Benchmarking Key Performance Indicators PDF

Benchmarking HR Practices:
Approaches, Rationales and Prescriptions for Action
Jean M. Hiltrop
Charles Despres
IMD: The International Institute for Management Development

Chemin de Bellerive, 23
Lausanne, Switzerland
1 March 1994
Hlltrop, J. & Despres, C. 1995. Benchmarking HR Practices: Approaches,

Publication information rationales and prescriptions for action. Chapter 9 in D.E. Hussey (Ed.),
Rethinking Strategic Management: Ways to Improve Competitive Performance.
Wiley (1995), pp. 197 - 220.
Contact information Charles Despres

Graduate School of Business, Marseille-Provence (Groupe Ecole Superieure de
Commerce, Marseille-Provence) / Domaine de Luminy / 13288 Marseille,
France
tel +33 4 91 82 79 00 / fax +33 4 91 82 79 01
despres@esc-marseille.fr / charles.despres@online.fr
Benchmarking HR Practices: Approaches, Rationales and Prescriptions for Action
Introduction consequently, produces little perceived

ability to affect the "bottom line". One
The 1990's have become a period of
recent study (Geanuracos, 1994)
global competition, streamlined
determined that only 30% of executives
organizations and efficient work processes
surveyed expressed satisfaction with their
aimed at delivering high quality outputs.
companies' performance management
The decade is also characterized by
systems: the majority believed that
sociopolitical fragmentation, troubled new
performance measures were, among other
market economies, toppling corporate
faults, still too financially oriented.
giants and unprecedented levels of
redundant, technologically-displaced and Recognition of these problems, and in
jobless individuals. Executives in the particular the third, has led to a flurry of
midst of this swirling confusion are writing on the need to move toward a new
anxious to maintain or improve their paradigm of performance management.
company's competitiveness, and most The call is to supplement the traditional
recognize that the effective management and small set of financial performance
of human assets is a key to success. measures with non-financial indicators of
the processes that lie behind them (Eccles
Experienced managers also know that
and Nohria, 1992). Authors such as
measuring an event draws attention to
Kaplan and Norton (1992) have even
that event, and that tying rewards to the
argued for placing non-financial measures
measurement process will both magnify
(i.e., customer satisfaction, innovativeness
the event and sharpen attention.
and the development of human resources)
Traditionally, both the object of a
on an equal footing with financial criteria
performance management system and the
when determining strategy, promotions
measurements employed have been
and the allocation of organizational
financial in nature. This is no longer the
resources.
case. Managers now realize that an
exclusive focus on such measures as The European Foundation for Quality
return on equity and cash flow ignores Management (EFQM), formed by fourteen
other key success factors in an enterprise leading Western European companies in
which may prove critical to long-term 1988, agrees on this matter. In 1991
success. Geanuracos (1994: 18) writes, EFQM established the European Quality
Award which is "...awarded [yearly] to the
At the heart of this new thinking is
most successful exponent of Total Quality
an understanding that reliance on
Management in Western Europe" (EFQM,
financial measures alone often
1993: 2), and the criteria for this award
undermines the strategies the
are pertinent. EFQM developed the model
company must pursue to survive
in Figure 1 to depict the performance
long term. Today's smart firms are
categories that are deemed critical to
searching for ways to incorporate
excellence in organizational performance.
into their regular performance
evaluation non-financial measures Insert Figure 1
such as quality, market share,
It would appear that financial measures
customer satisfaction, human
are rather sparse among the EQFM
resources, innovation and learning.
performance criteria, and so they are.
Thus, the danger in traditional methods is Figure 2 excerpts certain of these criteria
that performance management may in the first four performance categories:
become finance-driven and myopic,
Insert Figure 2
resulting in some organizational
factorsCless important ones, we would According to Eccles and Nohria (1992), the
argueCbeing optimised at the expense of justifications for this new paradigm are
others. Furthermore, when rewards are founded in three fundamental truths about
tied to financial targets the organization performance management:
often alienates employees who have little
1. The use of non-financial measures
understanding of how their everyday
encourages managers to adopt a
transactions connect to overall corporate
broad and long-term view of
performance objectives which,
organisational performance.
.
Hlltrop, J. & Despres, C. 1995. Benchmarking HR Practices: Approaches, rationales and prescriptions for action. Chapter 9 in
D.E. Hussey (Ed.), Rethinking Strategic Management: Ways to Improve Competitive Performance. Wiley (1995), pp. 197 - 220.
Page 2 of 20
2. Measures of non-financial variables United Technologies, for example,

