Employee Returns: Linking HR Performance Indicators to Business Strategy

Carter A, Robinson D
Report 365, Institute for Employment Studies, March 2000

a publication supported by the IES Research Club

HR professionals are increasingly feeling forced to justify in a systematic way the cost of their activities. They are increasingly looking to HR performance indicators to demonstrate the added value of their work to the success of the organisation. This practical guide demonstrates how, through analysis and linking to organisational strategy and business objectives, together with careful targeting of comparative measures, measurement can help raise the profile of HR within an organisation.

Human Resource professionals in many organisations are increasingly feeling forced to justify in a systematic way the costs of their activities. They also have to make comparisons of their performance measures with those of other organisations. But what are HR practitioners measuring? Our recent experience is that many are still primarily concerned with their own activities. That is, they are only examining the operational efficiency of the HR function itself.

What and how to measure

The central aim of HR management should be to ensure that these activities support business strategy and lead to committed employee behaviour. Increasingly, in devolved organisations, it is the line managers or non-HR specialists whose practices have the greatest impact on strategy and employee commitment. This implies that examining the effectiveness of management and employee performance across the organisation is just as crucial as examining the HR function itself.

This report is a guide for HR practitioners. It provides some ideas and help for those who need to get to grips with measuring the performance of human resources across their organisations. It examines:

  • why measures can be helpful

  • the strategic context of measurement

  • choosing the most appropriate measures

  • the effective use of measures.

Time to rethink your approach?

Throughout, this report stresses that one of the biggest problems in HR measurement is the temptation to measure everything and create a multiplicity of performance indicators. As well as being time-consuming, this approach can lead to serious problems not being spotted beneath a mass of data; it also causes information overload or even paralysis. Instead, a focus on key measures, linked to key objectives, is recommended. HR practitioners need a better understanding of the business strategy of organisations in general, and their own in particular. Together with a focus on key measures, this will demonstrate that HR practitioners are aware of what is relevant and of value to the organisation, and is contributing to strategic goals.

Determining what’s key

An example of a company that could be said to primarily adopting a strategy of innovation is a high technology manufacturing company we shall call Techmanco. It believes the way to succeed in its particular niche market is through continuously bringing better products or better applications of existing products, or better after-sales packages to its customers. This means it needs its product development, servicing, marketing and other key staff to be innovative.

The theory goes that the type of environment conducive to producing innovative results, is one that harnesses cross-functional teamworking, is tolerant of ambiguity, and encourages risk-taking and creative behaviour. That is what Techmanco is striving to create.

The type of HR policies believed likely to best support such an environment are those which emphasise team, rather than individual, achievements. In this way, performance management and appraisal systems reflect team objectives and outcomes. In order to attract the top talent in their industry to stay with them, Techmanco chooses to pay above the market pay rates. However, it is careful to ensure team members from different disciplines are paid similarly.

What does this mean for the HR issues that Techmanco may wish to measure? In this example there are two priority areas. Firstly, it needs to check on the attitude and experience of its staff towards the organisation’s climate and context to make sure the required behaviours of creativity, for example, have the best chance of thriving. Questions inserted in a regular employee attitude survey can be very helpful here.

Secondly, since it believes internal equity in its pay and compensations systems and the development of transferable skills are critical to high performance in innovation, it will want to monitor both equity across teams and breadth of skills.

Many ways of spotting key issues at organisation level are demonstrated in this report. More HR function specific examples are also discussed.

For instance, when looking at vacancy, recruitment, retention and turnover levels, it would make sense to concentrate on those groups of staff that are particularly important to the organisation, especially if they are also difficult to replace. The quadrant shown here could help with the focussing process; it helps identify groups of staff that are the most critical in terms of retention efforts. The contents of the top right hand box will, of course, vary between organisations.

Identifying key people

Identifying key people

Source: IES

A question of balance

As recently as a decade ago, a company’s performance would have been judged largely on its financial outturn. For private sector companies, this meant a focus on declared profit, together with ratios such as Earnings Per Share (EPS) and return on Capital employed (ROCE). Public sector companies were judged on their ability to manage their annual budget. Today the need for a balanced portfolio of measures representing organisational performance is more widely accepted, although there is still a tendency to treat financial indicators with particular respect, as if only they represent the true ‘bottom line’.

Our experience is that HR’s contribution to balanced scorecards is varied, from responsibility for collecting or ‘owning’ data on the effectiveness across the organisation of people related items on a corporate scorecard, to responsibility for developing and measuring data on a separate scorecard for HR. Either way, the main struggles seem to be knowing what should be in the balanced scorecard and how the items that go in should be monitored.

Are financial figures and ratios really so sound? What, for example, is ‘profit’? It can be affected hugely by different accounting conventions, which are often carefully chosen to present the company in the best light. Stock valuation methods can be selected to deflate profit (the last in, first out method) or inflate it (first in, first out). Depreciation choices (method, length of time) can also significantly affect asset valuation, and therefore the bottom line of the balance sheet. Conventions and practices also differ greatly between countries.

What this means is that most financial indicators, which use measures such as profit, net asset value, capital, etc., are not built on such solid foundations as first appears. ROCE, for example, is a widely used indicator of business performance. ROCE aims to show how good the organisation has been at using the financial resources invested in the business to produce a profit. However, it is calculated by dividing profit before interest and tax by total capital (ie the bottom line of the balance sheet). If the profit figure is a matter of opinion, and the bottom line of the balance sheet has been affected by asset valuation practices, what does this say about ROCE?

Accounting professionals will justify their use of financial indicators by pointing out that, if organisations are consistent in their approach, it is fair to make comparisons over time, or between business units. We certainly do not wish to denigrate the accountancy profession, or imply that financial ratios have no value to the business. We agree that they are very important to senior managers and external analysts: but as one of a set of measures, rather than the only figures that are ever taken seriously. HR professionals should not be shy of presenting indicators that relate to people and their performance, and defending their use to senior managers. People indicators have as much validity as their financial counterparts, and can be put forward by HR professionals as their contribution towards the measurement of how well the organisation is doing in relation to its strategic goals.

The guide

The guide outlines business strategy issues in a straightforward way. It includes practical tools for presenting, calculating and analysing indicators; briefings on defining hard indicators and deriving indicators of satisfaction and commitment, plus an HR perceptions questionnaire.

Its chapters discuss: strategic context of measurement; debunking the myth of financial indicators; the balanced scorecard; approaches to measuring people issues across the organisation; measuring the HR function; benchmarking; plus a useful bibliography.

Employee Returns: Linking HR Performance Indicators to Business Strategy, Carter A, Robinson D. Report 365, Institute for Employment Studies, 2000.
ISBN: 978-1-85184-295-7. PDF Download only: £8.00

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