What Are the Best HR Metrics for a Large Organization?
Monday, July 26, 2004 | by Dr. John Sullivan
As a recognized expert in the area of HR metrics, I've had the opportunity to advise numerous large firms on what HR metrics they ought to be utilizing. Through this experience, I have observed that a good number of firms make the same two errors when it comes to developing and implementing metrics.
Avoiding these two errors will not guarantee success by itself, but it will go a long way towards ensuring that you are set up to handle any roadblocks or problems you may encounter along the path to using world-class metrics in your organization.
These two common errors are:
Developing and implementing HR metrics in a vacuum
Developing more metrics than it is feasible to maintain and utilize
The most common error that I find is that of HR managers trying to create and implement metrics in a vacuum. Instead, I recommend a collaborative approach, in which you take a list of strategic HR metrics that you can live with to the CFO and let him or her select the specific ones that are most likely to measure business impact and be easily understood and considered strategic by top management. By letting the CFO play a role in the selection process and allowing them to make the final decision on what metrics you will move forward with, you eliminate many of the roadblocks you may encounter — and you'll recruit a high-level champion at the same time.
The second most common error that senior HR managers make in developing metrics is that they develop and track too many. A large number of metrics is both unnecessary and difficult to maintain. I recommend instead that you settle on between 8 and 12 really important metrics that demonstrate HR's impact on the business. Because collecting data and calculating metrics is time-consuming and expensive, it's important to focus your energies on the ones that really matter.
My Hot List Of HR Metrics
The following is a list of the 37 individual metrics in 14 different categories that I would recommend for consideration by a large organization, or even one that is not ready to do sophisticated data collection and analysis. These are not the most sophisticated metrics I can provide, but each of them is relatively easy to understand and the data needed to answer them is relatively easy to acquire.
I recommend that you use this list of 37 powerful HR metrics as your initial list that you run by your CFO. Remember, before they have made their final selection, encourage them to limit the final metric count to 10 or less really strategic measures.
First-Tier Metrics
Overall Workforce Productivity
The very best measure of overall HR success is workforce productivity. Any HR department that takes responsibility for improving workforce productivity is sure to be a hero among senior executives. The key is to continually improve the ratio between the dollars spent on employee costs (wages, benefits and overall HR expenses) and overall company revenue.
Metrics in this category include:
Percentage improvement in workforce productivity. Improvement in dollars spent on people costs for every dollar of revenue/profit generated (as compared to last year)
The dollar value of the increased workforce productivity between this year and last year
Employee Engagement
It's essential that you balance employee engagement with employee productivity in order to ensure that managers don't abuse or burnout their employees in an effort to maximize productivity. Both are important, and there are studies that demonstrate the impact of high engagement on productivity and a firm's success. Managers should be rewarded for both high productivity and high employee engagement scores.
Metrics include:
The percentage of employees who "look forward to coming to work" everyday (from survey results)
The percentage of employees who feel that their managers exercise expected management behaviors (from survey results relating to two-way communication, challenging and exciting work, exceptional growth and learning, recognition and reward, some degree of control over their job, and knowing that their work makes a difference)
Recruiting
Managers consistently rate recruiting among the top three things they expect from HR. Without overdoing it, here are some simple metrics that you can use to assess recruiting effectiveness:
Number of overall days that key positions were vacant (due to recruiting)
Average performance appraisal score of new hires (compared to last year for the same job)
Manager satisfaction with new hires (survey hiring managers; compare results to last year's average)
The turnover rate of new hires within the first year
The percentage of diversity hires in managerial and senior positions
The dollar impact of a bad hire in key positions
Retention
Retention is also a highly rated management issue. In this case, most turnover measures are too simple. Potential metrics include:
Overall employee turnover (not recommended)
Performance turnover in key jobs (where performance turnover means that top performer turnover is "weighted" more heavily and bottom performer turnover more lightly than average worker turnover)
Preventable turnover in key jobs (where a sample exit survey is used to identify the real reasons individuals left the organization and whether the turnover could have been reasonably prevented)
Diversity turnover in professional, managerial, and technical positions
The dollar impact of employee turnover in key positions
Managers' overall satisfaction rate with HR's retention efforts and the impact of these efforts on team productivity (survey of a sample of managers)
Overall HR Costs
Even though overall HR costs are relatively small compared to all general and administrative expenditures, it never hurts to have a metric to ensure that the dollars spent in HR are resulting in a continuous rated improvement of workforce productivity.
