Discover the key differences between Human Capital Return on Investment (HCROI) and Human Economic Value Added (HEVA) for measuring the value created by investing in human capital.
Table of Contents
Question
Which measure shows how much more valuable an organization has become because of its investment in human capital?
A. Return on investment
B. Human capital return on investment
C. Human capital value added
D. Human economic value added
Answer
D. Human economic value added
Explanation
Human Economic Value Added (HEVA) is the measure that shows how much more valuable an organization has become because of its investment in human capital. HEVA calculates the economic value added by the organization’s human capital by comparing profits to the cost of employee wages and benefits.
The formula for HEVA is:
Revenue – (Operating Expenses – [Compensation Cost + Benefit Cost]) / (Compensation Cost + Benefit Cost)
In other words, HEVA measures profitability after accounting for the cost of human capital. A higher HEVA indicates that the organization is generating more economic value per dollar spent on employee compensation and benefits.
The other options measure different aspects of human capital investment:
A. Return on Investment (ROI) is a general financial metric that compares the gain or loss from an investment relative to its cost. It does not specifically measure the impact of human capital.
B. Human Capital Return on Investment (HCROI) compares profitability to human capital costs. The formula is:
Revenue – (Operating Expenses – Compensation Cost) / Compensation Cost
HCROI is similar to HEVA but does not factor in the cost of employee benefits.
C. Human Capital Value Added (HCVA) measures the average profit per employee. The formula is:
Revenue – (Operating Expenses – Compensation Cost) / Total Number of FTE
HCVA looks at profit per employee rather than the economic value added by human capital investment.
In summary, while all of these metrics relate to human capital, Human Economic Value Added (HEVA) is the measure that most directly quantifies how much more valuable an organization has become due to its investment in its workforce. Understanding HEVA empowers HR leaders to demonstrate the strategic value and ROI of human capital management initiatives.
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