Benchmarking Human Capital Metrics

April 25, 2016
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Scope—This article discusses how to align your organization's human capital metrics to support its business strategy. It also discusses how HR professionals can use benchmarking to compare their HR outcomes and measures within their industry, and it includes definitions of a variety of key human resource metrics.

Overview

The SHRM Workforce Analytics Model outlines a four-phase process to assist HR professionals in developing and aligning human capital metrics to their business strategy. After they develop metrics, HR professionals should undertake benchmarking to compare their firm's human capital metrics with metrics from similar organizations. To achieve a meaningful comparison, the definitions and calculations for the metrics being compared must be the same.

This article encompasses the following sections:

  • Aligning human capital metrics to business strategy.
  • Importance of benchmarking.
  • Interpreting benchmarking data.
  • Definitions and calculations of key HR metrics.

Aligning Human Capital Metrics to Business Strategy

The importance of human capital is increasing as the United States and other industrialized nations rapidly shift to a knowledge economy. Metrics of human capital include not only HR practices but also other work practices and people management strategies. The distinction is that human capital can extend beyond the HR function to include the organization's total strategy. Because organizations see human capital as an asset to drive value and optimize the firm's performance, strategies that align human capital practices to support performance are in demand. Yet showing which HR practices improve business performance can be difficult. Concrete measures to evaluate the effectiveness of these practices are more elusive. The SHRM Workforce Analytics Model addresses these challenges through a process that also builds HR credibility with stakeholders in the organization.

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The SHRM Workforce Analytics Model provides a framework for HR professionals to develop, build and implement human capital metrics in their organizations. The model consists of four phases:

  • Assess and plan.
  • Link and align.
  • Identify and build.
  • Implement and execute.

Assess and plan

During the initial phase, HR must acquire knowledge of the organization's strategy, plans and goals. The subsequent phases depend on HR professionals having a firm understanding of these areas. Success in this initiative often depends on support and buy-in from colleagues outside of HR. Therefore, HR professionals should identify a metrics team, similar to a steering committee, of three or more individuals. The more employees in the organization, the more members HR will need on the team. Large organizations may have 20 or more individuals on their steering committee; small organizations may have only three. To build credibility with this project, individuals from different departments, such as finance and operations, should be on the metrics team.

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Link and align

The central question in this phase is what impact(s) does the business strategy have on the workforce? When this question is answered, it is possible to identify workforce drivers that support the business strategy. To illustrate, if the business strategy of a retail operation is to open 20 new stores in a 12-month period, the potential workforce drivers would include the need to hire additional retail staff, provide training for store managers and develop onboarding practices for new hires.

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It is also critical to link and align the business strategy with the human capital performance management system by identifying key performance indicators (KPIs)—quantifiable performance measures based on the predetermined success factor of the business. Performance management measurements and KPIs provide an indication of the efficiency and effectiveness of the organization's performance management processes and the level of achievement of organizational goals and objectives. 

Identify and build

During this phase, HR professionals need to determine which metrics and analytics support the workforce drivers for each HR function. Using the previous retail example, HR analytics that support hiring additional retail staff would include the time required to fill positions, cost per hire, quality of hire and number of requisitions per recruiter. Such data help HR professionals determine how quickly they can fill positions for the stores being opened, the number of recruiters needed to achieve the hiring goals and the level of investment required for recruiting. All of these metrics support the business strategy.

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Implement and execute

This phase specifies how often analytics will be delivered and to whom. HR practitioners should include a feedback loop to receive comments from internal customers to improve the quality of data being distributed.

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Importance of Benchmarking

Benchmarking is rapidly becoming an indispensable tool for HR professionals. It is a mechanism for measuring processes, practices and results against the competition to improve performance. If it is used wisely, it can transform an organization's HR and people management strategies by showing how human capital practices influence the organization's performance.

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HR professionals can use benchmarking data to compare their organization against competitors or similar organizations. For example, HR professionals can compare their organization's cost per hire with similar organizations to see if the discrepancy warrants further analysis. Benchmarking also protects program areas that perform well. To illustrate, if line executives want lower recruiting costs, benchmarking data may show that their current recruiting costs are in line with their industry. In fact, to lower costs far below their competitors' costs might jeopardize the organization's ability to find the right talent to compete in the market.

Benchmarking can also create momentum for organizational change. For example, making changes to existing compensation practices may be difficult, unless objective benchmarking data are available that can support modifications. If, for instance, an HR professional wants to alter an organization's long-standing practice of not offering employee bonus plans, benchmarking data can help make the case. See Managing Organizational Change.

