How many HR employees should your company have?

That’s what the HR-to-employee ratio helps answer — or attempts to answer. The thinking is that the right number of HR staff is directly related to the effectiveness of your HR department. So, if you have the right number of people in HR, you’ll provide a better overall employee experience.

But this isn’t the only factor you should consider. Sometimes, the benchmarks used to determine the right ratio for a company in your industry or for a company your size might not be realistic for you. Or hiring internally may just not be the right approach at all.

Before we get into that, though, let’s define the HR-to-employee ratio, how to calculate it, and the factors that go into what’s traditionally thought of as a good ratio. Then we’ll discuss alternatives you have to hiring in-house professionals to run your HR department and what’s the best path forward for your company.

What Is the HR to Employee Ratio?

The HR-to-employee ratio is a metric used to determine whether you have enough human resources (HR) staff at your company.

It’s calculated with a simple formula. You divide the number of HR employees by the total number of employees, and then multiply that by 100. The ratio isn’t an exact science and often varies based on factors such as industry and company size. For example, if you’re a smaller company, you probably need someone to handle the minimum requirements of recruiting and benefits management. This may lead to a higher ratio.

For larger companies, the organizational needs often become more complex. You typically need a larger team to handle more complex issues such as legal compliance and taxes or have dedicated resources to specific HR functions such as payroll, workers comp, healthcare benefits, and retirement planning.

The key thing to remember is that this metric is just one of several businesses use to determine how they should approach HR to provide their employees the best experience and maximize their opportunity for growth. If you’re hiring an in-house HR team, this metric can be useful, but an in-house solution isn’t the only option.

And many businesses trying to determine the right ratio fail to consider their alternatives, which may provide a better overall HR solution for both their employees and their company. More on that later.

HR-to-Employee Ratio Benchmarks and Other Factors To Consider

There are some benchmarks for HR-to-employee ratios, but it’s important to note that these are just guidelines and not one-size-fits-all solutions.

You should always consider your own goals as an organization and the unique needs of your employees. Ultimately, it’s up to you to decide the best path forward to achieve high levels of operational performance, employee engagement, and revenue growth.

With that said, here are some benchmarks from SHRM’s capital benchmarking study that can give you a general sense of how other organizations of similar size have approached staffing their HR department.

• 1-250 FTEs (full-time equivalents) have an average ratio of 40
• 251-1,000 FTEs have an average ratio of 22
• 1,0001-10,000 FTEs have an average ratio of 03
• Average ratio for all companies is 57

 Other factors to consider include the industry you’re in, what technology you’re using, and your budget.

Some industries may require more specialized HR knowledge and expertise than others and companies that effectively use technology can often be more efficient and achieve a lower ratio. Budget also plays a significant role. This is a key factor to consider when looking at your options for HR.

The amount you’d invest in one or two HR employees may be better invested in alternative solutions, such as a PEO, which may provide better service and more expertise than one or two in-house employees could.

Will a Certain Number of HR Employees Solve Your Core Challenges?

Because you have a unique set of challenges, basing a solution on an industry benchmark isn’t always the best option.

Before you start looking at data and implementing a solution, you first need to define your objectives. What challenges are you facing in achieving those objectives? What are the available strategies you could use to address those challenges?

For larger companies, the challenges might be the overall efficiency and performance of the HR department. If they’re not performing optimally, it could be because they’re understaffed and overworked, or they don’t have the technology to operate efficiently. Or maybe you have certain initiatives you’d like to roll out and you need to consider whether you have the existing technological resources to support them.

If you’re a small- to mid-sized company, your objectives and challenges may look completely different.

If you haven’t hired an in-house HR manager yet, maybe you’re struggling to balance the role of being a business owner or CEO with the responsibilities of an employer. Your goals and challenges may include:

• Finding more time to grow your business
• Offering a competitive benefits package
• Keeping up with legal and compliance changes
• Improving employee engagement
• Establishing a more attractive workplace

One solution to these problems is to hire an internal HR person. But that’s not the only option available.

