This year, CEOs are prioritizing growth, technology and the workforce, and HR leaders are focused on initiatives that will drive success in these high-priority areas.

However, HR leaders have to balance CEO growth expectations with HR budgets, which are becoming increasingly conservative. According to a Gartner December 2024 survey of more than 500 HR organizations, fewer HR leaders planned to increase budgets this year (35%), down from 40% in 2024 and 45% in 2023. Meanwhile, more HR leaders planned to cut spending this year (33%), up from 30% in 2024 and 29% in 2023.

HR efficiency benchmarks help prioritize HR investment

In order to achieve success in strategic areas and balance costs, HR leaders need to understand if their function is performing efficiently. Benchmarks are necessary to validate HR’s performance, inform discussion about HR’s strategic priorities and business impact, and identify areas where the spend may need to be adjusted.

However, HR leaders often lack fundamental data about HR staffing allocation and HR spending ratios to guide both HR optimization plans and investment strategies. Gartner has outlined benchmarks for key metrics that HR leaders can use to inform and optimize function performance:

• HR spend as a percentage of revenue and a percentage of operating expenses
• HR spend per employee and HR activity area spend
• HR productivity ratios

HR spend as a percentage of revenue and operating expenses

HR cost as a percentage of revenue is often the most recognized metric, as it shows the investment levels in the HR function relative to organizational performance. According to Gartner’s survey, the median HR functional spend as a percentage of revenue is 0.80%, a lower level of investment compared to other functions, such as finance (1.25%), IT (3.14%), sales (4.47%) and marketing (7.5%).

Another way to understand HR investment levels is to look at HR cost as a percentage of operating expenses. Unlike revenue, which is subject to external forces and volatility, operating expenses are usually more consistent. The same Gartner survey found that the median HR function cost as a percentage of operating expenses is 1.33%. When we look at benchmarks across industries, those with a high ratio of highly skilled workers, such as professional services, have a higher HR cost as a percentage of revenue and operating expenses, compared to more labor-intensive industries, such as energy and utilities and consumer goods.

Typically, organizations with a greater level of HR investment see HR as a strategic enabler of workforce productivity and business performance; however, HR cost above or below these benchmarks shouldn’t be interpreted as good or bad. The metrics reflect neither the quality of HR services provided nor HR’s contribution to business performance. Benchmarks should always be interpreted in the context of the HR function’s maturity level, workforce-related metrics and investment levels of other functions.

HR spending by employee and activity area

HR spending-by-employee is often seen as an initial litmus test to see if the function should reduce spending, shift resources or invest in new capabilities. According to Gartner’s December 2024 survey, the average HR function spends about $2,908 annually per employee. Recruiting is the largest expense, costing $396 per employee, followed by total rewards ($241 per employee) and learning and development ($215 per employee).

There is a nuance in interpreting these numbers, as variations can occur due to an increase or decrease in the number of employees and investments in new technology. An above-average HR cost per employee could indicate that an organization sees HR as a key contributor to ongoing success and competitiveness. For example, the current volatile business environment has led to an increasing demand for HR support, putting pressure on HR functions to increase investment in employees’ experience and skills development. However, a high HR cost per employee could also indicate a people-heavy HR function. Activity area spend can help answer questions about whether certain processes are inefficient and potentially ripe for standardization.

HR productivity and staffing allocation

Gartner research found that, on average, HR functions deploy one HR full-time employee (FTE) per 58 employees; however, this can vary by industry, geography and workforce characteristics.

HR FTEs are mostly allocated toward staffing and recruiting, followed by HR administration, employee relations and payroll. This finding reflects that HR staff are still heavily involved in transactional and day-to-day employee activities, taking away the function’s ability to act strategically and provide value to the business. As transactional and tactical work still takes precedence, leaders should plan to improve HR efficiency by extending the use of HR technology, leveraging emerging technologies and transferring more tasks to shared services.

Balancing cost and efficiency vs. quality and effectiveness

HR leaders can use data from the above HR efficiency benchmarks to initiate conversations with CEOs and CFOs about how HR is performing and whether there is a need to reassess organizational priorities or HR goals. When using benchmark data to validate performance, CHROs shouldn’t just focus on comparing spending to peer organizations, but also assessing HR services from a cost efficiency versus quality and effectiveness lens, and investing in HR initiatives that support business objectives.

Having high-quality peer group benchmarks will help HR leaders evaluate and rethink functional spending and staffing and secure funding for non-negotiable HR investments.