The Optimal HR to Employee Ratio

Published by Guests, on 01/04/2020

By Erik van Vulpen (founder of AIHR)

The HR to employee ratio is a useful tool for assessing the optimum capacity of HR in an organization. In this article, we will look at what the HR to employee ratio is, list factors that will influence this ratio, and give a benchmark of the HR to staff ratio.

What is the HR to employee ratio?

Let’s start by exploring what the HR to employee ratio (also known as HR to staff ratio or HR staffing ratio) is. As the name already indicates, the HR to employee ratio is the number of HR professionals divided by the number of people working at the organization.

This metric provides a ratio that is indicative of the efficiency of HR. A high ratio (meaning that there are relatively many HR people working at the organization) could indicate a lower efficiency in the delivery of HR services. However, this is not always true and a high ratio can be explained by multiple factors. We will explore this in the next section.

But first, let’s take a look at the exact formula. The HR to employee ratio is the number of HR staff (expressed in FTE, or Full-Time Equivalent) divided by the number of total staff in an organization (also expressed in FTE). This leads to the following formula.

Say a fast-growing scale-up company has 2045 employees (1860 FTE). Jill, the organization’s HR director is concerned because there is a lot of pressure on HR to perform resulting in much more work than there are people to do it. The current HR team consists out of 35 people (32 FTE) and Jill wants to make a case for more HR hiring budget. To do this, she wants to compare the ratio in the organization to the benchmark ratio in the industry. To do this, she calculates the HR to staff ratio is as follows:

This 1.7% is well below the benchmark ratio for companies of a similar size, giving Jill an additional data-driven argument for increasing the HR team size. However, there are many other considerations when it comes to determining the optimum HR to staff ratio.

HR to employee ratio best practice

When it comes to this ratio, best practices will depend on the specifics of the case. Several factors will influence the HR to staff ratio. This does not mean that there are necessarily best practices – the best practice will depend on your situation. Here goes!

• Technology. The first aspect that will influence your HR to employee ratio is the level of HR technology in the organization. Organizations who have heavily invested in digital HR and self-service functionalities, usually have a smaller HR organization. In these organizations, both employees and managers can self-manage most of their HR requirements. This leaves very little work for HR administration, rendering their role more tactical and strategic and requiring less FTE to have the same impact.
• Role of HR. In line with the previous, the role of HR is another factor that influences the HR to staff ratio. A highly operational HR function will do different work and require a larger HR workforce compared to a highly strategic HR function. An example is the HR business partner population. When the ratio of business partners to the rest of the organization is low, these business partners usually have a much more strategic role. When the ratio is high, the business partner acts more like a traditional HR advisor, having a much more operational role.
• Budget and budget control. A third factor is budget (duh) and staffing budget control. Budget makes sense: a larger HR budget allows for more HR people on the payroll. However, in some organizations, the decision to expand personnel is made by HR. In these organizations, it is not uncommon for the HR department to determine that they need people more urgently than other departments do, resulting in a higher HR to staff ratio. I have seen this happen in a major European multinational. Once this has happened, it is very hard to turn it back.
• Industry. Another factor is the industry. Although the benchmark data that we will show in the next section does not specify industry, there are some industries that will require more HR involvement than others. Examples include professional service firms where highly skilled professionals require more extensive training and personal development in order to engage and retain personnel compared to lower-skilled, blue-collar labor.
• Organizational size. The size of organizations also influences the ratio. Smaller organizations will hire their first HR person at between 20 to 50 people. Although this person will often also have other tasks, having one HR professional per 50 employees is a normal ratio. Larger organizations will have a lower ratio, as economies of scale through digitization and automation enables a single HR professional to serve a lot more internal customers. We’ll cover this in more detail in the benchmark section later in this article.
• Unionization and collective agreements. The last factor is the degree to which employees are unionized. Collective agreements and unions usually pose a challenge as they will be involved in any major decision regarding employees. Involving these unions and active stakeholder management is a key activity that usually falls under the HR department. As a result, a high degree of unionization can lead to a higher HR to staff ratio.

Although this is not an exhaustive list, it does touch on the major points that influence the HR to employee ratio. Therefore, it also shows that a simple number is insufficient to make the case for an increase (or decrease) of HR staff to total staff.

HR director Jill will, therefore, have to come with additional arguments. Just knowing the ratio is not enough. For example, it could be that she is fine because her HR organization is technologically advanced and highly strategic. Instead of hiring new people, she could better invest in further automation of processes while keeping costs low.

Optimal HR to employee ratio benchmark

Let’s take a look at the HR to employee ratio benchmark. As far as we know, this data has never been benchmarked in different industries. However, we do know how the HR to employee ratio stacks up compared to company size.

The Society for Human Resource Management (SHRM) has researched this over multiple years. In their 2015 Human Capital Benchmarking Study, the following staffing ratios were reported.

As noted before, the HR staffing ratio in smaller organizations is often lower. Organizations with fewer than 250 employees have on average 3.4 HR professionals per 100 employees while larger organizations only have a fraction of this.

In fact, the 2009 report looked into 119 large organizations and found HR-to-employee ratios as low as 0.4 for organizations with over 7,500 employees. However, it is good to note that these ratios have been changing over time, so the 2009 numbers may be less relevant today – however, they do show the huge difference between small and large organizations.

To emphasize this, a 2017 SHRM study found an HR to employee ratio average of 2.6, with a median of 1.58. The average and 75^th percentile are almost identical, indicating that 2.7 is close to the highest possible HR to employee ratio. The 25^th percentile was at .99. This is significantly higher than their 2016 benchmark, which reported an average of 2.32 and a median of 1.33.

Bloomberg Law’s 2018 HR Benchmarks Report mentions that HR departments have a median of 1.5 employees per 100 people in the workforce. At the time, this represented an all-time high as it has long been around 1.0 per 100. Both the SHRM and Bloomberg numbers are very similar.

In conclusion, the HR staffing ratio heavily depends on the number of people working at the organization. However, there are other factors, including the technological capabilities of HR, the degree to which HR is strategic, budget and budget control, and unionization. All these factors make up the unique metric that is your HR to employee ratio.

(This article was originally published on analyticsinhr.com)