The essential guide to
Human capital
management and
measurement
How to measure the impact
of HR practices
Human Resources
Best Practice Series
Ibec represents Irish
business; home grown,
multinational, big and
small, spanning every
sector of the economy.
The organisation and its sector associations work with government
and policy makers nationally and internationally, to shape business
conditions and drive economic growth. Ibec also provides a wide
range of professional services direct to members.
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THE ESSENTIAL GUIDE TO
HUMAN CAPITAL
MANAGEMENT
AND MEASUREMENT
How to measure the impact of HR practices
RESEARCHER: Anne Coughlan.
SERIES EDITOR: Mary Connaughton, Head of HR Development, IBEC.
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DEFINITION OF HUMAN CAPITAL:
“The sum of knowledge, skills, experience
and other relevant workforce attributes
that reside in an organisation’s workforce
and drive productivity, performance
and the achievement of strategic goals.1”
1. Matthewman, J., Matignon,
F. (2004). “Human capital
reporting – an internal
perspective”, London: CIPD
and Mercer Human
Resource Consulting.
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CONTENTS
Section 1 Introduction
and definitions . . . . . . . . . . . . . . . . . . . . . . . . .1
Human capital management . . . . . . . . . . . . . .2
Section 5 Trends and practices
in human capital
measurement . . . . . . . . . . . . . . . . . . . . . . . .27
HR measurement . . . . . . . . . . . . . . . . . . . . . . . . . .2
The prevalence of HR measures . . . . . . . . . . .27
HR metrics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .3
International research . . . . . . . . . . . . . . . . . . . .29
Measuring training effectiveness . . . . . . . . .30
Employee engagement . . . . . . . . . . . . . . . . . . . .31
Section 2 The business case
for human capital
management . . . . . . . . . . . . . . . . . . . . . . . . . . . .5
Balanced scorecards . . . . . . . . . . . . . . . . . . . . . . .6
Section 6 Best practice
case studies . . . . . . . . . . . . . . . . . . . . . . . . . . . . .33
The HR scorecard . . . . . . . . . . . . . . . . . . . . . . . . . .8
BNP Paribas . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .33
Ballyknocken Cookery School . . . . . . . . . . . . .34
Analog Devices . . . . . . . . . . . . . . . . . . . . . . . . . . .35
Section 3 Developing the
human capital
measurement process . . . . . . . . . .11
HR measurement framework . . . . . . . . . . . . .12
eircom . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .37
Section 7 Future trends . . . . . . . . . . . . . . . . . . . . . . . . . .41
Data analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .12
Potential difficulties . . . . . . . . . . . . . . . . . . . . . . .15
Section 8 Resources . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .43
Section 4 Sample measures
and metrics . . . . . . . . . . . . . . . . . . . . . . . . . . . . .17
Appendix . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .45
Sample measures . . . . . . . . . . . . . . . . . . . . . . . . .17
Accounting for people . . . . . . . . . . . . . . . . . . . .45
Sample HR formulae . . . . . . . . . . . . . . . . . . . . . .22
Measuring absence –
the Bradford factor . . . . . . . . . . . . . . . . . . . . . . .26
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IBEC’S HUMAN RESOURCE BEST PRACTICE SERIES
Much of Ireland’s recent economic success
derives from our knowledge-based economy.
Within this context, the management and
development of people remain a critical
component in sustaining Ireland’s economic
success. IBEC is responding to this need by
supporting companies to examine ways to
improve productivity and people
management practices.
The Human Resource Best Practice Series
offers practical solutions for implementing
effective HR practices, explaining the business
case, and re-enforcing the responsibilities of
line managers in relation to ongoing people
management and development. Each guide
brings together leading thinking on the topic,
along with current trends and best practices
from organisations in Ireland.
DISCLAIMER:
This guide is for information purposes only and IBEC assumes no responsibility for any use to which the information may be put,
or for any errors. This guide is not a substitute for specialist employment law or legal advice, where appropriate.
© Copyright Ibec, 2013.
No part of this guide may be reproduced or transmitted in any form or by any means, electronic or mechanical, or by any
information storage or retrieval system without the prior permission of the publishers.
THE ESSENTIAL GUIDE TO HUMAN CAPITAL MANAGEMENT AND MEASUREMENT
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HUMAN CAPITAL MANAGEMENT AND MEASUREMENT
ABOUT THIS GUIDE
The requirement to demonstrate the
contribution of human assets to an
organisation and to provide high-quality
information to guide decision-making has led
to a growth in human capital measurement.
Human capital management (HCM) focuses
on identifying how people and their
management add value to an organisation
and contribute to its performance. The
ultimate aim is to provide managers with the
information to focus on the unique
behaviours, systems, processes, which have
strongest effect on performance and
productivity in their organisation.
External factors are also influencing
organisations to measure and report on
human capital. Alongside investor and
other stakeholder interests, are legislative
and government-reporting requirements,
greater awareness of corporate social
responsibilities, and a search for external
endorsements such as employer of choice
awards. As interest in HCM and measurement
grows both nationally and internationally,
methods of measurement and capacity for
benchmarking are developing considerably.
This guide is designed to inform business
leaders and HR professionals of the central
role played by HCM in understanding what
practices add value to an organisation, how to
establish HR measures, the types of measures
to consider, and those currently in use in
organisations in Ireland. In this guide IBEC has
compiled a number of formulae to help
companies to standardise how they report on
various HR measures. The consistent use of
these formulae will facilitate both internal and
external benchmarking.
The advancement of HCM provides the
HR function with the opportunity to take a
leading role in the execution of business
strategy and the development of strategic
measures to identify how to drive the business.
There is also a challenge in developing the
analytical models to assess HR processes and
practices from a strategic perspective.
Therefore human capital management
brings with it a need for HR practitioners to
understand different models of HCM, the
ways different types of measures can be used,
how they match the needs of different
organisations, and how they can be structured
for success. This guide highlights the practical
steps in creating and delivering human capital
measurement and outlines, in case study
format, the best practices that are widespread
in some of Ireland’s most successful and
dynamic organisations.
Key features are outlined at the start of
each section, so elements of the guide can
be used, depending on the starting point of
development of the HR measurement process.
Further sources of information are listed in the
Resources section, and IBEC expertise is
available to support members with practical
advice and guidance in dealing with this and
other human resource practices.
THE ESSENTIAL GUIDE TO HUMAN CAPITAL MANAGEMENT AND MEASUREMENT
Brendan McGinty
Director of Industrial
Relations and Human
Resource Services, IBEC
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HUMAN CAPITAL AS A BUSINESS DRIVER:
A survey of CFOs found that human
capital was seen as crucial to achieving a
variety of business goals, especially customer
satisfaction, profitability and innovation.
Human capital is no longer seen as a cost
to be contained, instead it is a source of
value and competitive advantage.
CFO Research Services
(2003). Human capital
management: the CFO's
perspective. Boston: CFO
Publishing Corporation.
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INTRODUCTION
AND DEFINITIONS
SECTION ONE
INTRODUCTION
AND DEFINITIONS
Human capital management focuses on
identifying the people management practices
and interventions that add value to an
organisation and bestow competitive
advantage. Models of human capital
management (HCM) are designed to
demonstrate how people and their
management contribute to the performance
of organisations and hence to the growth of
tangible and intangible assets. HR measures
are used to analyse and report on people
management activity in an organisation.
The use of HR measures has become more
popular because of the growing demand on
organisations to demonstrate how human
capital practices contribute to the creation of
value in the organisation. Organisations use a
range of measures to analyse and evaluate
overall performance. To date, much of the data
collected on employee issues has focused on
costs, headcount and efficiency. The goal of
human capital measurement is to
demonstrate the contribution of human assets
and provide organisations with standardised
and high-quality information to guide
decision-making. It is within this context that
the HR function assumes a critical role in
improving business performance.
Responsibility for HCM extends beyond the
HR function. It is of relevance to those
involved at all levels of an organisation.
The people management practices that
have the greatest effect vary within and
across organisations and change with time.
The ultimate aim is to enable managers to
focus on the behaviours, systems and
processes which have strongest effect.
Key features
k the purpose of human capital
management is to understand how
to build value in organisations;
k the growing need for human
capital measurement to
demonstrate the contribution
of people;
k approaches to measuring human
capital and types of HR metrics.
The development of a HR measurement
process has to be set in the context of each
organisation’s strategy and culture. The
selection of the measures is the responsibility
of business leaders and should be guided by
the formulae and measures already in use in
the business. This allows for comparisons
with business performance and helps to
demonstrate business impact in a way
that can be understood by managers.
The capacity to link improvements or
slippage in specific practices with changes
in organisational performance aids
organisational decision-making.
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This guide is designed to inform business
leaders and HR professionals about the central
role played by HCM in the effectiveness of an
organisation, and about how to establish HR
measures to evaluate the impact of HR
activity. It aims to build an understanding of
HCM and the way it underpins HR measures
and metrics. It identifies the types of
measures worth considering, as well as those
currently used by organisations in Ireland.
The process of selecting and implementing
the most appropriate HR measures for an
organisation is not an easy task and has
to be carefully considered. The IBEC HRM
Survey 2006 found that, from over 300
companies, only 39% measured the
contribution of HR to the organisation.
The majority of these believed that the
process was either somewhat successful
(70%) or very successful (12%).
This guide explains the practical aspects of
HCM and the mechanisms to measure it.
Section 2 presents the business case and how
HRM fits with the balanced scorecard model.
Section 3 looks at the issues to be considered
when developing a process and selecting
metrics, and Section 4 provides examples of
different measures that can be used,
depending on organisational priorities. Survey
evidence on the type of HR measures used in
Irish and international business is presented in
Section 5. This is followed by examples of best
practice through case studies showing what
organisations in Ireland are currently doing.
The final section of the report looks at future
trends in human capital.
Human capital
management
Organisations are demonstrating an
increasing demand for information that
accounts for the way in which people
management practices influence
organisational performance. This leads to the
collation and analysis of information on how
specific people management practices add
value to the business and bestow competitive
advantage. There is a need to demonstrate the
return from investing in people and to be able
to present a robust case on the expected
effect of any initiative.
2
A variety of definitions of human capital and
human capital management exist. According
to Matthewman and Matignon (2004), 1
human capital is:
“the sum of knowledge, skills, experience
and other relevant workforce attributes
that reside in an organisation’s workforce
and drive productivity, performance and the
achievement of strategic goals.”
Weatherly2 defines a company’s human
capital asset as:
“the collective sum of the attributes,
life experience, knowledge, inventiveness,
energy and enthusiasm that its people
choose to invest in their work.”
At government level, the UK’s Accounting
for people task force3 (see Appendix) defined
human capital management as:
“a strategic approach to people management
that focuses on the issues that are critical to
an organisation’s success.”
In summary, HCM is about establishing
connections between people management
practices and business performance in a
systematic manner.
HR measurement
The identification of any causal links
between people management and
business performance requires effective
measurement and reliable analysis. There are
a number of human capital measurement
models which set out to provide evidence of
the link between how people are managed,
motivated and retained on the one hand, and
business performance on the other. Figure 1
displays the organisational performance
model developed by Mercer to show how
the human factors in an organisation
contribute to shareholder value.
1. Matthewman, J.,
Matignon, F. (2004).
“Human capital reporting
– an internal perspective”,
London: CIPD and
Mercer Human
Resource Consulting.
2. Weatherly, L.A. (2003).
“Human capital –
the elusive asset”,
HR Magazine,
March 2003, 48 (3).
