they may focus narrowly on specific human resource management and activities (again, such as hours of training per employee ).21In any case, the bottom line is that measuring how we re doing, and why is important for managing one s human resources.
Types of Metrics
There are many measures that human resource managers use. For example, the HR-to-employee ratio averages about 1.12 HR employees per company employee for all employers. However, the ratio varies with employer size. For example, there is (on average) one human resource employee per 100 company employees for firms with 100 249 employees. The HR employee-to-employee ratio drops to about 0.79 for firms with 1,000 2,499 employees and to 0.72 for firms with more than 7,500 employees.22
Figure 3-10 illustrates more focused human resource management metrics. These include absence rate, cost per hire, and health care costs per employee.23
FIGURE 3-10 Metrics for the SHRM®2011 2012 Customized Human Capital Benchmarking Report Source: Reprinted with permission from the Society for Human Resource Management. All rights reserved.
Organizational Data Revenue
Revenue per FTE Net Income Before Taxes
Net Income Before Taxes per FTE
Positions Included within the Organization s Succession Plan
HR Department Data Total HR Staff
HR-to-Employee Ratio
Percentage of HR Staff in Supervisory Roles
Percentage of HR Staff in Professional/Technical Roles Percentage of HR Staff in Administrative Support Roles Reporting Structure for the Head of HR
Types of HR Positions Organizations Expect to Hire in 2011 HR Expense Data
HR Expenses
HR Expense to Operating Expense Ratio HR Expense to FTE Ratio
Compensation Data Annual Salary Increase
Salaries as a Percentage of Operating Expense Target Bonus for Non-Executives
Target Bonus for Executives Tuition/Education Data
Maximum Reimbursement Allowed for Tuition/Education Expenses per Year
Percentage of Employees Participating in Tuition/Education Reimbursement Programs
Employment Data
Number of Positions Filled Time-to-Fill
Cost-Per-Hire Employee Tenure
Annual Overall Turnover Rate Annual Voluntary Turnover Rate Annual Involuntary Turnover Rate
Expectations for Revenue and Organizational Hiring Percentage of Organizations Expecting Changes in Revenue in 2011 compared to 2010
Percentage of Organizations Expecting Changes in Hiring in 2011 compared to 2010
Metrics for More Profitable Organizations Total HR Staff
HR-to-Employee Ratio HR Expenses
HR Expense to Operating Expense Ratio HR Expense to FTE Ratio
Annual Salary Increase
Target Bonus for Non-Executives Target Bonus for Executives
Maximum Reimbursement Allowed for Tuition/Education Expenses per Year
Percentage of Employees Participating in Tuition/Education Reimbursement Programs
Time-to-Fill Cost-Per-Hire
Annual Overall Turnover Rate
Improving Productivity Through HRIS
Tracking Applicant Metrics for Improved Talent Management As an example of the benefits of using metrics, consider that most employers spend thousands of dollars (or more) each year recruiting employees, without measuring which hiring source produces the best candidates. The logical solution is to assess
FIGURE 3-11 SHRM Customized Human Capital Benchmarking Report
Source: Reprinted with permission from the Society for Human Resource Management.
All rights reserved.
Tuition/Education Data
n 25th
Percentile Median 75th
Percentile Average Maximum reimbursement
allowed for tuition/
education expenses per year
32 $1,000 $5,000 $7,500 $6,000
Percentage of employees participating in tuition/
education reimbursement programs
32 1.0% 3.0% 5.0% 4.0%
Benchmarking in Action
Measuring how one is doing (for instance in terms of employee turnover, or employee productivity) is rarely useful by itself. Instead, for a thorough analysis, you ll usually want to know How are we doing? in relation to something. That something may be historical company figures (for example, Are our accident rates going up or down?).
Or, you will want to benchmarkyour results.Benchmarkingmeans comparing the practices of high-performing companies to your own, in order to understand what they do that makes them better.27
SHRM provides a customized benchmarking service. This enables employers to compare their own HR-related metric results with those of other companies. SHRM s service provides benchmark figures for many industries. These include construction and mining, educational services, finance, manufacturing, and others. The employer can also request the comparable (benchmark) figures not just by industry, but broken down by employer size, company revenue, and geographic region. (See http://shrm.org/
research/benchmarks/.)