Dollars spent on HR costs for every dollar of revenue generated (compared to last year)
Manager Satisfaction
While many HR departments strive to assess manager satisfaction with HR, I offer caution. Because most HR people are great at building relationships managers seldom rate HR professionals low when they are asked directly whether they are satisfied with HR or their HR representative. However, if they are asked a different question relating to how satisfied they are with HR's impact on their business unit's productivity and success in reaching its goals, you quite often get a different less positive answer.
As a result, I recommend you use a forced ranked survey that includes not just HR but every individual overhead function. Within that survey managers are asked just one particularly important question: "Rate each of these individual overhead functions on how much they contributed directly to your business unit's productivity and its success at reaching its goals?"
The metric to use:
Average ranking of all individual HR functions in a manager survey where managers are asked to rate all individual overhead functions specifically on their contribution to productivity and in helping the manager to meet his or her performance goals
Dollar Impact of HR on the Business
Estimate of the overall dollar impact of HR as a result of last year's recruiting, retention and productivity improvement (ROI) efforts
Second-Tier Metrics
Compensation and Benefits
Rather than trying to use a statistical method to determine pay fairness, I recommend that you survey employees on their perceptions of pay fairness compared to work expectations.
The number of "cents" in total compensation and benefits costs that it took to generate a dollar of revenue (as an indication of compensation effectiveness, where this year's ratio would be compared to last years ratio)
Percentage of employees who are satisfied with their compensation (survey of a sample of employees on their satisfaction with the rewards and the expectations of the firm)
Percentage of employees who are rated in the top performance appraisal level and who are paid above the average salary for their position (and vice versa)
Percentage of the average employee's pay that is "at risk" based on the employee's on-the-job output
Percentage of top-performing employees who resigned for compensation-related reasons (using a post exit survey, identify the percentage of top performers who listed pay issues among their top three reasons for leaving)
Employee Relations
The metrics focused in the employee relations area analyze whether poor performing employees rapidly improve their performance or are terminated within a year.
Percentage of employees who report that they have a bad manager (based on an employee survey, comparing this year's percentage to last years)
Turnover percentage of low-performing managers and employees within one year of receiving the low rating
Percentage of low-performing employees who are on a performance management program.
Percentage of employees who are in any performance management program who improved at least one level on performance appraisal ratings within one year
Manager satisfaction with the impact of HR's employee relations efforts on their team's productivity (survey results of a sample of managers)
Training and Development
Although learning, growth, and development are critical to both performance and employee retention, few training departments focus on the type of development that managers and employees find to be the most effective: on-the-job training and assignments. As a result, the recommended training and development metrics focus on learning, development, and growth.
Percentage of employees who report that they are satisfied with the learning and growth opportunities provided by the firm (survey of a sample of employees)
Percentage of employees who report that they are satisfied with on-the-job learning, project assignments for growth and development, and job rotations (survey of a sample of employees)
Percentage of employees who report that they are in the leading edge of knowledge in their profession (survey of a sample of employees)
Percentage of new hires that report excellent training opportunities among the top three reasons they accepted the job (survey of new hires in which they force-rank their job acceptance factors)
Generalist Activities
In many HR departments a significant percentage of all HR services are provided by generalists. As a result, it's important to identify metrics that measure generalists' satisfaction and impact. Each of the individual generalist scores would be averaged to get the overall effectiveness of the generalist function.
Percentage of managers who are satisfied with generalists (survey of all managers who are serviced by generalists)
Average percentage improvement in workforce productivity (ratio of employee costs to dollar value of output) within the divisions that each generalist serves
Employee referral rates in their business unit, as an indication of employees' willingness to recommend others to the firm
HR Goals Met
HR departments frequently set unclear and unquantifiable goals at the beginning of the year, but they are seldom measured throughout the year and formally assessed at year end. In order to improve HR performance and ensure that HR professionals are focused on the appropriate goals and activities, it's essential that the goal assessment process be more formalized.