3. Accounting for people
task force (2003).
Accounting for people:
report of the task force
on human capital
management. Presented
to the Secretary of State
for Trade and Industry.
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INTRODUCTION
AND DEFINITIONS
Figure 1 / Sample organisational performance model4
Business environment
Organisational
architecture
Business
design
Capi
tal a
ssets
Rewards
Shareholder
value
Decisionmaking
sets
n as
a
m
Hu
In order to succeed, HCM must be tailored
to the goals, culture and HR practices of
individual organisations. The process involves
mapping HR measures (for example, training,
reward, employee retention) against business
metrics such as customer satisfaction and
sales figures, and highlighting any significant
correlations. While many links may appear
to be obvious, such as that between
employee commitment and customer
satisfaction, human capital measurement
is about delivering objective data and
defining causal relationships. This process
must take place over time to give as broad
a picture as possible.
People
Work
processes
Information Managerial
and
structure
knowledge
HR metrics
In order to show a relationship between HR
practices and business outcomes, the
following have to be in place:
A reliable set of HR figures is required to
provide factual information to measure
HR and to define the success or otherwise
of the HR strategy. The term “HR metrics”
refers to the range of factors that are
measured to show how HR practices
contribute to business performance.
These can be measures of efficiency and
effectiveness, reporting on items such as
training days, absence levels, retention rates,
etc. In many cases, processes have to be
designed to collect the numerical data
relevant to the chosen metric and to analyse
and report it. The use of systems for
recording and analysing HR and business
information generally eases this process.
Metrics generally report on:
k the right HR metrics;
k quantity;
k assessment of the contribution of
managers in implementing initiatives;
k quality;
k valid measures of company performance;
k good analytical models.
k time;
4. Mercer Human Resource
Consulting (2004).
Human capital and
business performance:
measuring the links.
New York: Mercer Human
Resource Consulting.
k cost;
k opinion /satisfaction.
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According to Lawler et al5, HR metrics can to be divided into three categories:
category 1:
metrics that measure the efficiency of the HR function and how well it
performs its administrative tasks;
category 2:
metrics that measure the effectiveness of HR programmes and practices;
category 3:
metrics that measure the impact of HR on the business.
The challenge for many organisations is to move beyond categories 1 and 2 to report on category 3.
In examining HR metrics, there are different
types of data to be considered:
k performance data both company and employee data;
k workforce profile/demographic information on the size and composition
of the workforce, i.e. age, gender, years of
service, grade, ethnicity;
k opinion data data from employee attitude
surveys, feedback on leadership and
communication practices, customer
satisfaction data, etc.;
k employee recruitment/retention employee turnover rate, promotion trends;
k training and development data number of days training per employee
per annum, cost of training, types of
training, training needs analysis,
organisation capability;
k other an audit of skills, competencies and
training to assist with planning for
future human capital requirements.
Principles for HR metrics
k a limited number should be adopted;
k senior management should be involved in decisions on what to measure;
k track information that is currently available – look at trends, changes over time,
compare to business performance data;
k use formulae and business measures that are used in the organisation/business units
as benchmarks;
k remedial action should not be based on figures which do not paint a complete picture
(e.g. employee turnover rates);
5. Lawler, E., Levenson, A.,
Boudreau, J. (2004).
“HR metrics and
analytics: use
and impact”,
Human Resource
Planning, 27 (4).
k measures that relate to company performance should be used.
4
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THE BUSINESS CASE FOR HCM
There is an growing requirement to be able
to define and measure the contribution of
human capital, and the return on investment
in it, in a coherent and transparent way.
Scarbrough and Elias's6 CIPD study on
evaluating human capital concluded that
it should be viewed as a bridging concept
linking business strategy and HR practices.
It can then support decision-making by
predicting the impact of HR interventions
on organisational performance.
According to Weatherly7, in accounting
terms, it is not unusual for a company’s
intangible assets to exceed its tangible assets
two- or three-fold. A research study exploring
the financial perspective on human capital
management estimated that the value of
human capital represented over 36% of total
revenue in a typical organisation8. Studies
such as the Watson Wyatt Human Capital
Index have shown that effective HR practices
drive positive business outcomes and could
be linked to a 30% increase in shareholder
value (see Table 1).
Table 1 / Effect of HR practices on
market value9
HR practice
Impact on
market value
Total rewards and
accountability
16.5%
Collegial flexible
workplace
9.0%
Recruiting and
retention excellence
7.9%
Communication integrity
7.1%
THE BUSINESS
CASE FOR HCM
SECTION TWO
Key features
k the need for human capital
management to support
decision-making;
k the role of HCM in maximising
the return on investment;
k linking HR and business metrics and
the role of the balanced scorecard.
For most organisations, employment costs
are a high proportion of total business costs
and there is a continuous battle to balance
the investment in people against competing
business challenges. It is important,
therefore, to be able to demonstrate how
organisation-specific people management
practices have a tangible positive effect on
business performance and profitability.
Research by Smallwood and Ulrich10
demonstrates that firms with strong
leadership brands have higher price/
earnings ratios than their industry average
and that the financial value of leadership
was evident in company performance over
the previous 10 years.
6. Scarbrough, H., Elias, J.
(2002). Evaluating human
capital. London: CIPD.
7. Weatherly, L.A. (2003).
“Human capital –
the elusive asset”,
HR Magazine, March
2003, 48 (3).
8. CFO Research Services
(2003). Human capital
management: the CFO's
perspective. Boston: CFO
Publishing Corporation.
9. Watson Wyatt Worldwide
(2002). Human capital
index: human capital
as a lead indicator of
shareholder value.
Washington, D.C.:
Watson Wyatt Worldwide.
10.Smallwood, N., Ulrich, D.
(2007). “Building a
leadership brand”,
Harvard Business Review,
July 2007, 85 (7) pp92-100.
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It can be argued that a lack of measurement
of human capital performance ultimately
results in senior management not knowing
how best to deploy human capital to
business advantage and not giving people
management issues the time and attention
they deserve. The supply of this information
can underpin effective decision-making. In
addition, there may be a future accounting
requirement for some measurement of
human capital in the future (see Appendix,
EU accounts modernisation directive).
In addition to the internal reporting of human
capital, there has been some debate (see
Appendix, Accounting for people task force) as
to how human capital should be reported
externally. Increasingly, organisations are
including more information in their corporate
social responsibility report. As well as
showing how the environment, human rights
and the local community are given due regard
when conducting their business, companies
also show how that consideration has been
extended to their employees.
In relation to this information, Michael
Armstrong of the CIPD argued at an
IBEC conference11 in 2006, that, in order to
add value to a business, human capital
reports must:
Another reporting tool, the balance
scorecard, is growing in use. The scorecard
is designed to give managers results on
a selection of objective measures developed
around four key perspectives – financial,
the customer, operations, and learning
and growth.
k set out quantitative and qualitative
information;
k set out measures of employee
satisfaction/engagement;
k analyse benchmarking data;
k identify key performance drivers and
demonstrate how HCM is creating
added value in these areas;
k review how well HR strategy and
practice are contributing to achieving
business goals;
k set out returns on investment in people
management programmes;
k draw conclusions on implications for
HR strategy and practice.
Instead of pages and pages of statistical
data, Matthewman and Matignon suggest
that reports need to answer a few basic
questions, such as:
k what does the data tell me?
k what do I need to improve?
k what are the issues to watch?
k are there any major challenges
I will have that will prejudice the
performance of my business unit?
k what investments in my human capital
will generate the best returns?
6
Balanced scorecards
Kaplan and Norton12 pioneered the balanced
scorecard model in the early 1990s to counter
the tendency of companies to focus on
short-term financial reporting. The balanced
scorecard is based on the argument that no
single measure can provide a good indication
of business achievement. A selection of
objective measures, designed to give
managers a fast, concise and comprehensive
picture of both financial and operational
issues, are developed around four key
perspectives (see Figure 2). Metrics are
developed related to each of the four
measures, based on the priorities of the
strategic plan. Processes are then designed to
collect information relevant to those metrics.
The results of the measurement process are
tracked to provide feedback and to guide the
organisation. All metrics have to link back to
the key success factors in the organisation.
The model presents the big picture while
allowing managers to view critical
operational factors and their
interrelationships with current and future
performance in mind. Emphasis is on vision
and long-term success.
11. “The reward gap”
delivered at the
Guinness Storehouse,
Dublin, 15th June 2006.
12. Kaplan, R., Norton, D.
(1996). The balanced
scorecard: translating
strategy into action.
Cambridge, MA:
Harvard Business
School Press.
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Initiatives
Targets
Measures
To satisfy our
shareholders and
customers, what
business processes
must we excel at?
Objectives
Initiatives
Targets
Business
processes
Initiatives
To achieve our
vision, how will
we sustain our
ability to change
and improve?
Targets
Learning
& growth
Measures
vision &
strategy
Objectives
Initiatives
Targets
To achieve our
vision, how
should we
appear to our
customers?
Measures
Customer
Objectives
To succeed
financially,
how should we
appear to our
shareholders?
Measures
Financial
THE BUSINESS
CASE FOR HCM
Objectives
Figure 2 / The balanced scorecard12
Figure 3 / Sample balanced scorecard in Analog Devices
The balanced scorecard methodology is used by Analog Devices. The corporate
scorecard drives the manufacturing site scorecard, which in turn drives the HR
measures. The site’s objectives and scorecard demonstrate how all aspects of the site
are integrated and progress is reported quarterly both corporately and to all employees.
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The HR scorecard
What services and/or products do HR
customers need? The scorecard provides
a snapshot of the state of the workforce
(and, by extension, of HR programmes and
strategies) over a defined period and
communicates management priorities to
the entire organisation, thereby reinforcing
the business strategy.
Some organisations have replaced the
learning and growth quadrant in the
balanced scorecard with a broader “people”
or HR quadrant. This has been developed
around such areas as:
k human capital (knowledge and skills);
k talent management (recruitment and
retention of key staff);
k capacity to transform (creating a flexible/
motivated/committed workforce);
k HR service delivery and execution
(meeting objectives and budget).
The HR scorecard can operate as part of a
company-wide balanced scorecard or it can
stand alone. It tries to answer such questions
as: What does HR produce that contributes to
corporate goals?
Building on Kaplan and Norton’s work, the
following HR scorecard comes from Beatty,
Huselid and Schneier, 2003 . In this example,
the HR deliverables are workforce mindset,
technical knowledge/competence and
behaviours. To produce these, HR practices,
systems and competence have to be aligned
with the strategic focus to deliver the
business strategy.
Figure 4 / Sample HR scorecard13
HR competencies
■ Admin. expertise
■ Employee advocacy
■ Strategy execution
■ Change agency
HR practices
■ Communication
■ Work design
■ Selection
■ Development
■ Measurement
■ Rewards
Strategic focus
■ Operational excellence
■ Product leadership
■ Customer intimacy
HR deliverables
■ Workforce mindset
■ Technical knowledge
■ Workforce behaviour
13. Beatty, R.W., Huselid,
M.A., Schneier, C.E.
(2003). “New HR metrics:
scoring on the business
scorecard”,
Organizational
Dynamics, 32 (2),
pp107-121.
HR systems
■ Alignment
■ Integration
■ Differentiation
8
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The scorecard concept can also be used to support analysis and decision-making on single
issues, demonstrating progress over time and highlighting areas requiring critical attention.
