Employers frequently undertake benchmarking to compare their organization's human resource (HR) metrics with metrics from similar organizations. Benchmarking can also be done internally, by comparing data from different points in time or across different divisions or locations. By linking HR metrics with the overall business strategy, leadership can more easily see how HR practices impact the organization's performance.
Benchmarking is a mechanism for measuring processes, practices and results for comparison to improve performance. If it is used wisely, it can transform an organization's HR and people management strategies by showing how human resource practices influence the organization's success. See 9 Tips for Using HR Metrics Strategically and 3 Steps for Building the Business-Focused HR Scorecard.
Employers can use benchmarking data to compare their organization against competitors or similar organizations. For example, an employer can compare the organization's cost-per-hire with that of 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 competitors' costs might jeopardize the organization's ability to find the right talent in a competitive market. See Data Plays Growing Role in Driving Hiring Decisions.
Benchmarking can also create momentum for organizational change. For example, making changes to existing compensation practices may be met with resistance, unless objective benchmarking data is available that can support modifications. If, for instance, management wants to implement a new employee bonus plan, benchmarking data may help make the case that providing bonuses can improve employee recruitment and retention. See How to Use Compensation Survey Data to Set Executive Pay.
Benchmarking is often applied to internal data as well. Employee satisfaction or engagement surveys are a common internal benchmark. Employers typically strive to increase these ratings over time and will compare internal survey scores in order to measure the effectiveness of initiatives to increase employee satisfaction and morale. Another example of benchmarking internally is comparing turnover data by department or manager to identify outliers that may need attention or recognition.
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.
A Model for Strategic Benchmarking
The amount of benchmarking data available and the myriad metrics an employer can track may seem daunting. It helps to have a plan on how to use benchmarking data strategically. The following steps can be useful in guiding an employer through the process.
Know the business strategy
To begin, there must be thorough knowledge of the organization's strategy, plans and goals. Success when benchmarking HR data depends on the employer having a firm understanding of these areas and obtaining support and buy-in from colleagues in all areas of the organization. To build this buy-in and gain credibility, individuals from different departments, such as finance and operations, should be included in the benchmarking process.
Link to the business strategy
Identify the impact the business strategy has on the workforce to identify the drivers that support the 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. See How can the balanced scorecard be applied to human resources?
It is also critical to link and align the business strategy with the company's performance management system by identifying key performance indicators (KPIs)—quantifiable performance measurements based on the predetermined success factors 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. See What are key performance indicators and how do they relate to the human resource function?
Identify the metrics needed
Determine which metrics and analytics support the workforce drivers for each HR function. Using the previous retail example, HR metrics 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 helps 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. See How do I determine which HR metrics to measure and report?
Compare and report the findings
Collect the identified data and utilize appropriate internal or external benchmarks for comparison. Identify both where the data aligns and where there are significant deviations from the comparison data and describe any circumstances that may explain the deviations. Once the data is analyzed, employers should define how often data will be delivered and to whom. Include a feedback mechanism to receive comments from internal customers to improve the quality of data being distributed. See HR Department Monthly Metrics Report.
Interpreting Benchmarking Data
As employers 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 resource 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. See HR Benchmarking Technology Is Faster, Easier to Use.
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 resource measures may differ greatly. No decision should be based solely on the results of any one study. Just because a particular practice works well for some organizations does not mean it will succeed in another organization. In some circumstances, internal benchmarking data may be a better comparison than that of a competitor. See Predicting Business Success: Avoiding Benchmark Myopia.
Understand the significance of deviations
A deviation between your data and the comparative data is not necessarily favorable or unfavorable; it is merely an indication that additional analyses may be needed. Data that relates more closely to the context of the organization's industry, revenue size, geographic location and number of employees is more descriptive and meaningful than generic information, such as for all industries combined. The larger the discrepancy between the organization's figure and the comparative figure, the greater the need for additional scrutiny.
If an employer determines that potentially serious deviations do exist, they may want to calculate the same measure for their organization over the past several years for comparison to identify any trends.
Locating External Benchmarking Data
Obtaining data that is reliable and specific enough to an employer's organization to be able to compare "apples to apples" isn't difficult, but it can be expensive. There are numerous professional service organizations that sell benchmarking reports for all different areas of human resources. Employers should look for reports that offer customized data to compare against peer groups of similar industry, revenue size and headcount. When choosing a provider to purchase benchmarking reports from, consider asking for recommendations from peers. Local SHRM chapters and online social groups such as SHRM Connect can be helpful in gathering suggestions. See How to Identify Quality Benchmark Data.