target events that are meaningful and convened a task force with just this issue
actionable in managerial experience, in mind during the early 1990s (Dailey,
e.g. delivery times, market position, 1992). The group surveyed "internal
the development of organizational customers" of the HR function in each of
competence and employee turnover . United Technologies' six major businesses
(Pratt & Whitney, Sikorsky Aircraft,
3. Non-financial measures can serve as
Carrier, UT Automotive, Otis and Nordon
leading indicators of financial results
Systems) with the straightforward
and thus be made legitimate even to
objective of comparing perceptions of
those for whom the bottom line is
performance between HR and line
everything.
managers. The eighteen-item instrument
But the task of extending the traditional used is presented in Figure 3.
approach to performance management
Insert Figure 3
beyond common financial measures poses
significant problems. One of the most The performance categories in this
difficult facing both academics and instrument are instructive and, generally,
practising managers is the development of the task force found that HR professionals
non-financial measures that deliver perceived the quality of their services to
realistic data on a company's current be higher than did line managers. More
position, and which serve well as leading worrisome, HR managers were viewed as
indicators of future financial performance. competent but disconnected from the
company's strategic direction:
Human Resource Management
Practices HR professionals stood up for the HR
perspective, which is good, but did it quite
The human resource management (HRM)
traditionally. They were fairly competent,
function is, at root, a range of activities
but didn't measure themselves very
and approaches that allow a firm to
rigorously. They did their homework and
attract, retain and mobilise a critical mass
came to meetings prepared, but were not
of human talent. Most efforts to assess
seen as very innovative or risk taking. In
HR performance have been limited to (a)
short, the message from this survey was,
general measures of limited value, such as
'You're not really a strategic partner.' "
headcount or payroll costs, or (b)
(Dailey, 1992: 15-18)
sophisticated measures that managers are
sometimes unable or unwilling to use. The results of this effort included a two-
Moreover, experience shows that day conference where 100 HR and 20 line
managers seldom review in a systematic managers discussed the findings, set
way the intent, impact or results of an HR priorities, charted a new direction, and
action or policy. As a result, adjustments cascaded the process to corporate and
in human resource policies and practices business units.
tend to be based on intuition rather than
As United Technologies illustrates, the
methodical assessment of concrete and
competitive environment is intensifying
specifiable effects.
and the development of key HR
Like their counterparts in production, performance indicators together with their
marketing and financial management associated monitoring systems is
many HR managers are being becoming increasingly important. In fact,
(understandably) forced to justify in a given the increasing emphasis on cost
systematic way the costs of their activities, reduction, quality and excellence in many
and to compare their activities and overall organisations, it is surprising that human
performance measures with those of other resource management has escaped
organisations (Mackay and Torrington, scrutiny for so long.
1986). This need to evaluate the value-
Approaches to Measuring HR
added effects of HR practices on
Performance
organizational products and processes
began in earnest during the late 1980s How can a forward-thinking organisation
and is becoming critical in this, the age of develop an effective performance
performance management. monitoring system in the area of human
.
Page 3 of 20
resource management? According to Second, a recent approach to performance