THE BUSINESS
CASE FOR HCM
Single issue scorecard
Figure 5 / Sample absence scorecard
National absence rate
=
3.8%
Sector average
=
3.7%
Company target rate
=
3.2%
Current company rate
=
4.1%
Decrease in last 12 months
=
0.6%
■
■
■
Key:
Score is below overall average rate – good result
Score is above target – did not reach target
At least 1% above target – needs critical attention
Absence Rates – by grade and gender
Grade
Males
Females
Overall Rate
1
1.2%
1.0%
1.1%
2
1.0%
1.0%
1.0%
3
2.5%
4.8%
3.8%
4
2.5%
3.0%
2.9%
5
3.6%
3.0%
3.2%
6
4.8%
5.8%
5.5%
Absence Rates – by grade and department
Grade
Overall Rate
Department A Department B Department C
1
1.1%
1.4%
0.8%
2
1.0%
1.3%
0.8%
0.8%
1.0%
3
3.8%
5.0%
3.9%
4.0%
3.0%
4
2.9%
2.8%
3.2%
5
3.2%
3.0%
3.6%
3.3%
3.0%
6
5.5%
6.4%
6.3%
3.2%
3.4%
THE ESSENTIAL GUIDE TO HUMAN CAPITAL MANAGEMENT AND MEASUREMENT
Department D
0.9%
2.9%
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“If you don’t learn how to implement
HCM properly, you’ll be left behind.
It’s a source of significant competitive
advantage and when done well, it
demonstrates direct business impact . ”
14
14.Young, S. (2005).
“10 steps to successful
human capital
management”,
Strategic HR Review,
Nov./Dec. (2005)
Vol. 5 (1), p24.
10
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SECTION THREE
Different organisations value different
aspects of employee behaviour and
capability. This makes HCM contextdependent and the measures selected reflect
the strategy of particular organisations. There
is a wide range of assessment and analysis
techniques, and the spectrum of possible
measurement and analysis is extensive.
At the early stages of implementing human
capital measurement, organisations do not
generally have the sophisticated tools
necessary for simulating and forecasting the
business returns on human capital
investment. They have to concentrate on
those metrics that provide information which
they really need to know and which will help
decision-making on critical aspects of people
management. Those that implement
successful HCM, according to Young14, do not
just try to introduce one or two metrics and
leave it at that. Rather, they are strategic
about getting support and embedding the
idea of HCM throughout the organisation. In
some cases, according to Young, human
capital metrics are factored into performance
and reward for senior people, albeit with
limited success to date.
Nalbantian et al15 found that there are three
core principles to ensure that HRM is
effective in an organisation:
1. Approach it from a systems viewpoint, so
that business models and human capital
strategies are consistent and developed in
reference to each other.
Key features
DEVELOPING THE
HC MEASUREMENT
PROCESS
DEVELOPING THE HC
MEASUREMENT PROCESS
k the evolutionary nature of human
capital measurement;
k the strategic nature of selecting
measures;
k reviewing and reporting HR data.
3. Acknowledge the positive contribution,
as opposed to the cost, of human capital,
i.e. its value in enabling the organisation
to identify the human capital drivers of
productivity, service and performance.
The choice of measures is not neutral and
will convey a message about what the
organisation values and prioritises. For
example, in one organisation a key
performance indicator (KPI) may be the
retention of staff with a certain level of
experience, while in another the KPI might
be the retention of employees whose
performance was rated as exceptional.
No organisation has the resources to
measure an infinite amount of employee
data, nor do there appear to be many
common measures which have the same
result across organisations.
15. Nalbantian, H. R., Guzzo,
R.A., Kieffer, D., Doherty, J.
(2004). Play to your
strengths: managing
your internal labour
markets for lasting
competitive advantage.
New York: McGraw Hill.
2. Real facts and information that go beyond
external benchmarking and internal
perceptions should be worked with.
THE ESSENTIAL GUIDE TO HUMAN CAPITAL MANAGEMENT AND MEASUREMENT
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HR measurement
framework
Becker, Huselid and Ulrich16 present a useful,
seven-step model for implementing HR’s
strategic role and linking HR measures to
business strategy.
Figure 6 / Linking HR measures to
business strategy
1. Clearly define the
business strategy
2. Build a business case for
HR as a strategic asset
3. Create a strategy map
kLeading and lagging indicators
kTangibles and intangibles
4. Identify HR deliverables
within the strategy map
5. Align the HR architecture
with the HR deliverables
kHR function
kHR system
kStrategic HR behaviours
6. Design the strategic
measurement system
kDevelop HR scorecard (leading,
lagging, cost control and value
creation measures)
kMeasure HR intangibles and firm
performance relationships
7. Implement management
by measurement
12
The mission and market position of a
company will dictate the most appropriate
HR practices, which in turn will provide the
focus for measurement of success. Senior
management are critical to the identification
of the right metrics.
HR measurement is an evolutionary process,
with varying starting and finishing points,
and it is important to know what
information you have and to aim for what is
achievable. In the early days, the process can
be supported by one-off investigations into
specific issues before moving to ongoing,
year-on-year, reporting. Statistical analysis
will establish the links between variables and
then move on to identifying the key human
capital drivers of performance. Statistical
tools also allow other factors that influence
business performance to be controlled for in
the analysis.
It is worth repeating that it is important not
to develop more metrics than it is feasible to
maintain and use. In this process there is
always a risk that the validity of the results
will be challenged, particularly when the data
is not favourable. While it is essential not to
make decisions on the basis of dubious data,
it is also important to get the process up and
going, and not wait for the “perfect” data.
Consideration has to be given to what
resources are available to carry out the
measurement and to acknowledge that it
takes time to get measurement consistent.
Full details of HR measures to consider are
presented in Section 4.
Data analysis
Before embarking, it is necessary to see what
data are already being captured and to assess
their reliability. Applicable criteria in this
respect will include the information’s format,
accessibility, currency and consistency and
what use, if any, has already been made of it.
The focus has to be on the critical questions
that need to be answered and the data
required to answer them.
16.Beckler, B., Huselin, M.,
Ulrich, D. (2001).
The HR scorecard: linking
people, strategy, and
performance. Cambridge,
MA: Harvard Business
School Press.
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Table 2 / Evolutionary stages of human capital measurement17
MONITORING
Data is collected for monitoring purposes
Activities:
Collect basic HR data such as absence figures, training days/costs, turnover,
accident rates, employee surveys, etc.
Analysis:
Explore the data and look for patterns and trends. Consider potential
causes/reasons. Benchmark against industry/national/regional norms.
Communicate:
Provide relevant managers with the information in the format they require.
Show that the data is accurate, reliable and of value.
Action:
Indicate actions that need to be taken to address the issues that arise
from the data.
STAGE 2
EVALUATION STAGE
Developing measures to evaluate HR policies/practices
Activities:
Assess the effectiveness of HR policies and practices. Evaluate the impact
of existing services and initiatives. Use employee surveys to assess staff
satisfaction/engagement levels.
Analysis:
Use results of evaluations/employee surveys to inform the design and
implementation of HR policies and practices. Focus on what drives people
to generate business success. Look for correlations between data sets.
Communicate:
Explain the reasoning and value behind HR policies and practices to line
managers and show them how their actions can affect performance.
Action:
Design HR policies/practices that are relevant to business. Develop processes
that can evaluate and assess the progress of these policies and practices.
STAGE 3
MATURE STAGE
Identifying performance drivers
Activities:
Set down the key performance indicators relating to the business strategy
(generally a mixture of financial, operational and customer information)
and decide what data needs to be collected to measure against them.
Analysis:
Manipulate the data collected in an analysis model related to the company
strategy, e.g. balanced scorecard or HR scorecard.
Communicate:
Inform relevant managers of the range of measures that have been designed
and provide them with feedback on the performance and progress of their
departments and the likely impact of changes.
Action:
Demonstrate the effectiveness of HR policies and practices in terms of their
contribution to the bottom-line performance. Depending on the results,
indicate action that will need to be undertaken.
THE ESSENTIAL GUIDE TO HUMAN CAPITAL MANAGEMENT AND MEASUREMENT
DEVELOPING THE
HC MEASUREMENT
PROCESS
STAGE 1
17. Adapted from CIPD
“Human capital
evolution – evolving
the data”, Human
Capital Panel Report,
Autumn 2006.
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HR measurement implementation process
1. Review current data available and how it is being reported and used.
2. Agree with managers and the financial division what to measure in the context of
business impact.
3. Agree the specific metrics and the formulae so that the output is comparable with
other performance and productivity measures.
4. Implement the data collection for a limited number of metrics (maximum 10).
5. Track the results against business performance indicators and any available
external benchmarks.
6. Identify the leading and lagging indicators.
7. Report to managers on organisation, business unit and team results and work with
managers to evaluate the patterns, strengths and gaps.
8. Formulate an organisation-wide response to areas requiring critical attention.
9. Implement local initiatives to gather further information to understand why patterns
are emerging and to address specific localised problems.
10. Track changes against organisational performance and realign initiatives and programmes
with main human drivers of productivity and performance.
11. Use measures that relate to company performance rather than HR-specific measures,
such as cost per hire or speed of expense payment.
12. Review and realign as necessary.
When the various types of data have been
collected, analysis and forecasting can begin.
This is often regarded as the more difficult
and least developed aspect of HCM. While
information may in itself prove interesting,
what managers want to know is its impact
on the achievement of business objectives
and what leadership activities make a
significant difference to achieving the goals.
3. Data collection should be automated
where possible.
HR scorecards are often mentioned in this
regard. The metrics shown on the scorecard
should be easy to understand and used to
communicate tangible results and establish
future objectives. Hatch and Burton18 outline
a number of general principles that are
useful when developing a HR scorecard:
6. Ownership of the process needs to
be defined.
1. Relative numbers are more useful than
absolute numbers.
2. Data should be placed within an
appropriate context.
14
4. Calculations must be accurate and clearly
documented, as the metrics will be used
to support and develop strategy.
5. The scorecard should be geared to
answering senior and line managers’
questions.
7. The scorecard should be considered as
one element of an overall process.
18. Hatch, J., Burton, J. (2003).
“The HR scorecard: the
new way to measure
your human capital”,
Saratoga Institute – a
PricewaterhouseCoopers
Human Resources
Services Offering.
In presenting the output of a HR scorecard, the
terms “dashboard” and “scorecard” are used.
Regardless of the terminology employed, the
purpose of this mechanism is to give its users
information which can be acted upon rapidly
in order to advance strategic objectives and
improve business processes.
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It may be important to provide different
levels of analysis for different HR customers,
such as line managers or chief executives.
It is also important when viewing scorecard
results, to bear in mind any particular
circumstances that may be affecting results.
Potential difficulties
DEVELOPING THE
HC MEASUREMENT
PROCESS
While the logic of HR metrics and HCM
sounds straightforward, many organisations
have found the actual process not meeting
expectations. According to Bates19, some
organisations can undertake metrics
initiatives with high expectations and at
great expense only to have to step back at a
later stage to reconsider what they were
doing, how they should continue and even
whether they should continue. Some of the
potential difficulties are listed as follows:
k The contribution of people is hard to isolate
from other factors such as market forces
which influence business performance.
k HR data has traditionally been
collected for administrative rather
than evaluation purposes and HR staff
are not necessarily trained to interpret
data and demonstrate the contribution
of people to business performance.
k Traditionally it has been difficult to
achieve consistency in the collection
and processing of information across
large organisations.
k When making external comparisons, it is
necessary to consider if one is comparing
like with like. Even common metrics such
as absence, training cost and turnover do
not always use standard components.