Figure 3-11 illustrates one of the many sets of comparable benchmark measures you could obtain from SHRM s benchmark service. It shows how much employers are recruitment effectiveness, using measures or metrics. Metrics here might include quality of new hires and which recruitment sources produce the most new hires. 24
One way to track and analyze such data is by using an applicant tracking system (ATS). Many vendors provide ATSs. Vendors include specialized ATS vendors like Authoria, PeopleFilter, Wonderlic, eContinuum, and PeopleClick.
Regardless of the vendor, analyzing recruitment effectiveness using their software involves two basic steps.
* First, the employer (and vendor) decides how to measure the performance of new hires. For example, with Authoria s system, hiring managers input their evaluations of each new hire at the end of the employee s first 90 days, using a 1 5 scale.25
* Second, the applicant tracking system then enables the employer to track the recruitment sources that correlate with superior hires. It may show, for instance, that new employees hired through employee referrals stay longer and work better than those from newspaper ads do. Most applicant tracking systems enable hiring managers to track such hiring metrics on desktop dashboards.
Applicant tracking systems support an employer s talent management efforts in other ways. For example, installing an Authoria ATS enabled the Thomson Reuters Company to identify the sources, candidate traits, and best practices that work best in each geographic area where they do business.26 This in turn enabled them to reduce recruiting costs, for instance, by shifting recruitment dollars from less effective sources to ones that are more effective. Similarly, the ATS can also help hire better employees, for instance, by helping the employer see which applicant traits correlate with subsequent employee performance.
Note: To ensure that the data are seen as credible, data for metrics with an n of less than 5 are not displayed.
spending on average for tuition reimbursement programs, and what percentage of employees typically participate in such programs.
Strategy and Strategy-Based Metrics
Benchmarking (comparing one firm s HR metrics with another s) only provides one way to look at how your company s human resource management system is performing.28 It shows how your human resource management system s performance compares to the competition. It may notshow the extent to which your firm s HR practices are helping your company to achieve its strategic goals.
For example, if our strategy calls for doubling profits by improving customer ser- vice, to what extent are our new selection and training practices helping to improve customer service?
Managers use strategy-based metrics to answer that question.Strategy-based metricsare metrics that focus on measuring the activities that contribute to achiev- ing a company s strategic aims.29
As an example:
* Let us say the owners of the Paris International Hotel decide to make their hotel one of the top 10 hotels in France.
* They believe doing so will translate into revenues and profits 50% higher than now.
* They decide that achieving those strategic aims requires improving customer service. They will measure customer service in terms of measures like guest returns, and guest complimentsof employees.
* What can the hotel s human resource managers do to help achieve this improved customer service? They can take measurable steps to improve certain targeted HR practices, such as increase training per year per employeefrom 10 hours to 25, boost incentive pay(tied to guest service ratings) from zero now to 10% of total salaries, and move from no job candidates tested before hiring to 100% testing prior to hiring.
* So, for the Paris Hotel, the strategic HR metrics would include (among others) 100% employee testing, 80% guest returns, incentive pay as a percent of total salaries, and sales up 50%. If changes in HR practices such as increased training and better incentives have their intended effects, then metrics like guest returns and guest compliments should also rise. And if so, the Paris Hotel should also achieve its strategic goal of being one of the top 10 hotels in France.
Workforce/Talent Analytics and Data Mining
Employers increasingly use workforce analytics (or talent analytics ) software appli- cations to analyze their human resources data and to draw conclusions from it.30 For example, a talent analytics team at Google analyzed data on employee back- grounds, capabilities, and performance. The team was able to identify the factors (such as an employee feeling underutilized) likely to lead to the employee leaving. In a similar project, Google analyzed data on things like employee survey feedback and performance management scores to identify the attributes of successful Google managers. Microsoft identified correlations among the schools and companies employees arrived from and the employee s subsequent performance. This enabled Microsoft to improve its recruitment and selection practices.31 Software company SAS s employee retention program sifts through employee data on things like skills, tenure, performance, education, and friendships. The program can predict which high-value employees are more likely to quit in the near future.32Alliant Techsystems created a flight risk model to calculate the probability an employee would leave.
strategy-based metrics
Metrics that specifically focus on measuring the activities that contribute to achieving a company s strategic aims.
6 Explain with examples why metrics are important for managing human resources.
This enabled Alliant to predict unusually high turnover in one important group and to take corrective action.33IBM uses workforce analytics to identify employees who are idea leaders to whom other employees frequently turn for advice (for instance based on e-mail interactions and e-mail mentions by colleagues).