Morgan (1992), there are three management involves the identification of
approaches. key performance indicators that are
associated with a specific HR practice,
One is to adopt a stepwise procedure,
such as recruitment and selection. From
similar to the scientific method, in which
this perspective the wisdom lies in keeping
meaningful and reliable variables are
things simple and avoiding information
identified. The process begins by
overload, and the implication is that only a
developing as many measures as possible,
few measures are needed to help line
particularly in the HR areas of greatest
managers or HR professionals gauge the
concern. Second, measures whose
current state of affairs.
potential benefit is outweighed by the
expense or difficulty of data collection are This second approach offers an appealing
eliminated. Third, systems are developed logic: if objectives have been defined in
which regularly collect the necessary advance, there should be associated
information, preferably devolved to line measures and thus no difficulty in
management, and a commitment is made collecting and interpreting the data. Most
to the time and effort needed for managers simply cannot attend to twenty
analysing the data and interpreting its measures at onceClet alone optimise
meaning in the realm of HR strategy. themCdespite company rhetoric that may
After two or three years (often the time implore them to do so. In fact, imputing
required to realise the impact of an HR significance to each of these measures
activity) it becomes possible to reduce the may only push the problem of devising a
number of measures to four or five key meaningful performance measurement
indicators by eliminating those which only system down to the level of each
confirm the results of others. For frustrated individual (Eccles and Nohria,
example, if employee turnover, job 1992). But as Morgan (1992) points out,
satisfaction, absenteeism and so forth this method also runs the risk of being too
were all perfectly correlated with one superficial. It is not enough to know that
another, only one of the measures is a specific practice or activity has worked
necessary; by examining this single to a greater or lesser extent. To be of real
measure a manager would know the benefit there must be enough information
company's performance for all the others. to understand why the specific outcome
The relationship between performance has occurred, and to incorporate the
measures is often complicated and non- lessons learned.
linear, however, making multiple measures
A third approach to HR performance
a virtual necessity.
monitoring, one which is currently the
Although this approach is laudable in its vogue, is through the process now known
attempt to capture all measurable aspects as Benchmarking. Benchmarking denotes
of HR performance, there is the risk that a comparison with selected performance
the task of collecting data, analysing them indicators from different organisations,
and interpreting the results will be costly, typically in the same industry, or with
time-consuming and result in no clear comparable organisations that are
guidelines for action. There is also the considered to be "best in class". The most
danger of what Eccles and Nohria (1992: obvious points of comparison are with
160) called creeping numeration, which close competitors, but some organizations
refers to "the temptation to turn every have gone beyond their industry group to
measure deemed relevant into a crucial identify best practice wherever it can be
part of an official measurement system". found. Xerox, for example, where
Indeed, once the decision is made to benchmarking has been credited as one of
expand the class of measures from a the main factors in its 1980s revival, has
single (financial) category to three or four, benchmarked railways, insurance
and four or five measures are developed companies and facilities that generate
for each category, a company can quickly electric power.
have twenty or more 'key' performance
Successful benchmarking requires careful
indicators.
selection and manipulation of comparison
measures. A recent study (Geanuracos,
.
Page 4 of 20
1994) found that while 70% of the 4. Which attitudes and behaviours are
executives surveyed reported using currently displayed by these
benchmarking to evaluate performance, employees?
nearly 60% were benchmarking against
5. Which attitudes and behaviours are
their own company's historical record as
responsible for the trouble areas
opposed to competitors or industry
identified above?
leaders. Clearly, the greatest gain to be
had from a benchmarking exercise is 6. What HR policies and practices are
provided through comparisons with other contributing to the current attitudes
firms and different ways of thinking. and behaviours?
Indeed, as a programmatic effort
7. Which HR policies and practices need
benchmarking serves a number of
to be changed as a result of the above
purposes (Glanz and Daily, 1992). First, it
in order to build on strengths or
enables a company to calibrate how it is
correct weaknesses in our approach to
delivering HR practices. By examining the
HR management?
way other organisations accomplish tasks
and responsibilities, a company can audit 8. What are the performance measures
itself and identify areas where practices to determine the effect of our actions?
are within or outside a given norm.
What are the major cost components of
Second, benchmarking enables a company
the change program? Currently, the most
to learn from others' successes and
common form of HR benchmarking
mistakes. Building a continuous
involves salary surveys. It is the rare HR
improvement mentality has become an
manager who steps beyond this, for two
important goal for many organisations in
principal reasons: (1) the difficulty of
the last decade; benchmarking can open
finding standard and acceptable
minds and create a climate in which active
performance indicators similar to those
learning is encouraged.
used in financial management, such as
Third, benchmarking can be used as a tool return on capital and cash flow ratios, and
for creating the motivation to change. By (2) the reluctance of companies to divulge
learning what other companies are doing, sensitive information about their employee
line managers and HR professionals can retention, employment costs, and so on.
build a stronger case for allocating There are other reasons for the lack of HR
resources to HRM activities in ways similar benchmarking in contemporary
to those of successful companies. Finally, organizations, the most prevalent perhaps
benchmarking can be used to help set being the mythology that has developed
direction and priorities for an HR manager. around personnel work. As Jac Fitz-Enz
Rather than fall into the trap of trying to (1984: 7) observes:
do everything well and please everyone
The fundamental belief is that personnel is
with limited resources (which typically
something of a complex and mysterious
results in no one being satisfied), HR
art. Allegedly, the true and full value of
managers can use benchmarking to focus
the work can only be judged by those who
on critical activities (Ulrich, Brockbank and
perform it. Even then, the appraisal is
Yeung, 1989). Questions which may
bounded by subjective criteria. Many of
indicate a need for benchmarking HR
the faithful believe that, like virtue,
practices in an organization include the
personnel work is its own reward. Terms
following:
used to describe results are satisfied,
1. What is most critical to business quick, better, interesting, good, important,
success: Cost reduction? Innovation? creative, and other similar non-specific
Quality improvement? terms .
2. What areas are causing the most There are also people who believe that
trouble? measuring the effectiveness of human
resource management is simply
3. Which employees contribute most to
inappropriate. In their eyes, HRM is
the critical success factors?
devoted to stimulating and supporting
human happiness and development, and
.
Page 5 of 20
they see no reason to evaluate outcomes EFFECTIVENESS CRITERIA FOR HR