19. Bates, S. (2003).
“The metrics maze”,
HR Magazine, 48 (12),
Dec. 2003.
k Some metrics suit specific types of
organisations. Businesses with knowledge
and service workers will require different
metrics to capital-intensive industries,
where the connection between
productivity and revenue is less direct.
k The process is time-consuming to get up
and running, and organisations may need
to invest in automation and technology.
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“Two mistakes that HR practitioners
commonly make, according to Sullivan20,
is to develop and implement HR metrics
in a vacuum and to develop more metrics
than it is feasible to maintain and utilise .”
20
20. Sullivan, J., Burnett, M.
(2005). “Getting started
with metrics” and Sullivan,
J. (2004). “What are the
best HR metrics for a
large organisation?”
www.drjohnsullivan.com
16
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SECTION FOUR
SAMPLE MEASURES
AND METRICS
In this section, a range of HR measures is presented, followed by a number of formulae for
measuring activity. Appropriate time periods need to be used consistently for measures.
Sample measures
Recruitment
and induction
Aim: to assess the effectiveness of the organisation’s recruitment
and induction processes
k What percentage of appointments is filled by external candidates?
k What percentage of new employees leave within the first year
of employment?
k How many people hired at entry level have moved into leadership
positions? After how long?
k How satisfied are managers with the performance of
new employees?
k How many candidates with the necessary requirements apply
for each vacant position?
k What length of time, on average, does it take to fill a vacancy?
k For how many days were key positions vacant?
Commentary
SAMPLE MEASURES
AND METRICS
Area
In recruitment, it is
important to focus on
the attraction and
retention of critical
skills and not to overemphasise operational
efficiencies, such as
recruitment costs.
The availability of internal
candidates (transfers,
promotions) reflects the
organisation’s success in
capability building.
k What is the average cost of an appointment? (see formulae)
k Are recruitment difficulties restricting/delaying the organisation’s
ability to meet its objectives?
k Does the formal induction process invest time in embedding
the organisation’s culture and values?
k How long after appointment does an employee achieve the
required competency standard for the role?
k What time is invested in feedback and support for the
employee during the induction period?
THE ESSENTIAL GUIDE TO HUMAN CAPITAL MANAGEMENT AND MEASUREMENT
Statistical analysis:
Relate the performance
of new employees to
experienced employees
and to business metrics.
Does the business
incur a cost due to lack
of resources/skills?
(see formulae)
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Area
Sample measures
Retention
Aim: to assess level, impact and reasons for employee turnover
k What is the overall employee turnover rate?
k How does this compare to market average for similar roles
in your industry?
k What is the turnover rate for specific jobs/grades in the
organisation?
k What is the service profile of current employees?
k What is the rate of positive attrition (loss of poor performers
or those in unviable roles)?
k What is the rate of negative attrition (loss of high performers,
critical skills)?
k What is the cost of employee turnover for key jobs/grades?
(see formulae)
k What has been the reduction (if any) in employee turnover in
the 6 months following specific HR/ management initiatives?
k Are exit interviews carried out when employees are leaving?
Commentary
Reports of employee
retention rates have to be
backed up by qualitative
information from exit
interviews. It is important
to distinguish positive
attrition and negative
attrition rates.
Statistical analysis:
Assess trends.
Compare to industry
averages.
Relate retention figures
to customer satisfaction,
productivity and
profitability figures.
k What are the main reasons employees are leaving, especially
top performers?
Talent
management
Aim: to ensure the organisation is developing employees to meet current and
future skill requirements in a cost-effective manner
k What is the average period of training /development
per employee, per annum?
k What is the average number of training days for specific positions?
k What is the average annual cost of development as a percentage
of payroll?
k What percentage of employees avail of educational support?
k How satisfied are employees with learning opportunities
(e.g. from reaction questionnaires, employee survey)?
k What impact do training interventions have on improving
employee performance?
k What impact do training interventions have on improving
employee retention?
k What is the return on the investment in training?
k Compare the performance ratings of those with the highest
and lowest levels of training investment.
The evaluation of training
interventions has to focus
on improvements in
performance, not simply
activity measures (i.e.
number of training days).
Statistical analysis:
Compare improvements
in business performance
with the investment
in training.
Compare the rate of
improvement in employee
performance for those
with the most and the
least training investment.
k To what extent is knowledge management and sharing promoted?
18
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Area
Sample measures
Employee
engagement and
communications
Aim: to evaluate the extent to which investments in HR practices are increasing
employee commitment and leading to increased customer satisfaction
k What mechanisms are in place to hear the voice of the employees?
k What mechanisms are in place for managers to communicate
with employees?
k To what extent is the management style participatory?
k Have specific management practices been identified as increasing
engagement? (e.g. using employee survey results)
k Has this increased or decreased in the last year?
k How are changes in employee survey results correlated with
changes in customer satisfaction or revenue?
Performance and
productivity
Employee commitment
is considered a lead
indicator of customer
commitment, which in
turn is a lead indicator
of profitability.
Statistical analysis:
Assess trends.
Compare employee
engagement figures
on a range of measures
(from employee survey)
with employee absence,
turnover, business
performance, customer
satisfaction, profitability.
SAMPLE MEASURES
AND METRICS
k What percentage of employees are satisfied with their job;
communications; supervision/ management; reward; working
environment; development opportunities, etc. (using employee
survey results)?
Commentary
Aim: to evaluate the extent to which investments in HR practices are increasing
employee commitment and leading to increased customer satisfaction
k What percentage of employees participate in setting
goals/objectives?
k What percentage of employees have a documented annual
performance review?
k What is the distribution of performance ratings/evaluations?
k What percentage of employees have a performance improvement
plan (PIP)? (in a defined period)
k Extent to which employees understand how their role contributes
to the organisation’s success.
k What percentage of management training is focused on
performance and productivity enhancements?
k How many managers have been trained in coaching skills?
k What is the employee cost per unit of output?
k What is the ratio of direct to indirect labour? How does this
compare to the industry average?
k How much have productivity and revenue increased/decreased
over a time period?
k How much has revenue increased/decreased over a time period?
Clear processes and
protocols are necessary
to create a strong
performance culture.
Increasing the revenue
and profit per employee
is a critical indicator
of productivity.
Statistical analysis:
Compare the level of
employee involvement
in the performance
management process
with business growth
and performance.
What are the trends in
employee costs and how
do these compare to
performance levels,
industry averages?
k Have employee costs (total payroll and benefits costs) changed
as a percentage of business costs?
k How many days were lost due to downtime or strike?
(in a defined period)
k How much management and HR time was invested in dispute
resolution? (in a defined period)?
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Area
Sample measures
Reward
Aim: to assess the cost of benefits and the extent to which good performance
is recognised and rewarded
k What percentage of revenue is taken up by payroll and
benefits costs?
k What percentage of employees have an element of performancerelated pay (PRP)?
k On average, what percentage of pay/benefits is performancerelated?
k Does any element of the reward strategy include critical
behaviours/practices?
k What percentage of employees is paid above the (internal)
average for their grade?
k What percentage of employees believe that they are fairly
compensated? (e.g. employee survey)
k What percentage of key position holders/top performers
left because of reward?
k What forms of non-financial recognition are used?
k What percentage of management reward is linked to their
performance as managers?
Employee profile
Commentary
It is necessary to
understand the way
reward drives
performance. Individual
line of sight to reward
should be maximised.
Statistical analysis:
Compare the productivity
and contribution of
employees receiving PRP
with those not receiving it.
Compare any change in
the reward system with
productivity changes.
Review changes in
revenue/profit with
changes in employee
numbers and cost of
payroll and benefits.
Aim: to ensure the organisation is attracting and retaining a diverse mix
of employees
k Has the organisation conducted a diversity audit?
k How does the employee profile match the customer base?
k What programmes exist to maximise the contribution of diverse
employee groups?
k To what extent do managers believe diversity management
is a business imperative?
k How inclusive do employees regard their workplace to be?
(e.g. employee survey)
k What proportion of women are filling senior management
positions? (define seniority level)
k What proportion of non-nationals are filling senior management
positions? (define seniority level)
k What examples/statistics demonstrate the added value of
diversity to the organisation?
It is necessary to
evaluate the integration
of diverse employees,
not just report on the
employee profile.
Consider how diversity is
enhancing organisational
performance and
how diversity issues
are being resolved.
Statistical analysis:
Compare employee
engagement and business
performance levels for
diverse groups.
What is the relationship
to customer satisfaction
and productivity figures?
20
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Area
Sample measures
Employee health
Aim: to assess the health of the organisation and the impact of flexible
working arrangements
k What is the sick leave absence rate – short- and long-term?
k What does sick leave absence cost per month (employee cost
and loss of revenue)?
k What are the absenteeism rates for different employee groups?
k How effective is the absence management programme at
reducing absence? (in a defined period)
k What level of absence is specified as work-related stress?
Commentary
Monitoring absence is
necessary to minimise
increases and understand
underlying causes. For
some organisations,
flexible working has a
positive impact on
absence and attendance.
Contribution of HR
SAMPLE MEASURES
AND METRICS
k What is the level of other absences (authorised and unauthorised)? Statistical analysis:
A strict measurement
k How much time is lost per month due to lateness?
and reporting scheme is
k What percentage of employees have access to and avail of
necessary for absence.
various sorts of flexible working?
Report absence levels for
different departments/
k What number of employees request flexibility outside of
employee profiles. Assess
current programmes?
the impact of an absence
k Are there differences in absenteeism and turnover rates between
management programme
those who are/are not in flexible working arrangements?
(both cost and savings –
k Are there differences in productivity levels between employees
see eircom case study).
who are/are not in flexible working arrangements?
Evaluate the cost of
k What is the volume of health and safety incidents?
absence and its impact
k What volume of issues/complaints of bullying and harassment
on profitability.
occur? (consider informal, formal complaints)
Evaluate the impact
k What are the trends in the use of an employee assistance
of flexible working
programme?
arrangements on absence,
turnover and productivity.
Aim: to assess the effectiveness of the HR function
k How do managers rate HR activities in terms of importance
and performance?
k Is there a gap between how senior managers view the HR
department and how HR views the department?
k To what extent is spending on HR programmes aligned to
business priorities in the current period?
k What specific programmes has HR initiated that require HR to
work towards the business goals in the current period?
k Is the contribution made by HR to the achievement of managers’
goals evaluated?
k Number of employees per HR professional.
THE ESSENTIAL GUIDE TO HUMAN CAPITAL MANAGEMENT AND MEASUREMENT
Evaluation of HR should
be based on the extent
to which it contributes
to the achievement of
business goals.
Statistical analysis:
Compare how overall
expenditure in HR is
aligned to business
priorities.
Evaluate the costs and
savings to the business due
to specific HR initiatives.
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Sample HR formulae
IBEC has compiled a number of formulae to help companies to standardise how they report on
various HR metrics. The consistent use of these formulae will facilitate both internal and external
benchmarking.
HR metrics
Description
Absence rate
This measure of absence evaluates unauthorised absence. It is defined as:
“unscheduled disruption of the work process due to days lost as a result of
sickness or any other cause not excused through statutory entitlement or
company approval” (IBEC).
It is necessary to separate out certified and uncertified, short-term and
long-term illness in order to understand the pattern and determine the
most appropriate interventions. Also consider using the Bradford factor
(see page 26) to help to quantify the impact of disruptive frequent
short-term absence.
The following are not generally included as absence: statutory leave
(e.g. annual leave, public holidays, maternity leave, adoptive leave, parental
leave, force majeure, carer’s leave, jury service); days lost due to strikes
and lay-offs; and excused leave such as bereavement leave, exam/study
leave, marriage and paternity leave, planned doctor’s visits.