Percentage of top priority HR goals that were met or exceeded during the year (goals are set, quantified, prioritized, and approved by senior management at the beginning of the fiscal year)
Dr. John Sullivan (JohnS@sfsu.edu) is a well-known thought leader in HR. He is a frequent speaker and advisor to Fortune 500 and Silicon Valley firms. Formerly the chief talent officer for Agilent Technologies (the 43,000-employee HP spin-off), he is now a professor of management at San Francisco State University. He was called the "Michael Jordan of Hiring" by Fast Company magazine. More recruiting articles by Dr. Sullivan can be found in the ER Daily archives. Information about his numerous other articles, books and manuals about recruiting and HR can be found at www.drjohnsullivan.com. Dr. Sullivan is also the editor of VP of HR, an e-newsletter providing "out of the box" solutions for senior HR managers. Free subscriptions can be obtained on his website.
HR Metrics: The Business Case - Carla Joinson
Though most companies would say that employees are their greatest assets, few would say they find these assets easy to measure. Are the company's most valuable assets productive? Are they regularly upgraded through targeted training? Does the company know how to acquire more quality assets cost-effectively? Do the assets stay with the company long enough to be worth the investment?
Without HR metrics, no one in management can really put a finger on what's working or not working with the people who make up the company. HR's success at measuring "people issues" directly contributes to informed decision-making by executives and board members. The challenge for HR is to measure and deliver meaningful data that is relevant to the bottom line.
Tricky Deliverables
Jeanne Hugg, director of HR for start-up Avalon Pharmaceuticals in Gaithersburg, Maryland, says that HR may have felt somewhat exempted from measurement in the past, but that could be one reason HR complains today about 'not being invited to the table'.
"If you're in sales or science, you're expected to show what your value-added is," says Hugg. "Similarly, in HR you can't just hire people and not worry about costs or how long it takes. HR has to be able to measure what it's bringing to the table."
The challenge lies in deciding what to measure and how to do it.
According to the 2002 Staffing Metrics Study conducted by the Society for Human Resource Management (SHRM) and the Employment Management Association (EMA), even common metrics don't always use standard components. Different companies, for instance, used a range of expense categories to calculate a common metric like cost per hire. Seventy-six percent of respondents included advertising in their calculation, 63 percent included online/Internet services, while only 50 percent included reference/background checks and recruiter costs.
Though standards may evolve in the future, simple figures won't necessarily provide enough information. Many companies track retention, for example, but to solve a turnover problem HR needs to discover why people leave. HR adds value when it decides not only what to look at, but also how to tweak its methodology to get the kind of information the company can use.
Diana Kamyk, manager of Diversity & Work/Life at Bayer Corporation, says that HR includes exit interviews to understand turnover, but also incorporates a unique feature. "We send a departure survey within ninety days of termination to employees who have an 'exceeds expectations' on appraisals." By refining HR's methodology, Kamyk obtains valuable information about the kind of employee her company would most like to keep.
Likewise, when Bayer started a mentoring program in 2000 in which high potential employees were matched with vice-presidents or higher, a challenge for Kamyk was how to measure the program's success.
She tackled the problem by developing an anonymous, confidential electronic survey that evaluates the experience for participants, who identify themselves as either mentor or mentored. "We also examine people who have been through the program and look at turnover or promotions for these people a year later," says Kamyk. She adds that the company can break down the data in various ways, such as by gender, to see where they may need to focus attention.
"Metrics are a form of continuous improvement," adds Kamyk. "They allow you to evaluate and make adjustments accordingly."
Deciding What To Measure
No company has the staff to measure and analyze an infinite amount of employee data, so many experts suggest concentrating on metrics that provide information the company really wants to know. Data requirements can come from managers, employees and stockholders, and can be as simple or sophisticated as the company needs it to be.
Hugg says, "Right now, I'm establishing a baseline on everything." At Avalon less than a year, she began developing her department by meeting with everyone in the company to find out what people wanted out of HR. She also had to decide what activities to focus on right away.
"I looked at standard systems first: was the budget working, could we recruit competitively, were we retaining employees?" says Hugg. "Those things tell me whether we're marketable and competitive."