in other than humanistic terms. ACTIVITIES
Benchmarking has its limitations. When As noted earlier, developing the specific
used solely to emulate rather than criteria which define effectiveness for HR
improve performance, advantages may be activities is one of the most difficult
short-lived, time consuming and challenges facing line managers and HR
expensive. Moreover, the most valuable professionals alike. In this regard there
information is generally not derived from are two schools of thought. The first
the actual data, but rather the qualitative school advocates monitoring the costs and
information on how and why the data benefits of human resource
outcomes were achieved. Nevertheless, a activitiesCthose associated with the
well established benchmarking process attraction, selection, retention,
can help managers set goals and targets development, and utilisation of people in
designed to make the company the best in organisationsCin economic terms. The
its competitive field, and to initiate underlying assumption is that the ultimate
focused programs that move the company single measure of HR effectiveness is
from its current position. Many firms financial ...the "bottom line". To illustrate
strive for performance improvements by this point, consider a comment by Cascio
benchmarking standards of excellence (1991) in his book entitled "Costing
from other firms in such areas as Human Resources":
production, research and development,
For some time now, I have had the
and marketing. HR can be employed to
uneasy feeling that a lot of what
similar competitive advantage, and it is
we do in human resource
sensible to unearth those HR indicators
management field is largely
that contribute relatively more to overall
misunderstood and underestimated
performance than others.
by the organisations we serve. In
Janssen Pharmaceutica, a wholly owned part, we in the field are responsible
subsidiary of Johnson & Johnson, for this state of affairs because
undertook just such a benchmarking much of what we do is evaluated
project in late 1989 (Liebfried and McNair, only in statistical and behavioural
1992) as a response to competitive terms. Like it or not, the language
pressures rocking the pharmaceutical of business is dollars, not
industry. Janssen examined in detail the correlation coefficients.
internal components of its administrative
Although methods for estimating the costs
overhead and, by comparing benchmarks
and benefits of HR activities have been
with a select group of peer companies,
available for many years (e.g., Brogden,
addressed what was considered a
1946; Cronbach and Gleser, 1965), they
"burgeoning problem that is difficult to
are only beginning to appeared through
analyze and control" (Liebfried and
the recent writing of academics such as
McNair, 1992: 143). To begin, the
Flamholtz (1985), Cascio (1991) and Fitz-
company determined that administrative
Enz (1990), and in the form of formulas
(white-collar) productivity could be defined
and accounting procedures for measuring
through four key elements (Figure 4).
the economic worth of the organisation's
Insert Figure 4 human assets. Figure 6 gives an
illustrative example of conducting simple
Management then compared Janssen's
exit interviews with terminating
performance with that of other companies
employees.
participating in the project. Janssen's
managers soon determined that achieving Insert Figure 6
white-collar productivity improvements
This economic approach to measuring HR
would be impossible unless appropriate
performance has the advantage of being
performance measures were developed
simple and understandable, but it fails to
and installed. Figure 5 displays four such
provide guidance when implementing
measures that Janssen now uses to
effective HR management programs.
monitor its performance in this area.
Many HR managers (and their
Insert Figure 5 organisations) understandably feel a need
.
Page 6 of 20
for more detailed and comprehensive number of completed HR activity cycles),

