Metrics for Human Resource Management
Updated January 2, 2015 by Matt H. Evans
Human Resource Metrics has become important for Balanced Scorecards and other performance measurement systems. The reason is due to the need for effective management over human resource capital; i.e. the intellectual capital that drives value. And to make matters more urgent, senior management often fails to comprehend the value of human resources within the organization. It is quite common to see little emphasis on human resource management within a balanced scorecard. Consequently, it has become very important to demonstrate the value of human resource capital to executive management. In one simple application, one CFO decided to apply the P/E (Price to Earnings) Ratio to each new employee. If the employee costs the company $ 50,000 per year and the P/E Ratio is 5, then the employee should generate $ 250,000 in value. However, a much better approach to human resource (HR) metrics is to delegate the design to HR people; i.e. let the HR people demonstrate the value of human capital to the Non-HR people and not vice versa.
The first step is for HR people to make the transition from "liking people" to "liking value." The sad fact is that many HR people simply don't understand or grasp concepts within value-based management (such as EVA, economic profits, etc.). Once HR people understand value-based and financial metrics, then you can move into developing a set of metrics that recognizes the relationship between human resources and finance. The primary focus is on people and how are we going to develop our human capital.
A good place to start is with a set of efficiency ratios to see how well you are managing human capital. The Society of Human Resource Management has identified ten key human capital measurements:
- Revenue Factor = Revenue / Total Full Time Employees
- Voluntary Separation Rate = Voluntary Separations / Headcount
- Human Capital Value Added = (Revenue - Operating Expense - Compensation & Benefit Cost) / Total Full Time Employees
- Human Capital Return on Investment = (Revenue - Operating Expenses - Compensation & Benefit Cost) / Compensation & Benefit Cost
- Total Compensation Revenue Ratio = Compensation & Benefit Cost / Revenue
- Labor Cost Revenue Ratio = (Compensation & Benefit Cost + Other Personnel Cost) / Revenue
- Training Investment Factor = Total Training Cost / Headcount
- Cost per Hire = (Advertising + Agency Fees + Recruiter's Salary/Benefits + Relocation + Other Expenses) / Operating Expenses
- Health Care Costs per Employee = Total Health Care Costs / Total Employees
- Turnover Costs = Termination Costs + Hiring Costs + Training Costs + Other Costs
It is also important to benchmark your HR metrics against past performance and other companies. For example, if you report turnover costs of $ 50,000, the CEO may think this is too high, but when you benchmark it, you are in the top 20% for lowest turnover costs. One of the best sources for HR benchmarks is the Saratoga Institute in Santa Clara , California .
HR Metrics, like other measurements within the Balanced Scorecard, should have strong connections to the strategies of the company. This will help ensure that the evaluation of HR really matters to the organization and we are working to make things happen. Listed below are some critical questions that GTE used in their award winning HR Balanced Scorecard:
Do we have the talent we need to be successful in the future?
Are we investing in growing our HR capabilities?
Are we viewed as a great place to work?
Are we creating an environment that engages our people?
Are our HR management processes and transactions efficient and effective?
Are we using technology to improve HR efficiency?
Is our return on investment in people competitive?
Are we managing our cost of turnover?
A final point that needs to be emphasized is the correlation between human capital and the creation of value. Watson Wyatt, a major consulting firm, recently released the results of a one-year study on human resource management practices for 405 publicly traded companies. The study concluded that there is a correlation between how human resources are managed and the amount of shareholder value. According to Bruce Phau, head of Watson Wyatt's measurement division, if you can improve your human resource management in certain key areas, you can experience a 30% increase in shareholder value. The message is clear - measuring and managing human capital is a major part of creating value and it must be a key component of the Balanced Scorecard.
Written by: Matt H. Evans, CPA, CMA, CFM | Email: firstname.lastname@example.org | Phone: 1-877-807-8756
Return to Listing of All Articles | Related Article > Measuring HR Returns |