She has already formalized the company's recruiting program, developed employee classifications, reviewed benefits and started an employee development program. Now she says she's ready to start measuring.
Hugg, whose career has centered on establishing HR at start-ups, says she'll benchmark 2 - 3 data points and use a few surveys to get the information she wants in a number of areas. "Next year, we'll be able to take a look at what we've done and how we've controlled things. I expect to see some improvement in areas like recruitment costs."
Examining measurement data can often pinpoint problems for HR. Hugg says that her company's performance appraisal system currently has a halo effect. "We recently put in a bonus plan and got a bell curve; I want a bell curve in our appraisal system as well next year."
Paula Caya, manager of the Organizational Effectiveness Center of Excellence at global chemical company Celanese, says that the company's vision drives their metrics. "Our vision on the people side is to have top performers delivering top results. So, we measure how well we're doing at this--are we getting top performers, and are we delivering the services they need?"
Metrics naturally include recruiting and staffing. "We measure college recruiting, for instance," says Caya. "We look at where we're getting our recruits and how well they're doing two years down the road."
Caya explains that her company discovered a couple of universities where they didn't get candidates, or if they did, couldn't keep them. "We changed some of our focus as a result," she says. "But we never would have discovered the situation if we weren't measuring this way."
When communications skills became a competency this year at Celanese, HR needed to do more than determine how many people attended key training programs. "We're looking for observable behavior like better presentation skills," says Caya. "Managers and HR can determine the impact of the training by monitoring employees who go through it."
Shareholder Value Is An HR Product
Theresa M. Welbourne, PhD, Associate Professor of Organization Behavior and Human Resource Management at the University of Michigan Business School and CEO of survey firm eePulse Inc., believes that HR can--and should--deliver data well beyond the basics. In Welbourne's view, data on cost per hire or how fast benefits are processed doesn't make HR a strategic partner.
"HR is similar to marketing," Welbourne explains. "Marketing knows what the customer needs: they do surveys, use focus groups, and analyze data. In turn, HR should know everything about the employee population.
"For instance, if HR does a survey and 80 percent of the employees mention a certain factor as interfering with getting their work done, they can see it's a systemic problem. This is valuable information for the company."
She understands that traditional metrics are important as a baseline of information. "But HR doesn't need to use these metrics to justify its existence," she says. "If HR is going to provide data, it should provide data that helps business decisions or helps productivity.
"Measure something about people that you know relates to company performance," Welbourne advises. "For example, research shows that the degree to which people are energized by their job predicts performance. If today, a department is low in this area, three weeks from now customer sales and satisfaction will be affected." Welbourne says that this is the kind of HR data managers can use to make decisions.
Welbourne's suggestions require sophisticated analysis that might not be within some companies' budgets or capabilities. However, a number of recent studies show a growing interest in measuring human capital. The Conference Board released a study in July 2002 that emphasizes the value of this data. For instance, tracking absenteeism can help increase productivity, or measuring diversity can help save a company from costly discrimination awards. The report also suggests that HR collaborate with finance professionals to use human capital measurements to calculate return on investment.
In 1999 Watson Wyatt wanted to explore whether the way a company managed its human capital significantly affected its financial performance. Their Human Capital Index (HCI) study verified that it could: where there were superior HR practices, there was higher shareholder value. A European study in 2000 and another U.S. study in 2001 confirmed their findings. According to Watson Wyatt, the latest study shows that "the better an organization does in managing its human capital, the better its return for shareholders."
The 2001 HCI study found 49 specific HR practices that play the greatest role in creating shareholder value. These practices are divided into six dimensions:
Total rewards and accountability
Collegial, flexible workplace
Recruiting and retention excellence
Communications integrity
Focused HR service technologies
Prudent use of resources
Many HR departments already measure certain elements within these categories--now the focus may turn to which programs are most beneficial to the company's financial health.
HR has always known its value; the problem has been quantifying it for senior management. Emerging research should finally allow HR to make dollars and cents business cases for its programs and give credence to its role as a strategic partner.
Carla Joinson is a Stafford, Va.-based writer specializing in human resources and management topics.
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