If you’re under 75 employees, typical organizational wisdom says you need to wait until then to hire an HR employee, and maybe not even until you have 100 employees. But that doesn’t mean you’re not already facing those types of challenges.

Even if you do have between 75 and 150 employees, will one to two HR employees be enough to tackle all of that? Maybe, but the HR staff will still deal with some of the same frustrations that you’re experiencing now when it comes to managing HR.

These types of core challenges include:

• Communicating with multiple points of contact at various vendors
• A lack of access to competitive benefits based on available budget
• Juggling payroll, compliance, employee engagement, and all the other HR functions
• Doing it all while addressing issues that come up such as internal conflict, workers comp, etc.

Hiring in-house HR staff can help, as they’ll be responsible for all of that without the burden of driving business growth. But it’s still a lot for one or two people, and you’ll need to invest in technology and other resources to help make them more efficient.

This is how organizations become burdened with disparate technological solutions and end up stressed managing all the different HR vendors. They’re limited in budget, so they allocate what they can to put band-aids on the most pressing issues, and then that balloons into a situation that’s not scalable.

So, what are your options? One effective alternative to consider is using a professional employer organization (PEO).

Why a PEO Might Be a Better Option for You

A PEO provides HR services to companies (typically small businesses, but not always) such as paying wages and taxes, supporting with maintaining state and federal compliance, and providing a competitive benefits package.

PEOs offer several advantages to companies that experience some of those core challenges related to HR. In fact, companies that use a PEO see, on average, a 27.2% annual return on investment (ROI).

The most common benefit is how PEOs can save you time. Because they handle the HR functions of payroll and compliance, business owners and CEOs have more time to focus on growing their business. The business owner also reduces how many points of contact they and their employees have for addressing HR issues.

Emplova, for example, provides one dedicated client success manager that serves as the sole point of contact for the business owner and employees when a need arises.

Another significant benefit of using a PEO is how they leverage economies of scale to provide a higher quality benefits package at an affordable price. Smaller businesses often can’t afford the types of benefits you’d see at a Fortune 500 company which can make it more challenging to hire and retain talent.

You will also get access to better technology and software that can help you operate more efficiently and provide a smoother employee experience. By keeping things consolidated, it provides a solid foundation that can continue to provide quality service as your company scales.

While an in-house employee may help solve some of the challenges, a PEO is an effective alternative option that offers an improved overall experience for both you and your employees at an affordable cost.

But not all PEOs are created equal.

The Ratio That Matters When Considering a PEO

Just as you would have an internal HR-to-employee ratio, PEOs also have a similar ratio that’s important for you to consider if you’re evaluating PEOs.

This ratio is the dedicated contact to employees managed ratio.

The PEO industry average is one dedicated contact for every 2,000 -5,000 employees. This certainly helps with reducing costs, but having that kind of ratio can make it difficult for the average PEO to deliver quality service.

At Emplova, our dedicated contact to employee ratio is 1:500. So one client success manager only has to manage around 500 employees — not 2,000-5,000! This enables us to provide more concierge-level service to our clients and their employees.

When you’re evaluating PEOs, you’ll want to find out how many total employees your dedicated point of contact will be managing. This will give you a good sense of the level of service you’re likely to receive.

What Matters Most Is the Employee Experience

What truly matters is providing a great experience for your employees while improving operational efficiency and overall company performance.

While the HR-to-employee ratio is one metric you should consider when determining how to accomplish that, it’s certainly not the only factor. Your budget, the unique needs of your company and industry, and the kind of service and benefits you’re looking to offer your employees are critical things to consider when determining how to solve the core challenges you’re facing from an HR perspective.

For many small- to mid-size companies, outsourcing to a PEO can be an effective way to improve the overall experience, reduce costs, and grow your business.

Emplova is a boutique Professional Employer Organization (PEO) that helps small to medium sized businesses grow and prosper by providing benefits, payroll, technology, compliance, and HR administration paired with concierge-style service and support. To learn how we can create a winning HR strategy for your business contact us today.

*Information in this overview is general in nature and not intended to replace legal advice in any particular manner.