. By answering questions posed by Christian Gomez, vice president of strategy at ADP's Global Enterprise Solutions Division, she illustrates how and why HR leaders should be able to show the financial return on investments (HCROI) in human capital programs and how those programs drive better financial outcomes for organizations. Building business cases for program investments helps gain buy-in for important initiatives.

What is the key challenge of quantifying the financial value of HR initiatives when presenting to finance leaders?

Dr. Solange Charas (SC): There is a fundamental difference in the language that HR and financial people use – which is where the disconnect happens. Whereas HR people tend to think about behaviors and performance, financial people tend to think about financial outcomes and value. In fact, even though they use different frameworks and language, they both strive for the same thing – sustainable and profitable organizations.

What needs to change is how HR measures and describes outcomes. Typically, what's communicated are "soft" outcomes, such as engagement, retention, development, and culture. Financial people don't know how to translate these outcomes in financial terms – seeing HR as an expense rather than as an investment in an "intangible asset" (as the SEC reclassified in 2020). HR people intuitively understand that better engagement and stronger cultures are good for the organization. It's hard, however, to convince the financial professional that people drive value as an intangible contribution to company outcomes. Intangibles are critical as a driver of market value. As shown by Ocean Tomo's 2022 research, 90% of the S&P 500 market value was comprised of intangible assets.

The way to connect the two is to translate human capital outcomes into metrics that can then be used to quantify value and track to financial performance indicators. Once we show human capital outcomes as a financial metric, finance professionals will be able to correlate the "why" for buying or investing in HR initiatives. The metrics should include measures like HCROI, NPV (net present value), and IRR (internal rate of return). HR leaders typically don't provide this information because they either don't think that way or they don't speak financial language as easily.

What financial professionals want to know before they will consider a "funding request" or a budget allocation is whether investing in that initiative will generate a positive return. Because HR typically does not present their budget requests as a "business case" with the appropriate cost/benefit analysis and financial metrics, HR budget requests often end up lingering on the corner of the desk.

How can an investment request be evaluated if the benefit of that initiative isn't presented? How can a financial professional decide among which initiatives to fund based on ROI when HR doesn't provide an ROI? It's no surprise that HR budget requests often drop to the bottom of the list or get cut instead. Even if a financial person believes an HR initiative is a good investment, they still have to make decisions based on quantitative analysis and evidence-based, data-driven rationale for budget allocations.

HR leaders are better served by creating a financial business case, allowing their requests to be evaluated alongside all other budget requests in terms of investment return. And what we've found is that because human capital is so leverageable, the "ROI" on HR programs (HCROI) has incredibly high numbers. In one organization, we saw that the return was in the hundreds! HR leaders need to translate "here's what this tool or product or service does" into "here's how this intervention can improve business performance, pay for itself over and over and ultimately, enhance profitability."

How can you build comprehensive financial business cases that resonate with budget holders?

SC: These five steps can help you through a process that addresses these challenges, links investments to people strategy, and builds a business case based on measurable impact (namely, profit outcomes):

Identify the business problem. Start by understanding what matters most. Ask questions like: What are your top two or three business challenges this quarter or this year? Are there business KPIs that are underperforming? Can better managing people drive better financial outcomes, and how? Is leadership asking you to shift HR strategy or budgets to reduce expenses? How can HR be leveraged to improve revenue performance?
Highlight the cost of doing nothing. Once you understand the problem, ask, "What's the trajectory for performance if we stay the course?" For example, if the key challenge is reducing expenses, it is essential to understand how attrition (or turnover) impacts these expenses. If you assume your attrition rate stays the same, how much is "doing nothing" going to cost the company? By understanding the cost of doing nothing, you can establish a baseline to determine the marginal benefit of doing something. See the next step. Sometimes quantifying the cost of doing nothing is hard to calculate, and sometimes it's easy. For example, using our attrition cost calculator to understand the cost of attrition is easy. This calculator not only quantifies the cost of replacement, but also the opportunity cost of lower productivity, and expresses this as a dollar value and as a percentage of total payroll. This gives a true view of the economic cost of attrition. (Important to note that no data is retained in the calculator; it's just a tool for you to use.)
Conduct a cost/benefit analysis. This is the most critical part of the exercise. Once you understand the cost of doing nothing, you need to understand the benefit of doing something. Estimating the benefit to the organization of an initiative in addressing a key human capital challenge. For example, this could be focused on reducing attrition through retention initiatives or improving productivity through learning and development initiatives. By estimating the benefit, you can then determine if the investment (cost) you must make in those initiatives yields a positive return (based on the financial benefit) and then calculate the ROI of the initiative. Remember that financial professionals have an obligation to optimize the return on investment and improve efficiencies for the organization. By generating a cost/benefit analysis, you are basing your budget "ask" on the same information the financial professional wants to see. They can then determine which initiatives (from across the organization) they want to fund, based on this analysis – obviously, funding the initiatives that drive the greatest "bang for the buck."
Quantify the HCROI benefit. Once steps two and three are completed, this is an easy thing to do. HCROI will be described below and is the easiest measure to show if the entire HR function (people and program costs) is generating profit for the organization. I always recommend calculating HCROI historically so you can understand the trend. One year's information won't show a trend, and what you want to be able to do is illustrate a trend and demonstrate that you can have a positive impact on that trend. This can help you gain the CFO's trust and credibility. We have an HCROI calculator as well to make calculating that number easy.
Use data visualization. Show, not just tell, the value of HR investments.

