Total Rewards: Improving Human Capital ROI Through an Integrated Approach

For many organizations, payroll is their largest expense. Yet few business leaders actually measure what this investment delivers in return.

The CEO, or owner-manager, often sees a cost line that continues to rise. HR leadership, on the other hand, sees talent that needs to be attracted, engaged and retained. Both are right, but they do not always speak the same language.

Indicators show that salary increase budgets will remain under pressure in 2027 and that certain critical skills will remain scarce. As we explain in our article 2027 Salary Forecasts: From Budget Normalization to Strategic Decisions, this environment is prompting organizations to make more strategic compensation decisions.

The question, therefore, is not “how much should we increase our compensation budget in 2027?” but rather “what will each dollar invested in Total Rewards deliver for the business?” Human capital ROI (return on investment) provides a common language for answering that question.

The Ordre des conseillers en ressources humaines agréés proposes, in its guide to sound governance¹ (French), a simple metric to track: human capital ROI.

In simple terms, this metric compares the value generated by the organization with what it invests in its workforce. It therefore helps track whether the value created is growing faster than the amount invested in people.

The result indicates the profit generated for each dollar invested in labour. A ratio of 1.2 means that every dollar invested generates $1.20 in profit. For the investment to be profitable, the ratio must be greater than 1.

For example, a company generates $20 million in revenue. Its operating expenses are $17 million, including $7 million in labour costs. Its ratio is: (20 – 10) ÷ 7 = 1.43.

As benchmarks, the HR+ Barometer (2021–2022 data) places manufacturing and wholesale trade between 2 and 3; finance and insurance between 3 and 4; and professional services, retail trade and food services between 1 and 2.

The message for CEOs is clear: labour is not merely an expense; it is a source of revenue. The message for HR leadership is equally clear: this metric helps demonstrate the contribution of talent to the company’s profitability.

This metric compares the value generated by the organization with what it invests in its workforce. The formula has two components that allow the CEO and HR leadership to bring complementary perspectives to human capital ROI.

The numerator, revenue minus expenses excluding labour, measures the value your people generate. This is the CEO’s language.

The denominator, total labour cost, measures what you invest in your people. This is HR leadership’s area.

The ratio improves when the value created grows faster than the investment. There are therefore two ways to improve it: get more from every dollar invested and increase the value created.

The trap is to cut the denominator. In the short term, the ratio rises. But if your best talent leaves, the value created declines the following year, and so does the ratio. The right question is therefore not “how much do our people cost?” but rather “how much value do we generate from every dollar invested in our workforce?”

The denominator represents the sum of your employee value proposition, namely direct compensation, employee benefits and working conditions.

A clear and valued employee value proposition affects both sides of the formula:

• Labour cost: it directs investment to where it has the greatest impact on attraction, performance and retention. It stops funding what does not create value. At the same cost, a well-designed Total Rewards offering that employees fully recognize and appreciate is perceived as more generous.
• Value created: turnover is costly; agency fees, recruitment and onboarding increase operating expenses. Vacant positions and learning curves reduce revenue. Retaining talent therefore directly improves the value created.

The ultimate objective is to maximize every dollar invested so that it creates as much value as possible.

However, this optimization does not depend on a single lever. Direct compensation, employee benefits, working conditions, performance and the retention of key people all influence, in different ways, either the value created or the amount invested. An integrated approach makes it possible to consider them as components of a single strategy rather than as isolated decisions.

Optimizing investment does not mean investing the same way everywhere. Certain roles and areas of expertise have a greater impact on creating or protecting value. This is particularly true for key people.

In many organizations, a small number of key employees account for a significant share of revenue, margins and client relationships. They have a major impact on the value created while representing a relatively small portion of total labour costs. Their compensation should therefore be designed to recognize their contribution to increasing the value created:

• Variable compensation tied to results that create value. Labour costs increase only when the value created increases. The compensation therefore pays for itself;
• A Long-Term Incentive Plan (LTIP) that aligns the interests of key people with those of shareholders;
• Retention mechanisms that protect the value created against the potential departure of someone who holds the organization’s critical skills and knowledge.

Let us return to the example of the company with a ratio of 1.43. It improves its employee value proposition, reducing recruitment and agency costs by $300,000. It also pays its key people a $150,000 bonus tied to increased productivity. This increase generates $600,000 in additional value.

As a result, the value created increases from $10 million to $10.9 million, while its investment in people rises from $7 million to $7.15 million. The ratio increases from 1.43 to 1.52. The company invests more in its people, and every dollar delivers a greater return.

The ratio naturally brings the two perspectives closer together: the CEO approaches it primarily from the standpoint of value creation, while HR leadership focuses on the effectiveness of investments in talent. Improving human capital ROI therefore depends on their ability to work together on both dimensions.

In practical terms, we recommend:

• Measuring the ratio annually and monitoring its trend;
• Supplementing the ratio with a few simple metrics, such as revenue per employee, turnover among key people and recruitment costs;
• Linking every 2027 compensation decision to its expected impact on the value created.

The best-performing Total Rewards strategy is neither the most generous nor the least expensive. It is the one that increases the value created faster than the investment.

Human capital ROI therefore gives the CEO and HR leadership a common language for guiding their decisions. But the ratio is not an end in itself: above all, it helps organizations ask better questions about how they invest in their people. By taking an integrated approach to the different Total Rewards levers, from governance to key people, the organization can sustainably increase the value it creates.

^{1. Ordre des CRHA, Guide et indicateurs : saine gouvernance RH (French), 63 pages}