No. of days of absence per month
(or period )
x 100
(total no. of employees) x (total no.
of work days available in the period)
Employee
turnover rate
Define work days, i.e. the number of
work days in period under review,
e.g. one month, likely to be about
20 days (excluding Saturdays and
Sundays unless part of the working
week in your organisation), less
public holidays and any other days
your organisation is closed. Where
shift work is part of the working
pattern, shift periods can be
converted into days (e.g. 12 hours
equals 1.5 days) or the formula can
be converted into hours.
This is the rate at which permanent full-time employees leave an
organisation on a voluntary basis (excluding redundancy or dismissal)
within a specified time period. This evaluation of employee turnover does
not account for multiple-turnover in the same job or for turnover in new
jobs since the start of the period.
Select a time period –
e.g. three months
No. of employees who were there
at the start of the period and have
since left the organisation
x 100
The number of employees who
were there at the start of the
period and have since left the
organisation includes both the
number who have left and
(i) were replaced, and/or
(ii) for whom a vacancy still exists.
No. of employees at start of
the period
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HR metrics
Description
Employee
turnover cost
Employee turnover costs have to be estimated for each position, or group
of positions, as the impact of turnover will vary depending on where the
role sits in the organisation. The following costs are compiled for each
post incurring turnover, and can then be added together for all costs in a
specific period.
For each role
Replacement Cost
Separation cost (costs to the
business of losing a valued
employee), i.e. estimated loss
of revenue due to reduced
customer/client satisfaction
+ loss of training investment
+ loss of skills
Advertising costs: design and
content, cost per advert per day.
Recruitment agency: agency fee,
generally relates to a percentage
of the employee’s salary.
+
Vacancy cost (cost of unmet
demand when position is left
unfilled) (see below)
Recruitment costs: recruiter costs,
IT costs, interviewers’ time, internal
interviewees’ time, administration
and travel costs, medical checks.
+
Replacement cost i.e. advertising
+ recruitment agency fee +
assessment centre cost +
recruitment costs + medical check +
hand-over + initial reduced capacity
SAMPLE MEASURES
AND METRICS
Assessment centre: no. of days,
facilities, cost of tests, cost of
facilitators/ assessors.
Reduced capacity: loss of
productivity as employee
familiarises him/herself.
+
Training and induction costs i.e.
trainer costs, on-the-job and offthe-job training time (see overleaf)
Vacancy cost
Vacancy costs have to be estimated for each position, or group of positions,
as the costs will vary depending on where the role sits in the organisation.
Cost of temporary workers + agency
costs + overtime costs + training
costs + any estimated loss of
revenue – (minus) the pay and
benefits that would have been paid
to the employee who has left
Vacancy rate
This can be measured at a point in time or over a period of time.
Total no. of current vacancies
x 100
Total no. of current jobs
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HR metrics
Description
Average no. of
training days
per employee
This records the average number of training days per employee per year.
It can also be calculated for shorter periods. Many reports focus on formal
training and do not give an adequate representation of informal training
(e.g. self-learning, coaching, observing colleagues).
Total number of training days
(formal and informal) carried
out in the 12-month period
The same formula can be used to
assess the number of training hours
per employee (replacing days with
hours). The inclusion of informal
training gives a more complete
picture, but it is necessary to be
consistent. Include both internal
and external delivery.
Total no. of employees
in organisation
Training cost
as a percentage
of payroll
All training costs need to be included to give a complete picture of the
percentage of payroll spent on training. The IBEC HRM Survey 2006 showed
that 67% of participants included the cost of formal training only; 19%
included formal and informal training; and 13% included formal and
informal training plus the salary of the employee being trained.
Cost of formal training (e.g. trainer
costs, travel costs, venue hire, etc.)
Alternatively, informal costs
can be calculated separately.
+
Cost of informal training days (e.g.
on-the-job training, e-learning)
+
Salary of employee being trained
x 100
Total payroll cost
Return on
training
Investment
There is increasing demand for information to demonstrate the return on
training investment. This requires the collation of business information on
training outcomes. A less sophisticated measure is to map training activity
onto productivity charts, conscious that other factors can intervene.
Benefits – Training costs
x 100
Training costs
‘Benefits’ measures any positive
training outcome in monetary
terms, such as increased revenue or
cost saving.
‘Training costs’ measure the full
cost of training (e.g. trainer costs,
travel costs, venue hire + cost of
informal training + salary of
employee being trained).
24
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HR metrics
Description
Revenue per
full-time
equivalent
This measure gives an overall view of the revenue generated per employee,
covering both direct and indirect employees. It gives an indication of
employee productivity, especially when viewed over time or in comparison
with similar organisations
Total revenue
number of employees
(full-time equivalents, FTEs)
Profit per
full-time
equivalent
FTE: what is meant by a full-time
equivalent, in terms of number of
hours worked, needs to be defined
(i.e. 1 FTE equates to the working
hours of a normal week, e.g.
39 hours, but this could be worked
by 3 part-time employees working
13 hours each).
SAMPLE MEASURES
AND METRICS
Earnings before interest, taxes
and depreciation may be used
instead of revenue
Revenue: all income including
non-operating income (e.g.
earnings from investments).
Alternatively, use the sales or gross
income from the operating
activities of the organisation.
This measure gives an indication of employee profitability, especially
when viewed over time or in comparison with similar organisations.
Profit before tax
Number of full-time employees
(full-time equivalents, FTEs)
Profit: sales or income less expenses.
Profit before tax is measure of a
company's profits before the
company pays corporate tax. All
expenses are deducted from
revenue, including operating and
non-operating expenses (sales,
goods, wages, heating, motor,
insurance, depreciation, interest etc.)
but it leaves out the payment of tax.
FTE: what is meant by a full-time
equivalent, in terms of number of
hours worked, needs to be defined.
Human capital
added value
This measure has been used to determine the value added by HR practices
per employee.
Revenue – (operating expenses
+ all benefits cost)
No. of full-time equivalents (FTEs)
Revenue: all income including
non-operating income
(e.g. earnings from investments).
Operating expenses: the sum of
all operating costs, to which are
added all pay and benefits costs.
FTE: what is meant by a full-time
equivalent, in terms of number of
hours worked, needs to be defined.
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HR metrics
Description
Human capital
return on
investment
This measure determines the added value per full time employee,
expressed as a ratio of remuneration (e.g. 1.5 means that the return from an
employee is 1.5 times pay).
Revenue – non-wage costs
Revenue: all income including nonoperating income (e.g. earnings
from investments).
No. of FTEs X average remuneration
Non-wage costs: the sum of all
operating costs excluding any pay
and benefit-related costs.
FTE: what is meant by a full-time
equivalent, in terms of number of
hours worked, needs to be defined.
Measuring absence - the Bradford factor
The Bradford factor is a tool to measure the impact of disruptive frequent short-term absence as
against occasional longer spells of absence. The Bradford factor is a way of distinguishing individuals
with a high incidence of absence, demonstrating a serious absence pattern worthy of further
investigation. It helps to highlight causes for concern and is often one of the first steps in an absence
management process.
Calculation
S: the number of occasions of absence
in the last 52 weeks
S x S x D = Bradford points score
D: the total number of days’ absence
in the last 52 weeks.
For example, for employees with a total of 14 days’ absence in one rolling 52-week period,
the Bradford score can vary enormously, depending on the number of occasions involved.
Example:
one absence of 14 days is 14 points (i.e. 1 x 1 x 14)
seven absences of two days each is 686 points (i.e. 7 x 7 x 14)
14 absences of one day each is 2,744 points (i.e. 14 x 14 x 14)
Although a rolling year is common, other timescales such as 13 weeks may be used,
with the associated points total correspondingly lower.
From IDS HR Study 842 (2007). Absence management.
26
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SECTION FIVE
TRENDS AND PRACTICES
IN HUMAN CAPITAL
MEASUREMENT
Key features
k the variation in use of
HR metrics and measures;
k the need to shift from historical
measures to those that drive
delivery of strategy;
TRENDS AND PRACTICES
IN HUMAN CAPITAL
MEASUREMENT
Growth in demand for HCM has been driven
primarily by the internal need to support
decision-making and to provide indices of
the strength of the organisation to external
stakeholders. IBEC’S HRM survey21 gathered
information on what companies in Ireland
are doing in this area. Alongside information
on a range of HR policies and practices,
the survey addressed the extent to which
companies measure the contribution which
HR makes to their operations and the nature
of any HR metrics used.
k mechanisms to measure
training effectiveness and
employee engagement.
The 2006 survey covered 326 companies
with around 88,000 employees. Overall,
39% of companies said they measured the
contribution of HR to the organisation.
The majority of these believed the process
to be either very successful (12%) or
somewhat successful (70%).
The prevalence of
HR measures
As part of the IBEC survey, the respondents
were presented with a list of HR metrics*
and asked what was measured formally or
informally by their organisation. Table 3
shows that organisations were most likely to
use metrics under the criteria of efficiency
and effectiveness (categories 1 and 2), rather
than category 3 metrics, which relate to the
human capital impact on organisational
performance (see section 1, page 4).
In terms of efficiency measures, companies
were most likely to have stand-alone
measures, such as absence, length of service,
turnover, recruitment and training.
They were less likely to measure the cost
of these issues; for example, only two in five
measured the cost of absence or the cost
of the HR function. A small percentage (15%)
of organisations formally measured the cost
of induction programmes, and a similar
percentage measured it informally.
In terms of measuring the effectiveness of
HR programmes and practice, more than
seven out of ten organisations indicated that
they evaluated training. A similar number
conducted exit interviews, while one-third
measured HR service delivery and
effectiveness, mainly informally. While 41%
tracked promotions, only one in five did this
formally, an issue that is important for
recruitment and retention and from a
diversity management viewpoint.
THE ESSENTIAL GUIDE TO HUMAN CAPITAL MANAGEMENT AND MEASUREMENT
21. IBEC (2006).
Human Resources
Management
Survey 2006.
*
The metrics were
not divided into
three categories in
the original survey.
27
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Table 3 / Percentage of organisations in Ireland with HR metrics21
PERCENTAGE OF
ORGANISATIONS WHICH
USE THIS MEASURE
HR METRICS
Category 1: Metrics that measure the efficiency of the HR function
Absence
90
Length of service
77
Staff turnover
75
No. of training days per employee per annum
71
Recruitment costs (costs per hire)
68
Discipline and grievance – number of cases reaching the various
stages of the internal procedure/number going to Labour Court, etc.
62
Workforce profile (age, gender, ethnicity, etc.)
60
Cost of training days per employee per annum
59
Skills profile
58
Recruitment – time taken to fill vacancies
54
Cost of benefits per employee
49
Average cost of absence per employee per annum
42
Cost of HR function
39
Induction costs
30
a small
“only
percentage of
organisations
engage in
measuring the
impact of training
and/or employee
satisfaction on
business and
customer metrics
”
IBEC Human
Resources
Management
Survey 2006
Category 2: Metrics that measure the effectiveness of HR programmes and practices
Training evaluation
72
Exit interviews (reasons for leaving)
72
Employee satisfaction/engagement
53
Customer satisfaction
49
Promotions tracking
41
HR service delivery and effectiveness
33
Category 3: Metrics that measure the human capital impact on the business
28
Profit per employee
29
Impact of training investment on customer satisfaction
14
Impact of employee satisfaction/engagement on turnover
14
Impact of employee satisfaction/engagement on absence
13
Impact of employee satisfaction/engagement on productivity
12
Impact of training investment on sales
10
Impact of employee satisfaction/engagement on business performance
10
Impact of employee satisfaction/engagement on customer service
10
Impact of training investment on turnover
8
Return on investment (ROI) for individual employees
21
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Only a small percentage of companies
measured the impact of human capital on
the business, with less than 30% using any
form of human capital measure. However,
this was further significantly reduced when
only formal arrangements were considered:
one in six organisations formally measured
profit per employee, while 7% formally
measured the return on investment for
individual employees.