DATA MINING Such efforts usually employ data mining techniques. Data mining sifts through huge amounts of employee data to identify correlations that employers then use to improve their employee selection and other practices.Data miningis the set of activities used to find new, hidden, or unexpected patterns in data. 34Data mining systems use tools like statistical analysis to sift through data looking for relationships. Department stores often use data mining. For example, Macy s captures huge amounts of data on its customers what they buy, when they buy it, how they pay for it, and what day of the week they tend to shop. Macy s can use data mining to make sense of it. For example, data mining reveals that some customers often come in to redeem 20% off coupons they get in the mail.
Other customers are more apt to buy new electronic gadgets with coupons than are others.
Thanks to data mining, the manager can discover patterns that he or she can then use to make predictions. He or she can answer questions such as Which of our products would this customer be most likely to buy? Which of our customers are making too many returns? , and What is the likelihood that this candidate will succeed here at Google? The accompanying HR as a Profit Center presents other examples.
HR AS A PROFIT CENTER
Using Workforce/Talent Analytics
Talent analytics can produce striking profitability results. For example, Best Buy used talent analytics to determine that a 0.1% increase in employee engagement led to a more than $100,000 rise in a Best Buy store annual operating income.35 Employers are using talent analytics to answer six types of talent management questions:36
Human capital facts.For example, What are the key indicators of my orga- nization s overall health? JetBlue found that a key measure of employee engagement correlated with financial performance.
Analytical HR.For example, Which units, departments, or individuals need attention? Lockheed Martin collects performance data in order to identify areas needing improvement.
Human capital investment analysis.For example, Which actions have the greatest impact on my business? By monitoring employee satisfaction levels, Cisco was able to improve its employee retention rate from 65% to 85%, saving the company nearly $50 million in recruitment, selection, and training costs.
Workforce forecasts.For example, How do I know when to staff up or cut back? Dow Chemical uses a computerized model that predicts future required headcount for each business unit based on predictions for things like industry trends.
Talent value model.For example, Why do employees choose to stay with or leave my company? For example, Google was able to anticipate when an employee felt underutilized and was preparing to quit, thus reducing turnover costs.
Talent supply chain. For example, How should my workforce needs adapt to changes in the business environment? Thus, retail companies can use special analytical models to predict store volumes and release hourly employees early.
What Are HR Audits?
Human resource managers often collect data on matters such as employee turnover and safety with the help ofhuman resource audits. One practitioner calls an HR audit an analysis by which an organization measures where it currently stands and deter- mines what it has to accomplish to improve its HR function.37Another calls it a process of examining policies, procedures, documentation, systems, and practices with respect to an organization s HR functions. 38In sum, the HR audit generally involves (1) reviewing the functioning of most aspects of the company s human resource function (recruiting, testing, training, and so on), usually using a checklist, as well as (2) ensuring that the employer is adhering to government regulations and company policies.
In conducting the HR audit, managers often benchmark compare their results to those of comparable companies. Many private human resource management consulting firms (such as Mercer, www.mercer.com) offer such comparable data on a variety of HR activities. Sample activities include what other employers are paying and the ratio of HR professionals per company employee. We saw that the Society for Human Resource Management provides extensive benchmarking services. HR audits vary in scope and focus. As an example, typical broad areas to cover with the HR audit include:39
1. Roles and head count (including job descriptions, and employees by exempt/
nonexempt and full/part-time status)
2. Legal issues (compliance with federal, state, local employment related legislation) 3. Recruitment and selection (including selection tools, background checks, and so on) 4. Compensation (policies, incentives, survey procedures, and so on)
5. Employee relations (union agreements, performance management, disciplinary procedures, employee recognition)
6. Mandated benefits (social security, unemployment insurance, workers com- pensation, and so on)
7. Group benefits (insurance, time off, flexible benefits, and so on) 8. Payroll (internal versus external payroll options, FLSA compliance)
9. Documentation and record keeping (HR information systems, personnel files, I-9 and other forms, and so on)
10. Training and development (new employee orientation, workforce development, technical and safety, career planning, and so on)
11. Employee communications (employee handbook, newsletter, recognition programs)
12. Internal communications (policies and procedures, and so on) 13. Termination and transition policies and practices
Drilling down to a finer level of analysis, here is what we might look for in several of these 13 items.