means of assessing their performance, timeliness (the degree to which an HR
and how their performance compares with practice is completed, or a result
other companies over time. produced, at the earliest time desirable),
cost effectiveness (in the sense of
The second school, espoused by
optimizing the gain or minimizing the loss
academics such as Ulrich (1989) and
from each unit or instance of use of
Kravetz (1988), is to measure the set of
human and financial resources), need for
HR practices delivered within an
supervision (the degree to which a person
organisation, and measure the
or unit can carry out an HR practice
contribution of each practice to the overall
without requesting assistance, or requiring
competitive advantage of the organisation.
intervention to prevent an adverse
A great deal of recent work has appeared
outcome), and positive impact (the degree
which attempts to capture in a single
to which an HR practice promotes feelings
conceptual model the variety of HR
of self-esteem, goodwill, commitment,
practices deployed by organisations to
satisfaction, and co-operation among co-
augment innovation, improve quality, and
workers and subordinates). Based on this
be the lowest-cost producer of goods and
model, the most effective managers or HR
services. In 1984, Schuler introduced
professionals are those providing the
such a model which identified six
highest possible quantity and quality of HR
categories of HR practices: planning,
practices at the lowest cost and in the
staffing, training and development,
most timely fashion, with a minimum of
appraisal, compensation and union-
supervision and with a maximum of
management relations. He suggests that
positive impact on co-workers,
competitive advantage accrues to
organisational units, and the
companies that identify and develop
client/customer population.
specific activities in each of these six areas
(Schuler, 1984), and that specific activities Ideally, the relative weights to be applied
(such as internal staffing and flexible to these six criteria are directly linked to
compensation) become important and organisational objectives such as
advantageous internal competencies. In increased sales, improved productivity
addition, selection of HR practices should and, of course, return on investment.
support overall corporate strategy and Strong linkages in this regard are
lead to employee behaviours that are extremely rare, however. As Ulrich (1989)
felicitous of it. points out, most organisations have
difficulty even measuring overall
After a decade of conceptual and empirical
performance in a reliable manner, and few
research by Tsui (1984), Kravetz (1988)
systematically relate individual
and others, it is now possible to define key
performance to unit or corporate
performance indicators in most of the six
performance. Moreover, organisations
categories identified by Schuler (Figure 7).
rarely get down to specifics on all six
Insert Figure 7 criteria and seldom relate them effectively
to the objectives of the firm. Nonetheless,
These indicators can help managers
it is widely understood that the linkage is a
evaluate how their HR practices relate to
necessary one if line managers are to be
both the operational and strategic level of
convinced that HR activities are integral to
the enterprise, and lay the foundation for
organisational objectives, and that they
comparing (longitudinally, or sectorially)
create and sustain a competitive edge.
the effectiveness of HR practices and
policies between companies, divisions or In addition to HR practices, Ulrich et al.
business units. Another conceptualisation (1989) suggest that benchmarks may also
evaluates the effectiveness of HR practices be developed for the HR competencies of
according to six performance criteria individual managers in the organisation.
(Bernardin and Kane, 1993): quality of Questions that may indicate a need to
delivery (in terms of conforming to some benchmark HR functions include the
practice ideal, or fulfilling the intended following:
purpose), quantity (expressed in terms
1. Who are the major customers of the
such as dollar value, number of units, or
HR function: Line managers? Other
.
Page 7 of 20
staff or support functions? Employee standards, and monitors performance over