Analysis by sector, size, ownership and
unionisation suggests that human capital
measurement is most likely to be found in
organisations that are large, foreign-owned,
engaged in the financial services or high-tech
manufacturing sectors, and where a formal,
written HR strategy exists. Little difference
was found between unionised and nonunionised organisations.
The survey also investigated the
measurement of the impact of HR
interventions and found that between
just 8% and 14% of companies assessed
the impact of training investment, and
only 10% to 14% measured the impact of
employee satisfaction/engagement on
aspects of business performance. A separate
IBM survey22 in 2005 found that just under
half of their survey participants measured
the effectiveness of their HR programmes on
the business, while more than three quarters
used measures based on employee
satisfaction. Just over 25% measured the
return on investment.
The IBEC HRM survey found that the main
constraint in relation to measuring HR was
resources, as Table 4 shows.
Main difficulties
Percentage of
organisations
Lack of resources
53
Relevant data not
collected by the
organisation
25
Data not available
in the correct format
16
Too complex
11
Other reason
10
International research
Research23 undertaken in the UK and Canada
questioned 246 business leaders and HR
practitioners on current and desired HCM
conditions. More than three quarters of the
managing directors surveyed acknowledged
that HCM was critical to the fundamental
success of the business. In terms of current
HCM, organisations were focusing on
operational and historical measures (such as
turnover, compensation, etc.) and not on those
HCM measures needed to drive strategy.
This was also found to be the case in a survey
conducted by Young24 and ISR Europe of
senior executives, managers and HR
professionals. The survey was undertaken to
ascertain the extent to which measurement
and management of human capital is
happening. On the surface, the survey found
that a high level of human capital
measurement appeared to be taking place, in
that more than nine out of ten respondents
indicated that they had some business
performance measures that related to
human capital. A closer investigation found
that the types of measures used were more
likely to do with convenience than strategy.
The top five human capital measures
companies were using were as follows:
headcount (56%), employee surveys (47%),
productivity (44%), training hours (40%),
and recruitment and selection costs (37%).
THE ESSENTIAL GUIDE TO HUMAN CAPITAL MANAGEMENT AND MEASUREMENT
TRENDS AND PRACTICES
IN HUMAN CAPITAL
MEASUREMENT
In addition, it was found that organisations
where the HR function was represented
at board level were almost twice as likely
to measure the cost of the HR function,
skills profile, staff turnover, induction
costs, employee satisfaction/engagement,
promotions tracking and HR service
delivery and effectiveness. This raises the
question of the influence of a HR presence
at senior board level on the prevalence
of HR measurement.
Table 4 / Main difficulties with regard
to HR metrics
22. IBM Business
Consulting Services
“The capability within –
the global human
capital study 2005”,
UK: IBM Human Capital
Management Practice.
23. Weiss, D., Finn, R. (2005).
“HR metrics that count:
aligning human capital
management to
business results”,
Human Resource
Planning, 28 (1).
24. Young, S. (2005).
“10 steps to successful
human capital
management”,
Strategic HR Review,
Nov./Dec. (2005) 5 (1), 24.
29
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Weiss and Finn (2005) identified a list of
measures that organisations would like to
report on in the future. This list differed
significantly from what was being measured
at the time, and there were differences in
priorities between HR practitioners and
managing directors. The most preferred
measures for both groups for the future were:
k leadership team capability;
k effective change programmes;
k employee competency;
k motivation.
HR professionals themselves did not
consider that the operational metrics
(e.g. headcount) should be included in the
top ten that they would report on to senior
management in the future. What they
wanted to report on were: employee
motivation (77%), leadership team capability
(76%), employee competency (70%), and
training and development return (70%).
Managing directors in the study, however,
still wanted HR to report on the core metrics.
Measuring training
effectiveness
Investment in training and development
continues to grow. The IBEC HRM survey
showed an increase of almost one
percentage point in average expenditure
on training from 3.15% of payroll in 2004
to 3.91% in 2006. The HCM approach
views training as an investment in the
organisation’s human capital, as opposed
to being an expense. Traditional training
evaluation methods tended to focus on
training delivery – both reactions and
knowledge acquisition. According to the 2005
IBM survey22, organisations are most likely to
evaluate learning activities on individual
reactions as opposed to business impact or
return on investment.
A US study25
of 500 publicly traded firms
found that firms that had invested the
most in training had a stockholder
return 86% higher than firms who had
invested the least in training, and 46%
higher than the market average.
30
Evaluating training in
a sales environment
A sales and marketing pharmaceutical
company in Ireland trains its sales
employees in a unique six-part selling
skills programme, covering one-to-one
selling to group presentations. The
company evaluates the training after six
months, during which sales staff are
recorded and monitored on video in a
mock sales scenario.
The company scores each employee’s
performance against the six segments
covered in training. Employees are given
feedback on their level of skill compared
to the competencies required for the
role, and this is recorded as part of the
performance management process. The
company acknowledges that the
capacity to link the impact of training to
sales growth is desirable, but that sales
growth is influenced by a wide range of
internal and external factors.
The challenge posed by measurement is
determining the extent to which training
leads to improved business performance.
Senior managers are now asking this
question. The practical expression of this is
the calculation of return on investment
(ROI) in training, calculated thus:
ROI% = (Benefits – Cost of Training) x 100
Costs of Training
“Benefits” in this context, refer to financial
returns. In this equation it can be difficult to
isolate the training impact from other factors
influencing organisational performance and
to account for benefits that accrue over time.
25. Weatherly, L.A. (2003).
“Human capital –
the elusive asset”,
HR Magazine,
March 2003, 48 (3).
The success of any training programme will
however depend on any number of factors
such as the organisation’s culture, and in
particular, on the support provided to the
learner and the expectation of a behaviour
change. Measuring the impact of training
also has to account for the fact that learning
is acquired over a period of time and may
impact on the bottom-line at different stages.
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Kirkpatrick26 introduced his four levels
of evaluation in the 1970s, and level 1
reaction is still the most common
level in use.
1. Reaction: how favourably
participants react to the training;
2. Knowledge acquisition/learning:
measurement of the increase in
knowledge and skills as a result
of the training;
An engaged employee is aware of business
context, and works with colleagues to
improve performance within the job for
the benefit of the organisation.”
IES developed a series of 12 statements28
to measure employee attitudes at work and
demonstrate the key drivers of engagement.
Their study found that, while differences
existed for different employee groups, the key
driver of engagement is “a sense of feeling
valued and involved”. The 12 statements
statistically “sat together” reliably to produce
a single indicator of engagement.
3. Changes in job-related behaviour:
the extent to which the knowledge
or skills gained in training are
transferred to the real work situation;
The study showed that positive responses
to the statements indicated:
4. Improvements in organisational
results: how changed behaviour on
the job affects business performance.
k a belief in the organisation’s products
and services;
k a positive attitude towards, and pride in,
the organisation;
k a perception that the organisation
enables the employee to perform well;
Employee engagement
Employee attitude and climate surveys
have become a key measure of human
capital, and the growth in their use is a
reflection of the need to demonstrate the
impact of specific HR practices and to
identify areas for improvement.
Research has been carried out demonstrating
the correlation between employee
engagement and changes in areas such as
profitability, productivity and customer
satisfaction. The assumption is that higher
levels of employee engagement lead to
improved business performance. As part
of regular climate, or engagement, surveys
employees answer questions about their
satisfaction with numerous aspects of the
organisation in which they work. Scores are
compiled and any increase or decrease is
correlated with changes in business
performance metrics.
The Institute for Employment Studies (IES) in
the UK has defined employee engagement27
as “… a positive attitude held by the employee
towards the organisation and its values.
k an understanding of the big picture
and a willingness to go beyond the
requirements of the job.
Other models of employee engagement
include the Gallup 12 questions model29.
Gallup identified 12 questions that measure
employee engagement and are tied to
relevant business outcomes such as
retention, productivity, profitability, customer
engagement and safety. Their research
pinpointed 12 key employee expectations
that, when satisfied, form the foundation
of strong feelings of engagement.
Organisations have to consider what it
means in real terms for employees to be
“engaged” within their specific organisation.
The evaluation of employee engagement
should provide comparisons across different
departments and for different groups of
employees. The organisation can then target
HR investment to maximise engagement in
different groups of employees with different
priorities. Bassi and McMurrer30 showed that
although organisations should generally
strive towards superior HCM across the
board, the practices that had greatest effect
varied within and across organisations and
changed with time.
THE ESSENTIAL GUIDE TO HUMAN CAPITAL MANAGEMENT AND MEASUREMENT
TRENDS AND PRACTICES
IN HUMAN CAPITAL
MEASUREMENT
k a willingness to behave altruistically
and to be a good team player;
26. Kirkpatrick, D. (1975).
“Evaluating training
programmes”, Alexandria,
VA: American Society for
Training and Development.
27. IRS Employment Review
(2004). “Learning the
rules of engagement”,
Employment Trends
No. 800, 21st May 2004.
28. Robinson, D., Perryman,
S., Hayday, S. (2004).
“The drivers of employee
engagement”, IES Report
No. 408, April 2004.
29. See http://gmj.gallup.com
30. Bassi, L., McMurrer, D.,
(2007). “Maximising
the return on people”,
Harvard Business Review,
March 2007,
85 (3) pp115-123.
31
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The challenge to HR leaders, at all
professional levels, is to search for ways
to utilise human capital measurement
systems to optimise the value of
people in their organisations .
25
25.Weatherly, L.A. (2003).
“Human capital –
the elusive asset”,
HR Magazine,
March 2003, 48 (3).
32
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SECTION SIX
BEST PRACTICE CASE STUDIES
CASE STUDY ONE
BNP Paribas Dublin was established in 1973
and is a full branch of BNP Paribas SA. It is
one of the largest foreign banks in Ireland.
Key businesses are international lending and
structured finance, proprietary trading and
the distribution of a wide range of treasury
and capital markets products to both Irish
and international clients.
Key features
k the range of information
compiled and reported centrally;
k use of a profit per employee measure.
BNP Paribas has 200 employees in Dublin
and 165,000 worldwide. There are four
staff in HR in Dublin.
HR measures
The company uses a global HR information
system. The following information is compiled
and reported on at varying intervals:
k workforce profile, length of service;
k number of training days per employee;
k cost of benefits per employee;
k exit interviews;
k recruitment cost and time to fill vacancies;
k return on investment (ROI) of individual
employees and profit per employee;
k number of discipline and grievance cases;
k salary changes;
k career progression of key individuals;
k employee surveys;
k cost of the HR function.
Specific focus of measurement
Profit per employee
The company calculates the profit per
employee as follows:
profit (€x million) ÷ no. of staff.
This information makes it possible to
compare the profitability of varying cost
Recruitment and retention
This is the number one priority for the HR
department. The number of vacancies, their
seniority level and the costs involved in filling
the vacancies are reported to the chief
executive on a regular basis.