CEOs and board-level executives depend on quality benchmarking data to make strategic decisions that affect their organizations. In fact, benchmarking is more effective when used as part of an overall business strategy. It is less effective when companies use it only for short-term goals and not as part of a long-term strategy. An example is when an organization lowers training budgets to meet short-term budget goals. Although this change may achieve the short-term objective, it has a negative impact on developing the skills of the organization's workforce. Thus, over the long term, the knowledge and skills of its human capital start to lag behind the market, and the organization may lose its competitive advantage.

Interpreting Benchmarking Data

As HR professionals work with benchmarking data, they should realize that the business strategy, organizational culture, leadership behaviors and industry pressures are just a few of the many factors that drive various human capital measures. For example, an industry that generally hires unskilled labor, such as manufacturing, may have a lower cost per hire than a high-tech industry that hires specialized knowledge workers. This is because organizations in high-tech industries may need to spend more to locate qualified staff and to relocate out-of-town candidates.

Absolute measures are not meaningful in isolation; they should be compared with one or more measures to determine whether a satisfactory level exists. Other measures, for example, might be the organization's past results in this area or comparisons based on organizational size, industry or geographic location.

When comparing their own data against other organizations' data, practitioners should keep the following issues in mind.

Understand the significance of deviations

A deviation between your figure (for any human capital measure) and the comparative figure is not necessarily favorable or unfavorable; it is merely an indication that additional analyses may be needed. Human capital measures that relate more closely to the context of the organization's industry, revenue size, geographic location and number of employees are more descriptive and meaningful than generic information, such as all industries combined. The larger the discrepancy between the organization's figure and the comparative figure, the greater the need for additional scrutiny.

Identify trends

If HR professionals determine that potentially serious deviations do exist, they may want to calculate the same human capital measure for their organization over the past several years to identify any trends. See SHRM Poll: Challenges Facing Organizations and HR in the Next 10 Years and What workforce composition trends should we monitor for strategic planning?

Use benchmarks as a tool, not as a rule

When comparing benchmarking data, the information should be used as a tool for decision-making rather than as an absolute standard. Because organizations differ in their overall business strategy, location, size and other factors, any two companies can be well managed, yet some of their human capital measures may differ greatly. No decision should be based solely on the results of any one study.

Definitions and Calculations of Key HR Metrics

The following are some examples of HR metrics in various categories. 

Organizational data

This category of metrics includes high-level, organizational information.

Full-time equivalent (FTE). FTE represents the total labor hours invested. To convert part-time staff into FTEs, divide the total number of hours worked by part-time employees during the work year by the total number of hours in the work year (e.g., if the average workweek is 37.5 hours, the total number of hours in a work year would be 37.5 hours per week x 52 weeks = 1,950 hours). Converting the number of employees to FTEs provides a more accurate understanding of the level of effort being applied in an organization. For example, if two employees are job-sharing, they constitute one FTE.

Revenue. Revenue is the amount of money that an organization actually receives from its activities, mostly from sales of products or services to customers. To investors, revenue is less important than profit, or income, which is the amount of money the organization has earned after deducting all of its expenses.

Revenue per FTE. Revenue per FTE is the total amount of revenue received during an organization's fiscal year divided by the number of FTEs. This ratio conceptually links the time and effort associated with the firm's human capital to its revenue output. An increase in revenue per FTE ratio indicates greater efficiency and productivity because more output is being produced per FTE. If the ratio decreases, it indicates less efficiency and productivity.

Net income before taxes. Net income before taxes is the amount of revenue received during the fiscal year minus the operating expenses during the fiscal year.

Net income before taxes per FTE. Net income before taxes per FTE is a measure of efficiency. Take the net income before taxes, which is the difference between gross revenue and expenses, and divide the outcome by the number of FTEs. Unlike revenue per FTE, which has only one factor (revenue), net income per FTE comprises two factors. This metric is most helpful when it is considered over a long period of time.

HR department data

This category of metrics includes various measures of HR staffing.

Total HR staff. The total HR staff is the actual number of employees supporting the HR function for an organization or level within the organization. See Big Change Close to Home, by the Numbers.

HR-to-employee ratio. The HR-to-employee ratio provides a more manageable way to compare HR staffing levels among organizations. It represents the number of HR staff per 100 employees supported by HR. The number is calculated by dividing the number of HR FTEs by the total number of FTEs in the organization and multiplying the outcome by 100.

Percentage of HR staff in supervisory roles. The percentage of HR staff in supervisory roles is calculated by taking the number of HR FTEs in supervisory positions and dividing that by the total number of HR FTEs. Because positions in this category supervise others, they are often called supervisor, manager, director or above.

Percentage of HR staff in professional or technical roles. The percentage of HR staff in professional or technical roles is calculated by taking the number of HR FTEs in professional or technical positions and dividing that by the total number of HR FTEs. Positions in this category are generally exempt and do not supervise others. Titles include recruiter, benefits administrator and HR generalist.