These five steps can help HR leaders shift from requesting funding for an initiative to delivering impact and from describing features to proving value.

What metrics can connect HR performance to revenue enhancement and expense reduction?

SC: HCROI is a financial algorithm. There's nothing in HCROI that singles out any HR program, like retention or learning and development, or culture. It is a pure financial indicator of the effectiveness and efficiency of dollars spent on people and people programs. It's pure numbers. Therefore, we can easily predict the impact on profits by changes in HCROI. That's why this serves as an indicator of a company's financial sustainability.

Since calculating HCROI is a formula, it's not as complicated as you might think. The expense part of the equation takes into consideration the total cost of workforce (TCOW). We adjust expenses to take out the TCOW, subtracting that from revenues. The numerator is an adjusted profit number, with the TCOW as the denominator, enabling you to determine the return.

So, for every dollar invested in your workforce, including all programs and salaries and everything you spend on people, you can quantify the contribution to adjusted profit. When this number is greater than $1, then that's good! The higher the number, the more effective and efficient investments in human capital are, and the resulting contribution to profit.

How can you ensure vendors provide ROI justifications when evaluating HR technology or service investments?

SC: Twenty years ago, when I was a CHRO, a vendor came to me pitching a tech-enabled performance management system. He walked me through all the features, the intuitive dashboards, the employee feedback loops, all the bells and whistles. When he finished, I said, "This sounds great, but what's the ROI? What benefits can I expect from using this product? Enhanced productivity, higher engagement, less attrition?" He stared at me blankly.

I said, "Listen, I have to ask my CFO for a quarter of a million dollars for this product, but I know they won't go for it unless I can prove the return on investment or, at least, the IRR on how long it will take for us to break even on our investment." I asked him to go back to his team, work on the ROI and bring it back to me. He never did, and obviously, I didn't buy the product.

Technology is so advanced today that it seems impossible not to be able to understand the financial impact of human capital initiatives, but the gap still exists, and as long as there's a gap, there will be a challenge getting in HR initiatives funded.

What strategies can help illustrate the financial risks of inaction to decision-makers?

SC: If we think about the formula for calculating profits – namely, revenue minus expenses, the fastest path to improving profits is managing expenses. When we consider what companies spend the most on – people – reducing headcount is an easy way to cut expenses and generate more profit. It's just math, and that's often how financial people solve profit margin challenges. This is especially true in labor-intensive industries such as professional services, technology, hospitality, and food services. However, these are the same industries that can't generate revenue WITHOUT people. So, by cutting the workforce, they are also cutting their ability to generate revenue (through delivering services!). According to the Bureau of Economic Analysis, more than 87% of GDP comes from services. Therefore, for most of our economy, people are the product.

I have been saying for the last several years that cutting people is like draining your car of gasoline and expecting it to get you to your destination. The logic holds for cutting people wholesale from organizations and expecting that organization to be sustainably successful.

What HR professionals can help financial people appreciate is that people and people programs aren't just an expense; they are the engine of economic value creation. Companies make money when the productivity of their employees exceeds their costs. We need to work to ensure that what we spend on people and programs is less than the productivity they produce for the organization. Then we can make smart decisions about where and if and when to cut staff.

How can you position HR as a strategic profit driver rather than a cost center in budget discussions?

SC: For most organizations, more than half of operating costs go to their workforce. That makes human capital the single most leveraged investment area for the organization. However, what's required is a mindset shift to view HR as an investment rather than an expense.

