Human Resource Staffing: The Magic Number

Most human resource (HR) operations from time to time contend with “right sizing” of its staff.   Moreover, the need to reduce staff to realize cost savings many times targets various “back office” functions and human resources is not immune.  On a regular basis, clients will ask me how large their human resource staff should be compared to total employees.  Several weeks ago, I had a discussion with a HR Director that was predicting her department’s staffing needs after bringing benefits administration back into her organization.  She needed an exact number so she could compare it to her current staffing level and determine the number of additional resources she needed.

One of the most common methods of assessing the appropriate staff level in an organization is the HR ratio.  The ratio involves dividing the HR FTEs (Full Time Equivalents) by the total employee FTEs and multiplying the result times 100. Most organizations attempt to standardize the comparison by only including generalists and specialists and leaving out the payroll and training functions of the organization when computing the ratio.  Although the HR ratio is the one possible element for determining the appropriate staffing level of the HR function, it is neither comprehensive nor conclusive.  Nevertheless, for the last several decades, convention wisdom has advocated a ratio of 1.0 or 1 HR FTE per 100 employee FTEs as the best method of determining appropriate staffing level.  As automation has become more prevalent, the ratio has crept higher with some even advocating a ratio of 1 HR FTE per 1,000 employees.

What are the factors that limit the applicability of the HR ratio? Three core factors general the most concern:

• Service offering and level
• Degree of automation
• Organizational size

Service Offerings and Level

Different human resource functions offer different services, possess different levels of service, and have different approaches of service delivery (centralized or decentralized).   The typical human resource function includes:

• Ensuring compliance with local, state and federal labor laws
• Recruitment and selection
• Employee record keeping
• Organizational design and development
• Change management
• Performance management
• Employee relations
• Workforce analysis
• Compensation and benefits management
• Training and development

A subset of organizations includes payroll, risk management, or labor relations as part of the core human resource functions and would consider these employees part of their HR staff.  Obviously, the inclusion of different functions results in different needs and employee counts.    In order to have meaningful comparisons when utilizing the HR ratio, it is important to ensure that same functions are being compared across different organizations or the comparison is of little value.  The level of service also plays a role.  Some organizations place a strong emphasis on strong internal customer service and develop comprehensive human resource functions.  A strong commitment to service can increase the HR employee count by as much as 20 percent.  Just like quality of service, the delivery method impacts size of staff as well.  The major delivery methods include:

• Centralized with little management involvement
• Centralized with management involvement
• Decentralized with little management involvement
• Decentralized with management involvement

Technology and training are critical determinants of management involvement.   A centralized system with little manager and employee ownership of the major human resource processes usually has the largest number of HR staff.  The smallest staff is generally associated with a decentralized structure with management involvement.

Degree of Automation

As mentioned with method of delivery, automation plays a key role in determining the long term size of the HR staff.  Automated tools can reduce human involvement in typical transactional processes and shift more basic HR functions to managers and employees.   As many organizations have found, the implementation of HR automation does not immediately result in a reduction of staff.  HR professionals are redeployed most times to use the new gains to improve customer service and to cover more strategic needs.  The real labor cost savings accrue from the ability to improve the efficiency and effectiveness of services without additional staff in the future.  Consequently, it is important to examine not only if automation has been implemented, but when the process occurred.

Organizational size

Figure 1: HR Ratio by Organization Size

Like many staffing calculations, there is an economy of scale effect with HR staff as an organization becomes larger.  As an organization increases in employees, the number of HR staff grows dramatically with the effort to fill the necessary specializations to address their most pressing needs.  Once the core expertise is assembled, the staff trend begins to slow as the volume increases for each team member, but there is no need for additional staff.  Figure 1 captures the ratio change for each size of organization.  According to the SHRM Human Capital Benchmarking Study, the average ratio is 2.7 with fewer than 100 employees and diminishes to a ratio of .42 for 7,500 employees or more.   The previously mentioned factors all play into this change: assembly of specialists, more defined functionality, standardized processes, automation, and great use of self service for managers and employees.

The short answer to the question of how large my HR staff should be is that it depends.  As we discussed, it depends on a variety of factors that inter-relate and mutually influence each other.  In the next several posts, I will discuss some general guidelines that will help you better determine the appropriate staffing level needed to provide human resource services.