organizations? External clients? time.
2. What services are provided to these Insert Figure 8
customers? Is there a reason for their
In a similar vein, Storey and Sissons
existence?
(1993) recently proposed a set of activities
3. What are the major cost components for benchmarking the organization's HR
of these services? department. Their intention is to outline a
possible approach to auditing the role and
4. What factors are responsible for
performance of the function. According to
customer satisfaction?
these authors, a number of steps are
5. What problems have been identified in involved:
the operation?
Step 1: Decide the composition of the
6. What performance measurements are audit team.
being used to determine the
There has to be a representative from the
effectiveness and efficiency of the HR
HR function and from among senior line
function?
managers if the exercise is to have any
7. What are the performance gaps and credibility. But it is not essential (or even
what action is needed to close these desirable) that the team is led by the head
gaps? of the senior HR manager.
Under the umbrella of strategic human Step 2: Identify the function's main
resource management, three sets of HR customers.
competencies may be identified:
The key decision is to clarify who makes
knowledge of the business, quality of
the final decision to buy the services
service, and the management of change.
provided by the function. In a
Knowledge of the business refers to the
decentralized multi-divisional organization,
extent to which an HR professional (or a
this is likely to be the general managers of
line manager with HR responsibilities)
the strategic business units.
understands the financial, strategic and
technological capabilities of the Step 3: Review the HR function's mission
organisation. Quality of service refers to statement.
the extent to which the HR or line
This statement describes the reason for
manager provides high quality HR policies
the HR function's existence, its principal
and services (such as training and
activities and its most important values.
development) to the other members of the
For instance: "To be the HR/Personnel
organisation. Management of change
consultant of choice for the firm's line
refers to the extent to which an HR
managers by achieving superior levels of
professional or line manager is able to
customer satisfaction at lowest costs and
increase the organisation's capability for
highest speed in the area of employee
change through creating meaning,
attraction, retention and motivation."
problem solving, relationship influence,
innovation, transformation, and role Step 4: Review the function's role in
influence. formulating and implementing the
organization's strategy.
According to Ulrich (1989), measures may
be established for specific behaviours in The list of questions in Figure 3 above are
each of these three domains of HR relevant here. This step will also be
competencies. However, these measures critical to establishing the link between HR
and behaviours have not been as well policy and practices, on the one hand, and
developed and researched as the the organization's overall business
performance indicators for HR practices strategy, on the other.
discussed perviously. Figure 8 outlines a
Step 5: Review the HR function's role in
felicitous approach discussed by Burn and
developing relevant HR policies and
Thompson (1993), in which the
practices.
organization defines an indigenous set of
indicators, installs measurement
.
Page 8 of 20
For example, what is the firm's policy with database of HR practices that gives an
regard to recruitment? Is there a overview of developments within the
preference for internal or external world's largest organizations today.
recruitment? Is this policy sustainable and
Step 8: Review the outcomes of the
desirable in the new competitive
analysis.
environment? Does it support the need
for high quality human talent? Is this Look for performance gaps and discuss
policy consistent with other HR policies the policy implications with the main
and practices, such as rewards, training customers. Gain their commitment for
and development, performance implementing the necessary
management, succession and promotion. improvements. This implies that those
Do these policies and practices focus on ultimately responsible for implementing
improving individual and organizational the changes, (1) acknowledge the need
performance? for improving HR policies and practices,
(2) understand the differences between
Step 6: Review the delivery of HR policies
current HR practices and what is desired,
and practices.
and (3) accept and retain full ownership of
Questions need to be asked here in the practical steps toward implementation.
relation to all the HR activities currently
Step 9: Implement the agreed
being undertaken by HR or personnel staff
improvements and measure the progress
which could perhaps be done as well or
against pre-set targets.
better by line managers, by computers, or
by external agencies and consultants. For The metrics selected should be the agreed
example, one recent survey identified an upon true indicators of the HR function's
increasing number of European performance and compare the results with
organizations that have decided to industry averages, competitors, 'best
outsource some of their traditional HR practice' firms, and/or with set targets or
services to completely independent previous performance ratings. As shown
businesses. An alternative option is to in Figure 8, it is usually feasible to produce
establish an 'internal consultancy or relevant ratios of HR performance data.
business unit' in which the HR function The most likely ratios should cover unit