SHRM members have access to human capital and talent access benchmarking reports that are available by organization size, sector, industry or region. In addition, SHRM's annual benefits survey provides data on the prevalence of specific employer-offered benefits across multiple categories. SHRM members are able to filter the data by organization industry, size and location.
THRIVE360 is a service offered by SHRM and McLean & Co. THRIVE360 uses a data-driven approach to analyze your HR function and leverages SHRM's Capability Model to align your HR function with a global standard of excellence.
While it may be tempting for an employer to gather benchmarking data on its own to avoid paying for a professional benchmarking report, there may be risks in this approach. Conducting this type of comparison-shopping can result in cost-fixing and may violate the Sherman Antitrust Act. Employers should consult with legal counsel before making compensation and benefits decisions based on data gathered from local competitors. See Can I contact other local organizations in my area to get a gauge on merit projections or other compensation and benefits data?
SHRM Compensation Data Center
SHRM HR Vendor Directory
Where can I locate resources for salary survey data for all industries and occupations?
Definitions and Calculations of Key HR Metrics
The following are some examples of common HR metrics. Each organization will differ in the data that is important to them. While almost all employers will track turnover rate, some employers find it helpful to identify the retention rate as well. An employer with a specific focus on diversity, equity and inclusion will likely want more data points in employee engagement survey results than other employers. The key is to determine what is important to the organization to support the overall business strategy.
Absenteeism rate. The absenteeism rate measures the incident rates of absenteeism and the percentage of employees absent during a defined period. This measure can be used to calculate the cost of absenteeism and lost productivity. See Absenteeism Incident Rate and Percentage of Employees Absent Spreadsheet.
Benefits as a percentage of salary. Benefits as a percentage of salary is the cost of all employer-provided benefits divided by the employee's gross annual salary. This measure is used for budgeting purposes and total rewards reporting.
Cost-per-hire. Cost-per-hire represents the costs involved in hiring a new employee. These costs include items such as 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. See What external and internal costs should be included in a cost-per-hire calculation?
Employee engagement rate. Employee engagement is most often measured through employee surveys and can be most effective when broken down to identify engagement levels based on employee tenure, age, gender, race, sexual orientation and other voluntarily disclosed identity groups.
Full-time equivalent (FTE). FTE is the number of full-time hours being worked by both full-time and part-time employees. The FTE calculation is an employee's scheduled hours divided by the employer's hours for a full-time workweek. 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 one full-time position, they constitute one FTE. See How do I calculate full-time equivalent (FTE) hours?
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. See HR-to-Staff Ratio Spreadsheet.
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.
Health care costs per employee. Health care costs per employee indicates the amount an employer is spending on health care for employees and is used for budgeting and reporting total rewards. See Health Care Costs Per Employee Spreadsheet.
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.
Open requisitions per recruiter. Recruiter workload indicates how many open requisitions an employer can effectively handle at any given time. This standard can vary quite a bit, and numerous factors need to be taken into consideration when benchmarking externally. See How do I determine an appropriate recruiter workload?
Recruiting yields ratios. The recruiting yields ratios measure an organization's applicant-to-interview-offer yield ratio, interview-to-job-offer yield ratio and job-offer-to-hire yield ratio. These ratios are used to show the efficiency of an organization's hiring process. See Recruiting Yield Ratios Spreadsheet.
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.
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.
Time-to-fill. Time-to-fill represents the number of days from when the job requisition is opened until a candidate accepts an offer. This number is calculated using calendar days, including weekends and holidays. See Time-to-Hire/Time-to-Fill Calculation Spreadsheet.
Turnover rate. The annual overall turnover rate is the rate at which employees enter and leave an organization during the year. A 100 percent turnover rate from year to year means that as many employees left the company as were hired. Employers often break down turnover data by voluntary and involuntary separations, length of service, department, and other criteria the employer has identified as important.
How to Determine Turnover Rate
Turnover Rate Calculation Spreadsheet
How do we calculate monthly turnover rates for our company?
How do I calculate retention? Is retention related to turnover?
Available in the SHRMStore:
Data-Driven HR: Creating Value with HR Metrics and HR Analytics
The Data Driven Leader: A Powerful Approach to Delivering Measurable Business Impact Through People Analytics
Human Resource Management: People, Data, and Analytics