Item 9, Personnel FilesDo our files contain information including résumés and applications, offer letters, job descriptions, performance evaluations, benefit enrollment forms, payroll change notices and/or documentation related to personnel actions, documents regarding performance issues, employee
HR audit
An analysis by which an organization meas- ures where it currently stands and determines what it has to accomplish to improve its HR function.
handbook acknowledgments, I-9 forms, medical information (related to a medical leave of absence or FMLA leave), and workers compensation information?40
Items 2 and 8, Wage and Hour ComplianceIs our time record-keeping process in compliance with state and with federal law (for instance
check-in/check-out no more than 3 minutes before starting/stopping work)?
Do we conduct a random audit of timecards to ensure that practices are as they should be?41
Item 1, HeadcountHow many employees are currently on staff? How many employees of those on staff are currently
* Regular
* Probationary
* Temporary
* Full Time
* Part Time
* Exempt
* Non-Exempt42
Evidence-Based HR and the Scientific Way of Doing Things
In this chapter, we ve seen that decision-making based on an objective review of the evidence is important for successful human resource management. Managers today strive to make decisions based on an analysis of the evidence.Evidence-based human resource managementis the use of data, facts, analytics, scientific rigor, critical evalua- tion, and critically evaluated research/case studies to support human resource management proposals, decisions, practices, and conclusions.43
You may possibly sense that taking an evidence-based approach to making management decisions is similar to being scientific in how you do things, and if so, you are correct. A recent Harvard Business Reviewarticle even argues that managers must become more scientific and to think like scientists when making business decisions.44
HOW TO BE SCIENTIFIC But how can managers do this? Two things are particularly important. First, in gathering evidence, scientists (or managers) need to be objective, or there s no way to trust their conclusions. For example, a medical school recently disciplined several of its professors. These doctors had failed to reveal that they were on the payroll of the drug company who supplied the drugs, the results of which the doctors were studying. Who could trust their objectivity or their conclusions?
Being scientific also requires experimentation.An experiment is a test the man- ager sets up in such a way as to ensure (to the extent possible) that he or she under- stands the reasons for the results obtained. For example, in their Harvard Business Reviewarticle, A Step-by-Step Guide to Smart Business Experiments, the authors argue that if you want to judge a new incentive plan s impact on corporate profits, don t start by implementing the plan with all employees. Instead, implement it with an experimental group (which gets the incentive plan),andwith a control group (a group that does notget the incentive plan). Doing so will help you gauge if any performance improvement stemmed from the incentive or from some other cause (such as a new company-wide training program).45
If you ve done a good job designing your business experiment, you should be able to use your results to explain and predict why, say, one plan succeeds and
another fails. For example, you own a small business and a vendor suggests that you pay her $10,000 per year to use a personnel test to identify high-potential sales candidates. You conduct a study (we ll explain how in Chapter 5, Testing), using the test with some applicants but not with others. You conclude that by using that test you can predict, with high accuracy, which candidates will succeed. How many extra sales will that produce? You decide based on the evidence that the $10,000 would be well spent. Hopefully, your study will also help you explainyour results, in other words to answer Why. For example, This test uncovers applicants who are highly self-confident, and that s a trait one needs to be a great salesperson in my business.
WHY SHOULD A MANAGER BE SCIENTIFIC? For managers, the key point of being scientific is to make better decisions. The problem is that what s intuitively obvious can be misleading. Does our expensive applicant testing program really produce better employees? Is this sales incentive plan really boosting sales? We ve spent $40,000 in the past 5 years on our tuition-refund plan; what (if anything) did we get out of it? What s the evidence?
EXAMPLES Examples abound of human resource managers taking a scientific, evidence-based approach to making decisions. For example, an insurance firm was considering cutting costs by buying out senior underwriters, most of whom were earning very high salaries. But after analyzing the data, HR noticed that these underwriters also brought in a disproportionate share of the company s revenue.
In fact, reviewing data on things such as employee salaries and productivity showed that it would be much more profitable to eliminate some low-pay call- center employees, replacing them with even less expensive employees. As another example, the chemical Company BASF Corp. analyzed data regarding the relationship among stress, health, and productivity in its 15,000 American headquarters staff. Based on that analysis, the company instituted health programs that it calculated would more than pay for themselves in increased productivity by reducing stress.46
Throughout this book we will show examples of how managers can use an evidence-based approach to making better human resource management decisions.
For example, which recruitment source produces the best candidates for us? Does it pay to use this testing program? Should we raise salaries, or not? And, Does our safety program really result in fewer accidents?