sells its services both inside and outside costs and appropriate customer
the organization (Adams, 1991). The satisfaction measures. If measurements
advantage of this approach is that line are not clear or difficult to obtain, two
managers can go elsewhere if they are not alternatives are possible (Camp, 1989).
happy with the service they receive from One, the process of determining
the HR function within the organization. appropriate HR performance measures
becomes a key step in the benchmarking
Step 7: Make external comparisons to
process itself. Or, there are approximate
establish 'best' practice.As Humble (1988)
measures available from other functional
points out, it does not require an
areas that give an indication of how the
'espionage' network to get the data.
HR function is performing. For example,
Articles in such magazines and journals as
lead-times may be used as a proxy for the
Personnel Management, Personnel Today,
effectiveness of a new delivery-oriented
and Human Resource Management carry a
incentive scheme.
great deal of useful information about
what other companies in Europe, Asia and LINKING KEY HR PERFORMANCE
the United States are doing in order to INDICATORS WITH ORGANISATIONAL
deal with the contemporary HR issues. In EFFECTIVENESS
addition, a considerable amount of
Obviously, many managers and investors
research conferences and workshops are
are interested in knowing if a certain
currently being organized by business
activity or practice can serve as a leading
schools and consultancy agencies that
indicator or determinant of financial
allows progressive HR managers to inform
performance. When such an indicator
themselves and compare their own
goes up or down, an organisation can take
practices with those of other
actions to minimise or maximise the
organizations. At IMD, we are also
impact by changing the relevant practice.
building and constantly updating a unique
.
Page 9 of 20
Consequently, over the past few years, a significantly higher sales growth, profit
number of studies have tried to link margins, equity growth and earnings per
specific HR practices and organisational share growth than the less progressive
effectiveness in terms of financial ones. For instance, the annualized sales
performance, productivity, product quality, growth (five year trend) of high HRP
innovation, and so on. One such study companies was 17.5 percent, compared to
was conducted by Kravetz (1988). In a 10.7 percent for low HRP companies; and
book entitled The Human Resources the annualized profit growth of high HRP
Revolution Kravetz looked for the firms was 10.8 percent, compared to only
correlation between financial results and 2.6 percent for those low in HRP.
what he termed human resources
In a second study on the same subject
progressiveness (HRP) in 150 US
Frederick Schuster (1986) examined the
companies. HRP was defined as the
relationship between human resource
extent to which an organisation is:
management performance as measured by
...operating in concert with the the Human Resources Index (HRI) and
current and future workplace, organisational effectiveness. His intent
rather than experimenting with was to lay the foundation for the
radical programs or spending development of a reliable and practical
exorbitant amounts of money on instrument, which could be used as a
human resources programs. A benchmarking tool by companies
company high in HRP understands representing a wide range of industries
the critical importance of people to and sizes. The HRI survey contained 64
the bottom line and operates with measures of human resource practices, six
this in mind. (1988: 36) of which were the focus of this research:
A firm's score on the HRP index was 1. The assessment centre approach to
measured through a fifty-item personnel selection
questionnaire pertaining to HR practices
2. Flexible or cafeteria approach in
and policies in the following nine areas:
reward systems
1. Degree of openness of communication
3. Productivity bonus plans
2. Degree of emphasis on people in the
4. Goal-oriented performance appraisal
company culture
5. Alternative work schedules
3. Degree to which management is
participative 6. Organisational development
4. Emphasis on creativity and excellence These six practices were chosen because
in the workplace they were though to be related to the
general management philosophy which
5. Extensiveness of career development
Peters and Waterman (1982) termed
and training
attention to employee needs, and could
6. Effectiveness in maximising employee therefore serve as an operational
job satisfaction definition of this philosophy. Schuster's
hypothesis and findings were consistent
7. Degree of recognition and reward for
with Kravetz in that he expected and
good performance
found a small but meaningful relationship
8. Usage of flexitime and part-time between the six HR practices and financial
employment performance (as measured by return on
equity and total return to investors). In
9. Degree of decentralisation and
particular, the total utility of the six HR
flattened management hierarchy.
practices for the average Fortune 1000
The results showed that human resource company was estimated at $7.5 million per
progressiveness in these nine areas was year.
significantly correlated with financial
These two studies represent a small
success over a five year period. In
sample of the work currently being done
particular, Kravetz concluded that highly
in this field. Their formulations and
progressive companies enjoyed
findings have helped to explore the link
.
Page 10 of 20
between HR practices and overall Change programs require clarity of