BEST PRACTICE
CASE STUDIES
k workforce changes (transfers, promotions,
departures, new staff, etc.);
centres with their counterparts abroad. In
Ireland, this is also used to calculate bonus
entitlements. There are two bonus schemes –
a share scheme bonus (paid to all employees)
and a discretionary bonus, made up of
individual/team/local and group performance.
Developments
An updated HR information system would
allow for more complex reporting, because
at present a number of the measurement
activities are carried out manually. With the
expansion of the organisation and the
increasing complexity of the business, this
is something to be addressed.
The different requirements and entitlements
across different countries are hard to
streamline – for example, the requirement for
technical training in countries outside of
Ireland affects the type of courses which are
run for employees based in Ireland and the
manner in which this is conducted.
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Specific focus of measurement
Employee satisfaction
BALLYKNOCKEN
COOKERY SCHOOL
Key features
k information gathered
informally through daily contact
with employees;
k focus is on employee
communications and development.
CASE STUDY TWO
Ballyknocken is one of Ireland’s leading
cookery schools, offering a broad range of
cookery classes for individuals as well as
attracting many corporate and social groups.
After 30 years as a bed and breakfast in the
Wicklow mountains, the school was
established by the current proprietor in 2000
after the premises were renovated. This has
developed into an award-winning business
with a significant culinary reputation.
Ballyknocken employs approximately 12 people
over the course of a year, including a number
of international work experience placements
who reside at the school. HR was one of the
first tasks tackled by the current proprietor.
The proprietor invests her time heavily in her
employees in order to create a positive attitude
among her staff and a relaxed and cheerful
atmosphere for her clients.
This is considered critical to creating a
relaxed and positive atmosphere for
customers. It is judged from daily interaction
with the staff, ongoing one-to-one meetings
and team cooperation. It is also judged from
customer feedback and their willingness to
re-visit Ballyknocken.
“Happy staff = happy guests = happy me!”
Employee communications
A number of formal and informal
communication methods are used – daily
interaction, open door communications policy,
team (dining!) events, notice boards, one-toone meetings and performance appraisals.
These communications are used to identify
performance gaps and training needs, to
reinforce performance standards and define
future recruitment needs. They also contribute
to evaluating the impact of cross-cultural
differences, which has resulted in initiatives
to educate employees on respecting different
cultures and also on aspects of Irish culture
and the hospitality sector.
Training
A significant amount of time is invested by
Ballyknocken in training and supervising
employees, particularly new placements each
year. This relates to the specific culture within
Ballyknocken and the behaviours expected in
the Irish hospitality sector in general.
Developments
HR measures
As a small business, information is mainly
gathered informally by way of daily contact
with both employees and customers. The HR
measures used to assess progress include:
k employee satisfaction;
k absence;
k training needs;
k recruitment needs;
k performance appraisals;
k quality employer programme reviews
(from the Irish Hotels Federation);
The proprietor acknowledges that the
informal approach works well for their
current size, but recognises that more formal
processes will be needed as the company
expands and employee numbers grow. It will
also lead to the need for a HR specialist and
a HR software system, as at present only the
payroll system is electronic.
Ballyknocken Cookery School won
the Best in HR Development Award
category in the 2007 SFA National
Small Business Awards.
k health and safety reports.
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k training data (see below);
k open positions and cycle time to fill them;
k employee relations status;
k health and safety.
Key features
k Sophisticated HR systems provide
information for use at local and
corporate level;
k Use of balanced scorecard links
HR and operational activity;
In addition, measures of employee satisfaction
and engagement, talent management and
performance appraisal are reviewed regularly.
While information on cultural diversity/ethnic
origin, etc. is collected when an employee joins,
it is not used.
Specific focus of measurement
Training and development
k HR scorecard benchmarks
attendance and training with
other sites.
CASE STUDY THREE
Analog Devices is a world leader in the
design, manufacture and marketing of
high-performance analog, mixed signal and
digital signal processing integrated circuits.
With a presence in Ireland for over 30 years,
Analog Devices operates a state-of-the-art
wafer fabrication manufacturing facility
alongside a large product design centre in
its Limerick facility, and also has a new
design centre in Cork.
HR measures
Sophisticated HR systems provide a databank
of information which supports decisionmaking by the HR function, the Limerick site
and the worldwide corporation. Responsibility
lies with managers and employees to ensure
the accuracy of all recorded information.
A number of measures are reported to
corporate headquarters on a quarterly basis,
example of which includes:
k headcount – direct and indirect employees;
k employee turnover;
k attendance (measured by hours at work)
and absence;
Quarterly training and
organisational development
measures:
k % payroll spend on training
per quarter;
BEST PRACTICE
CASE STUDIES
This case study relates to the manufacturing
facility in Limerick, which has about 650
employees, and is supported by a HR team
of five people. HR activity is driven directly
by business requirements.
Analog Devices places a strong focus on
training, education and development
(TED programme) on the site. A number
of training measures are used, including
training days and budget expenditure. The
company invests heavily in training needs
analysis to ensure the right courses are in
place and carries out pre- and post-training
assessments to improve both the learning
process and transfer of learning. In addition
to the TED programme, talent management
is assessed through succession planning
processes, leadership development, and the
performance appraisal process.
k Training spend per employee –
$ per quarter;
k Classroom training days per
employee per quarter;
k Training costs per participant
hour per quarter;
k Main focus of training during
the quarter.
Absenteeism and turnover
Figures on employee turnover and
absenteeism are directly accessible by line
managers on a continuous basis from the HR
system. At individual level, absence trends can
be evaluated covering a range of intervals of 1,
5, 13, 52 ,104 and 156 weeks. The Bradford factor
(see section 4) is also used to evaluate absence.
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Analog Devices HR scorecard
Attendance
Metric
Attendance
%*
Absence
%**
Training: external only
Casual
absence
%***
$ Spent
per emp
% Payroll
spent
Total
classroom
days
per emp
Turnover %
Cost per
participant
hour
Location 1
Location 2
Location 3
Location 4
Total
* Attendance %: total hours worked divided by the total hours available.
** Absence %: employees’ total hours absent multiplied by the total hours available. Holidays and company closure hours are not
counted as absence, but every other absence by the employee is counted.
*** Casual Absence %: employees’ casual absence hours multiplied by the total hours available. Casual absence is defined as those
unexpected days or hours when the employee calls in with little notice to say they will not be coming into work, and usually have
nothing to substantiate them (such as a doctor’s note, jury duty summons, family member funeral).
These measures are reported on by HR every
quarter and, in conjunction with employee
satisfaction measures, are used to identify the
need for intervention. This in turn feeds into
the next quarter’s planning cycle, e.g. absence
management programmes.
Employee satisfaction and engagement
A combination of formal and informal
measures are used on a continuous basis to
assess employee satisfaction and engagement:
k quarterly online survey of a sample
of employees;
k regular round-table discussions
facilitated by HR;
k “How is it going” forum, aimed at
employees with less than 12 months service;
k corporate survey of all employees
every two years;
k exit interviews.
The online survey of a sample of employees
covers the working environment, internal
communications, training and development
opportunities, job satisfaction, recognition, etc.
It highlights the issues of concern to employees.
Trends in the feedback are evaluated and, where
appropriate, drive HR interventions.
36
Scorecard
The balanced scorecard methodology is used by
Analog Devices. The corporate scorecard drives
the Limerick manufacturing site scorecard,
which in turn drives the HR measures. The site’s
objectives and scorecard demonstrate how all
aspects of the site are integrated and progress
is reported quarterly both corporately and to all
employees (see section 3 for Analog Devices
manufacturing scorecard.)
Developments
HR information in Analog Devices is drawn
from a number of systems, including SAP HR
and a time and attendance system. There are
corporate plans to integrate the payroll systems
and introduce a recruitment tracking system.
In reporting on HR, Analog Devices has found
that HR measures do not reflect activity levels
in the function and it is hard to demonstrate
the link between specific interventions and
turnover and absenteeism rates. It is also
aware of the risk of prioritising one item
to the detriment of another. The main
HR benchmarks for the manufacturing site
are other Analog Devices manufacturing sites,
rather than other Irish organisations.
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k the level of absence accounted for
by illness;
k the total calendar absence days in the
month and in the preceding 12 months;
k the change in the absence rate and how
this compares to the annual target;
Key features
k how eircom Retail division
measures and deals with
absenteeism;
k the range of absence measures
reported monthly;
k how excessive sick absence is
tracked and reviewed.
CASE STUDY FOUR
eircom is the principal provider of fixed-line
telecommunications services in Ireland, in
terms of both capacity and geographic reach.
The company provides a range of advanced
voice, data and internet services and the
Retail division is the interface for both
residential and business customers.
Absence measures
The Retail HR monthly operations report
contains information on a range of HR
measures for the retail business. In relation to
absence management, this includes:
k the percentage of absence in the division
and in each of its business areas;
k an analysis of the factors influencing
any change in the absence rate;
k a graphical comparison of quarterly
absence trends in the current financial
year with those in the previous year.
This report is followed by a detailed analysis
of the excessive absences category, currently
defined as 15 or more days of absence.
Absences which do not reach this level are
managed operationally by line managers on
a day-to-day basis.
The reporting of excessive sick absence details
the number of employees in each of the
excessive absence categories, the number of
days lost in the last year, the average number
of days lost per employee and an estimated
annual cost for excessive sick absence. This is
further broken down for each business area,
with more detailed analysis of the business
areas with the highest excessive absence
rates so that actions can be prioritised.
Absence management
BEST PRACTICE
CASE STUDIES
This case study describes the way in which
the eircom Retail division, with
approximately 1,800 employees, measures
and deals with absenteeism. An analysis of
the cost of absenteeism to the business
confirmed the imperative for change. This
resulted in the setting of an absence target
for the business, and the measurement and
reporting of progress against this target has
focused attention on the topic.
k an estimate of the absence pay
cost (calculated by number of days
absence multiplied by an estimated
daily salary cost);
Absence reduction is an operational issue in
eircom, and the implementation of an
absence management programme led to a
clarification of the responsibilities of line
managers in reducing the level of absence.
Return to work interviews were introduced
for all absences and briefings on this and the
attendance and discipline policies were held
for all managers. These briefings highlighted
the following:
k each manager’s role in carrying out return
to work interviews for any absence;
k the need to manage employee
expectations and show that these
interviews are based on a duty of care;
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Sample excessive absence report
No. of employees with excessive sick absences
Retail Business Areas
15-24
Days
25-34
Days
35-44
Days
45-59
Days
60-79
Days
80-99
Days
100+
Days
Total
Business area 1
Business area 2
Business area 3
Business area 4
Business area 5
Other
Total Retail
k how to handle return to work interviews
and complete the form;
k the impact of absence on their business –
both on team morale as well as revenue;
k the use of the Bradford factor (see section
4) to differentiate absence problems;
k relevant polices and managing the
requirements for medical certification.
Initially, managers were fearful about the
level of employee acceptance for return to
work interviews. These fears have not been
realised as managers have built credibility for
addressing attendance issues, reflecting the
organisation’s mindset of care.
The return to work interview forms are held
centrally to track support requirements and
ensure a record of discussions. The initiation
of return to work interviews resulted in a
number of employees coming forward with
requests for support, thereby highlighting
an issue at an earlier stage, and potentially
reducing the risk of future absence.
Excessive sick absence
When dealing with excessive absence, in
addition to medical approaches, the company
attitude is a proactive one, aiming to get
people back to work. The supportive
measures include:
k use of the regionally-based welfare
officers (equivalent to an employee
assistance programme, but where support
can also be initiated by the company);
k modifications to the working environment;
k change to working patterns;
k use of a trial return to work period so that
both sides can test it out.