Small improvements in how we manage and engage people can yield massive financial returns. You'll recall, Christian, what you and I have found in our own work with ADP clients, reinforced by years of academic research, is that a 1% improvement in HCROI could lead to a 20% or greater increase in profit.

HCROI is only one of several key human capital metrics that help CHROs understand how effective the HR function is in driving value (revenue) and reducing unnecessary costs (expense). Other metrics include human capital value add (HCVA), human capital investment intensity (HCII), human economic value add (HEVA), and human capital market value (HCMV), among others.

When you measure and prove the value of workforce investments, you're offering strategic de-risking. You can de-risk compliance, accelerate budget improvement and position yourself as the partner who bridges HR performance with financial performance, profitability and regulatory readiness.

How can CHROs prepare their reporting to meet increasing regulatory and investor demands for human capital transparency?

SC: According to EY's current projections, by 2026, most enterprises will be subject to some form of human capital disclosure, whether through regulation, investor pressure or stakeholder demand. These aren't voluntary disclosures. They will be mandatory disclosures. We're seeing this happening in different parts of the world already, including in Japan and Europe.

For many CHROs, preparing for these requirements is still a work in progress. Access to reliable data and advanced analytics is uneven, and translating HR outcomes into ROI that withstands CFO scrutiny is an emerging skill set.

First and foremost, CHROs need to understand their company's business model. What business are they in? How do they make money? What is their competitive advantage? What are the strategic initiatives of the organization?

Dave Ulrich, the "father of modern HR" and the Rensis Likert Professor Emeritus at the University of Michigan, would say that we don't do HR for HR's sake – we do it to support the customer and the business. CHROs need to evaluate how well their programs are supporting employees to drive impact outside of the HR function.

To prepare for the future of human capital governance and reporting, CHROs must ensure that either they or a member of their staff has a deep understanding of financial concepts and can read a balance sheet and income statements. It's critical to introduce the rigor of data analytics to determine how effective their programs are in achieving HR and corporate goals. It's equally important to prioritize investments in programs that support better enterprise outcomes and communicate their impact using a financial language – such as HCROI.

What data visualization techniques can help communicate complex HR financial relationships to executives?

SC: Human capital professionals like words, and financial people like numbers presented in tables, graphs and pictures. Illustrate how human capital performance relates to financial outcomes. Use a chart that shows an obvious connection between HCROI performance and financial performance (revenue and expenses on separate lines) over time to clearly connect human capital performance to profit performance.

With this approach, it will be clear when HCROI drops below one, indicating that for every dollar you spend, you're getting less than $1 back. And when it hits one, it's about to break even, and when it goes above one, companies have profit.

This type of chart can change the conversation and the strategic role of HR in the organization in driving sustainable financial outcomes. You can't terminate everyone to reduce expenses (and improve profit in the short term), but you can show how investing in people to drive up revenue and productivity can create value (improving sustainable profit performance).

Establishing HR investments as a strategic imperative

Transitioning from the perception of HR as an "expense" to HR as an "investment in an intangible asset," measured by human capital metrics like HCROI, will not only facilitate budget approvals but also establish HR as a strategic partner within the organization. This transformation is crucial for HR leaders seeking to secure resources and drive meaningful business impact.

The stakes can be high. With regulatory requirements urging transparency in human capital performance and CFOs requiring quantitative justification for every investment, HR leaders can no longer rely on intuitive appeals or subjective value propositions. What's more, many CHROs feel unprepared to quantify ROI for financial decision-makers.

HR leaders must embrace financial metrics and narratives to ensure they can articulate the intangible value of human capital investments as a tangible benefit to finance leaders. The HCROI framework serves as a bridge between HR initiatives and profit outcomes.

At one of our client organizations, they were told that their HR budget would be cut. The CHRO asked me to help reframe a request for a 3% increase in their overall budget. With a business case approach, the CHRO walked out of the budget meeting with an additional 6%! She showed the economic benefit of investing in specific programs to reduce unnecessary costs associated with replacing attrition, and filling open positions faster, using an analytics approach and presenting HCROI and IRR elements of her "investment" strategy. At no other time does Benjamin Franklin's adage ring true – an ounce of prevention is worth a pound of cure.

The opportunity is transformational. Organizations that adopt this approach won't just secure funding — they can fundamentally reposition HR from a cost center to the organization's most leveraged investment area. The financial case for strategic HR investment becomes irrefutable when properly articulated using the language of business.

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