Percentage of HR staff in administrative support roles. The percentage of HR staff in administrative support roles is calculated by taking the number of HR FTEs in administrative support positions and dividing that by the total number of HR FTEs. Often, but not always, positions in this category are nonexempt. Titles include coordinator and assistant.

Reporting structure for the head of HR. The reporting structure for the head of HR indicates to which person within the organization the head of HR reports. Occasionally in very small companies, the head of HR may report to the CFO or head of an operating unit. In larger organizations, the head of HR usually reports to the president or CEO.

Expectations for HR hiring. The expectations for HR hiring indicate the types of HR positions that organizations anticipate hiring in a given time frame.

HR expense data

This category of metrics includes various measures of HR expenses.

HR expenses. Human resource expenses represent HR's total costs for a given fiscal year.

HR expense-to-operating-expense ratio. The HR expense-to-operating-expense ratio is calculated by dividing the organization's total HR expenses by the operating expenses for a given fiscal year. This ratio depicts the amount of HR expenses as a percentage of total operating expenses, which is an indication of the number of dollars an organization invests in its HR function.

HR expense-to-FTE ratio. The HR expense-to-FTE ratio represents the number of human resource dollars spent per FTE in the organization. It is calculated by taking the HR expenses for a given fiscal year and dividing that by the number of FTEs in the organization.

Compensation data

This category of metrics includes various measures of employee compensation.

Annual salary increase. Annual salary increase is the percentage of increase in salaries that an organization expects to provide to its employees in a given fiscal year.

Salaries as a percentage of operating expense. Salaries as a percentage of operating expense is calculated by dividing the total amount of employee salaries by the operating expense for a given fiscal year.

Target bonus for nonexecutives. The target bonus for nonexecutives represents the average percentage of base pay that is targeted to be paid out in cash to nonexecutive staff during a given year.

Target bonus for executives. The target bonus for executives represents the average percentage of base pay that is targeted to be paid out in cash to executive staff during a given year.

Tuition and education data

This category of metrics includes various measures related to tuition reimbursement and employee education.

Maximum reimbursement allowed for tuition and education expenses per year. This metric is the average amount in dollars per employee the organization paid for tuition and education. These expenses include only training expenses for seminars and so forth that are part of a college- or university-level undergraduate or graduate course.

Percentage of employees participating in tuition or education reimbursement programs. The percentage of employees participating in tuition or education reimbursement programs includes only reimbursements for seminars and so forth that are not part of a college- or university-level undergraduate or graduate course.

Employment data

This category of metrics includes various measures associated with staffing and talent management.

Number of positions filled. The number of positions filled reflects the number of open positions for which individuals were hired during the fiscal year. Open positions could be filled either by internal or external candidates. "Hired" means the individual accepted the position during the fiscal year but may not have started until the following year. This situation generally occurs with candidates who accepted positions during the last month of the organization's fiscal year.

Time to fill. The time to fill represents the number of days from when the job requisition was opened until a candidate accepted an offer. This number is calculated using calendar days, including weekends and holidays.

Cost per hire. The cost per hire represents the costs involved in hiring a new employee. These costs include the sum of advertising fees, agency fees, employee referrals, travel costs of applicants and staff, relocation costs, and recruiter pay and benefits divided by the number of hires. 

Annual overall turnover rate. The annual overall turnover rate is the rate at which employees enter and leave an organization in a given fiscal year. Typically, the more loyal employees are to a firm, the lower the turnover rate. A 100 percent turnover rate from year to year means that as many employees left the company as were hired. To calculate the annual turnover rate, first calculate the turnover rate for each month by dividing the number of separations during the month by the average number of employees during the month, and then multiply by 100. The annual turnover rate is then calculated by adding the 12 monthly turnover percentages.

Annual voluntary turnover rate. The annual voluntary turnover rate is the rate at which employees enter and voluntarily leave an organization in a given fiscal year. To calculate the annual voluntary turnover rate, first calculate the voluntary turnover for each month by dividing the number of voluntary separations during the month by the average number of employees during the month, and then multiply by 100. The annual voluntary turnover rate is then calculated by adding the 12 monthly voluntary turnover percentages.

Annual involuntary turnover rate. The annual involuntary turnover rate is the rate at which employees enter and involuntarily leave an organization in a given fiscal year. Involuntary terminations occur, for example, when the organization asks the employee to leave the company. They are usually a result of poor performance, layoffs or other reasons. To calculate the annual involuntary turnover rate, first calculate the involuntary turnover rate for each month by dividing the number of involuntary separations during each month by the average number of employees during the month, and then multiply by 100. The annual involuntary turnover rate is then calculated by adding the 12 monthly involuntary turnover percentages.

Seeking Additional Assistance

SHRM offers an intensive two-day workshop, Fundamentals of HR Metrics, on effectively using metrics in your organization.

 


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