The monthly HR report provides an
overview of the progress made as a result of
reviewing individual cases and the proactive
absence management programme. Whilst
the overwhelming amount of resolution
options are supportive, disciplinary action
has been acknowledged as an option for
non-legitimate cases.
Each month a member of the HR team
attends the operational meeting for each
business area and reports on absence levels.
Managers can also identify difficulties
among those not part of the “excessive
absence” programme. The logging of absence
information has also improved as it is now
seen as a relevant business issue.
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Case management resolution report
Apr
07
May
07
Jun
07
Jul
07
Aug
07
Sep
07
Oct
07
Nov
07
Dec
07
Jan
08
Feb
08
Mar
08
Year to
Date
Sick leave
cases reviewed
Doctor to doctor report
Provisional pension
rate of pay
Promotion review
Other
Chief medical
officer appointments
Total
Staff on pension
rate/ half / nil pay
Pension rate of pay
Half pay
Nil pay
Total
Exits (staff under review
for illness and discipline)
Dismissal
Non-renewal of contract
Resignation
Termination/retirement
on ill health
Voluntary leaving
BEST PRACTICE
CASE STUDIES
Other
Total
Serious discipline cases
Open
Closed
Developments
The eircom HR Shared Services Centre
is the main source of recording and
initiating contact on short-term absence,
and it is expected that, over time, it will
get more involved in supporting case
management activity.
At a broader level, the HR function in eircom
Retail provides detailed monthly reports on
headcount, recruitment, discipline,
performance appraisals, etc., and has
initiated a project to identify how best to
assess human capital impact in the business.
The absence management programme
lowered the absence rate by 0.46% in a
recent two-month period, and the company
continues to measure and intervene to
achieve the absence target.
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“… companies that invest in human capital,
work to develop and retain valued
employees, and measure and hold people
accountable for that investment, have a
powerful competitive advantage31.”
31. IBM Business
Consulting Services
“The capability within –
the global human
capital study 2005”,
UK: IBM Human Capital
Management Practice.
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SECTION SEVEN
FUTURE TRENDS
A study32 of HCM in 12 organisations in the
UK drew four principal conclusions:
k Firstly, that HCM should be perceived
as a “bridging” concept, linking the
business and HR strategy.
k Secondly, human capital was seen as a
“precarious” asset, in that the employees
can leave an organisation at will, thereby
potentially undermining an organisation’s
ability to deliver.
k Thirdly, it was seen as a “paradoxical”
asset, in that the qualities that individuals
bring to their work that can potentially
benefit an organisation (e.g. innovation,
flexibility, commitment) are the most
difficult to measure.
k Fourthly, they found that human capital
measurement is context-dependent.
More importantly, however, the research
found that the various sets of measures which
organisations reported were less important
that the process of measuring and the uses for
the information gathered. This reinforces the
fact that HCM is not a simple process.
As more organisations get involved in HCM,
investor and other stakeholder interest in the
k HCM as a bridging mechanism
between business and HR;
k the growing requirement for
external reporting;
k building competitive advantage.
human capital potential to develop a
business will grow. Careful tracking and
analysis can help to confirm the effect which
selected measures have on business success.
The HR function must strike a balance
between its traditional role of developing
and supporting people management
processes, and building a knowledge base on
business management. There is a challenge
in integrating the daily qualitative
assessments that are made in the
management of people, with hard data. In
addition, there is a risk that additional HR
reporting could get lost in the information
overload currently experienced by managers.
However, real benefits are to be gained by
combining the HCM approach with the
traditional approach, by using the
measurements to support and help
develop HR strategy. Sophisticated
measures are emerging all the time and
progressive organisations are learning how
to refine and adjust their measuring to
support the process for determining strategy.
THE ESSENTIAL GUIDE TO HUMAN CAPITAL MANAGEMENT AND MEASUREMENT
FUTURE TRENDS
HR’s role needs to move from involvement in
basic operational measures to a more leading
role in the development and execution of
business strategy. HR therefore needs to
engage more in developing strategic
measures that will help identify how to drive
the business. This is due in part to the fact
that HR, in comparison to finance and
marketing, has only started developing
analytical models to assess HR processes and
practices from a strategic perspective.
Key features
32.Scarbrough, H., Elias, J.
(2002).
Evaluating human
capital. London: CIPD.
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External factors are also encouraging
organisations to measure and report on
human capital. These factors include: antidiscrimination legislation; national
governments’ requirement for high-standard
reporting; external endorsements such as
employer of choice awards; the greater
demand for transparency and accountability.
There is also a growing awareness of the
requirements of the different stakeholders in
businesses, and some organisations are using
human capital reporting as a way of
managing such requirements.
The challenge for the future is to develop a
system that assesses human capital in a
reliable way. This system will need to align
the measures used to the business strategy,
to evaluate reliably the impact of human
capital on business performance and to be
integrated into how the organisation is run.
The overall process of HCM will need to be
seen as a worthwhile investment with
tangible results, and not just another HR fad.
Measurement can provide HR with the
opportunity to develop solid evidence-based
arguments that the accountants and
business managers cannot ignore.
Conclusions
Because of the growing importance of
human capital in a services and knowledge
economy, HR now has a responsibility to play
a key role in developing and implementing
corporate strategy and the opportunity to
become a high value-added partner in
organisations.
Business strategies can make incorrect
assumptions about the ability of an
organisation to staff key positions, develop
new areas of expertise and sustain
management practices. The viability of a
business depends upon its ability to attract
and retain the talent which it requires.
Organisations that do not have the right
people will have problems implementing
new strategies and change programmes,
while those that have the right people and
implement HCM properly will benefit from
significant competitive advantage.
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SECTION EIGHT
RESOURCES
Publications
Accounting for people task force (2003). Accounting for people: report of the task force on
human capital management. Presented to the Secretary of State for Trade and Industry.
Beckler, B., Huselin, M., Ulrich, D. (2001). The HR scorecard: linking people, strategy, and performance.
Cambridge, MA: Harvard Business School Press.
IBM Business Consulting Services “The capability within – the global human capital study 2005”,
UK: IBM Human Capital Management Practice.
Matthewman, J., Matignon, F. (2004). “Human capital reporting – an internal perspective”,
London: CIPD and Mercer Human Resource Consulting.
Mercer Human Resource Consulting (2004). Human capital and business performance: measuring
the links. New York: Mercer Human Resource Consulting.
Nalbantian, H. R., Guzzo, R.A., Kieffer, D., Doherty, J. (2004). “Play to your strengths: managing your
internal labour markets for lasting competitive advantage”, New York: McGraw Hill.
Robinson, D., Perryman, S., Hayday, S. (2004). “The drivers of employee engagement”,
IES Report No. 408, April 2004.
Watson Wyatt Worldwide. (2002). Human Capital Index: human capital as a lead indicator
of shareholder value. Washington, D.C.: Watson Wyatt Worldwide.
Weatherly, L.A. (2003). “Human capital – the elusive asset”, HR Magazine, March 2003, 48 (3).
Young, S. (2005). “10 steps to successful human capital management”, Strategic HR Review,
Nov./Dec. (2005) Vol. 5 (1), p24.
Websites
CIPD in the UK: www.cipd.co.uk/
Society for Human Resource Management: www.shrm.org
THE ESSENTIAL GUIDE TO HUMAN CAPITAL MANAGEMENT AND MEASUREMENT
RESOURCES
Irish Business and Employers Confederation: www.ibec.ie
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“We believe that greater transparency on how
value is created through effective people
policies and practices will benefit
organisations and their stakeholders...The
process of identifying those aspects of HCM
that drive performance and enhance value
should itself lead to better management. ”
33
33.Accounting for people
task force (2003).
Accounting for people:
report of the task force
on human capital
management. Presented
to the Secretary of State
for Trade and Industry.
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APPENDIX
ACCOUNTING FOR PEOPLE
It is often stated in annual reports and accounts that people “are the greatest asset” of their
companies. This has given rise to the question as to why the greatest asset is not recorded in
the balance sheet. Some information on employees is included in a company’s annual report,
but this generally relates to a few facts about the number and related costs of employees.
Accounting for people task force
In January 2003, the Accounting for people task force was established by the UK Secretary of State
for Trade and Industry, Patricia Hewitt, and sought to raise the profile of human capital reporting in
company accounts. The task force explored methods of requiring publicly-traded organisations to
report on their investment in people in their annual reports and accounts. The report stressed the
value of human capital reporting to both internal (managers and employees) and external decisionmakers (investors and stakeholders). The hope was that companies would invest in HCM because it
could have explicit economic and investment implications. The recommendations of the task force
outlined a broad framework that companies should use in drawing up their reports and included
the following: that reports on HCM should have “a strategic focus” and “communicate clearly, fairly
and unambiguously, the board’s current understanding of the links between the HCM policies and
practices, its business strategy and performance.” It also recommended that reports should include
information on:
k the size and composition of the workforce;
k retention and motivation of employees;
k the skills and competencies necessary for business success, and training to achieve these;
k remuneration and fair employment practices;
k leadership and succession planning;
k information should be provided in a form that enables comparisons over time and uses
commonly accepted definitions where appropriate.
While offering guidance and making recommendations to companies, the task force did not set a
prescriptive approach for how companies should report on their human capital.
At around the same time as the task force was deliberating, it was thought that UK listed
companies would have to report on human capital in the Operating and Financial Review (OFR)
in order to provide a fuller picture to shareholders of their organisations’ performance. However,
more recently, reporting requirements were reviewed and reduced by the then Chancellor of the
Exchequer, Gordon Brown, in response to business pressure concerning the extra administration
cost of this requirement. Now companies have to produce a business review, which should cover
“information relating to employee, social and environmental matters, where it is material”,
reflecting the fact that the OFR had been originally designed to implement the EU accounts
modernisation directive. This directive requires companies to ensure that they report on
non-financial matters more fully.
APPENDIX
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EU accounts modernisation directive
The requirement for an expanded director’s report came into effect for medium-sized and large
EU companies in January 2005. The director’s report for a financial year has to contain a fair review
of the business of the company and a description of the principal risks and uncertainties facing the
company. The review must show a comprehensive analysis of the development and performance
of the company and the position of the company at the end of year, consistent with the size and
complexity of the business. As part of the review, financial and non-financial performance indicators
(including information relating to environmental and employee matters) must be included.
These key performance indicators (KPIs) are “factors by reference to which, the development,
performance or position of the company can be measured effectively”. Under the regulations
“the review must, to the extent necessary for an understanding of the development, performance
or position of the business of the company, include analysis using the key financial performance
indicators and, where appropriate, analysis using other KPIs, including information relating to
environmental matters and employee matters”.
The regulations do not say how many, or which, KPIs companies should report. In the UK,
companies are referred to the Accounting Standards Board for guidelines on how KPIs should be
reported. This body is responsible for setting financial reporting standards applicable to the UK and
Ireland. The board recommends that the definition, calculation and purpose of the KPIs selected
should be explained. It also recommends that the source of underlying data should be disclosed,
and that quantification or commentary on future targets should be provided. Where available, the
corresponding amount for the financial year before the current year should also be disclosed.
The directive is intended to increase the comparability between companies in the EU through
a common reporting framework. The disclosure of an organisation’s KPIs is intended to equip
shareholders with better information to assess the performance of the organisation. The directive
applies to all large and medium-sized companies (expressed as turnover, balance sheet total
and number of employees).
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