organisational effectiveness. Of course, it purpose and a good measure of initial
can be argued that better financial momentum in order to achieve success. It
performance leads to effective human is therefore advantageous to focus initial
resource practices (rather than the efforts on those HR practices which can be
reverse). While this causal effect is affected by individuals who will be subject
possible, at this point the data indicate to the measurement system. The least
that the two types of performance go desirable course of action is to install
hand in hand. As Kravetz (1988: 43) monitoring activities that cannot be
argues, influenced by the persons involved. By
this token, corporate training and
It is difficult to envision why a
development costs should not be allocated
company would change its
to division managers if these individuals
management style, have more
have no control over training and
employees work out of their
development activities in their units.
homes, or change the company
culture to one strongly oriented The performance management systems'
toward people. Many companies, measurements should be robust. By this
if they are enjoying great financial we mean that no single measure perfectly
success, are not likely to change, captures all aspects of HR performance,
figuring that you shouldn't fix even allowing for time lags (Eccles and
things that don't need fixing. They Nohria, 1992), and an array of different
retain their same successful qualitative and quantitative performance
practices until these need to be measures increases the dimensions along
abandoned to address a static or which change can be guided. This
declining market position. Success principle of triangulationCthe use of
is not likely to breed this type of multiple measures to bring a target issue
change. or event under controlCalso permits
managers to gain a broader sense of the
PRESCRIPTIONS FOR ACTION
HR practices that contribute to company
This final section of the chapter provides goals, since the likelihood is greater that
guidelines for installing an effective HR one measure among the set will relate
measurement system and is an attempt to effectively to their issues and concerns.
offer practical guidance rather than facile
HR managers can avoid the measurement
prescriptions, since cookbook approaches
trap by monitoring key performance
to the matter are inappropriate and
indicators, and only key performance
ineffective. Based on the lessons we and
indicators. The measurement trap springs
others have learned, HR managers should
shut when HR managers are busily
consider carefully the following factors
occupied monitoring sundry measures
when establishing a system for
which have little impact in the
determining the effectiveness of their
organization. As one counter to this we
activities or departments.
find it helpful to encourage an open,
First, it is important to recognise that the questioning, even dissenting work culture
underlying purpose of a performance which challenges the last best idea set
management system is change and forth. Ideally, line and HR managers will
organizational change of any type requires feel free to challenge traditional measures
the active support, preferably (e.g., employee turnover and direct labour
involvement, of topmost management. At costs) since in today's rapidly changing
a minimum, HR managers should have (a) world, the indicators in use may be
a clear understanding of what the irrelevant and focusing attention on the
company's principal strategic objectives wrong activities (Hora and Schiller, 1991).
are, (b) which proposed or actual HR
It should go without saying the line
practices and policies contribute to their
managers need to be actively involved
achievement, and in what ways, and (c)
when developing and monitoring an HR
the measures that are or will be linked to
performance measurement system; in
these HR policies or practices.
practice, however, it becomes convenient
and easy for HR managers to stay within
.
Page 11 of 20
their function and work with managers of unless some existing ones are eliminated
their own stripe. One of the great pitfalls creeping numeration will be the result.
of HR performance measurement systems
is opened when HR managers begin argue
that their actions are undiscussable so
long as their performance targets are met.
For HR measures to have real impact in
the organization, dialogue about the
meaning and relevance of programs,
activities and measures must remain open.
Some organizations have enforced this
dialogue through the use of a cross-
functional team which monitors the
system and ensures that relevant
measures are being used and understood.
Communication is the sine qua non of
effective change efforts. In this
connection HR managers must be
prepared to regularly communicate, with a
proactive attitude, the purpose and
specifics of the performance management
system to all involved employees, and be
prepared to clarify repeatedly the
measures in use. The assumption that
managers and employees understand or
accept the new system is dangerous and
constitutes a serious design flaw.
Analyze the data regularly, at a rate
compatible with their impact on decision-
making, and draw appropriate conclusions
by comparing the key performance
indicators over time. These comparisons
may be made between business units,
and/or against predetermined targets.
Current benchmarking efforts assess the
HR performance of business units against
comparable units within the same
industry, or against units and
organisations that are considered best in
class.
Finally, be ready to change the
measurement system if a particular
indicator fails to achieve business goals, or
if the costs of collecting and analysing the
data exceed the potential benefits of their
use. As Eccles and Nohria (1992) point
out, the discipline needed to discontinue
irrelevant performance measures should
not be underestimated. The benefit of
keeping the same measures for a period
of time lies in the historical comparability
thus afforded, and perhaps in longitudinal
evaluation of the impact anticipated by the
HR practice. The risk is that attractive
new measures can always be found, and
.
Page 12 of 20
Figure 1
Figure 2
EFQM Performance Criteria
Leadership ...how managers take positive steps to:

1. communicate with staff
2. give and receive training
3. assess the awareness of Total Quality
4. establish and participate in joint improvement teams with customers and suppliers
People Management ...how the organization releases the full potential of its people by:
1. integrating corporate and HR strategy
2. assessing the match between peoples' skills and organizational needs
3. establishing and implementing training programs
4. achieving effective top-down and bottom-up communication
Policy and Strategy ...how the organizations' policies:

1. reflect the fundamentals of Total Quality
2. test, improve and align business plans with desired direction
3. are communicated and instilled in the organization
4. account for feedback from internal and external feedback
Resources ...how resources are deployed in support of strategy, including:

1. financial
2. informational
3. technological
4. material
.
Page 13 of 20
Figure 3
United Technologies
Human Resources Practices Survey
Always: 1 Usually: 2 Sometimes: 3 Rarely: 4
To what extent does the Human Resource organization ...

___ 1. Understand business direction and what management is trying to accomplish?
___ 2. Stand up for the human resource perspective on business issues?
___ 3. Staff the HR organization with competent professionals?
___ 4. Participate actively in the business planning process?
___ 5. Take appropriate risks?
___ 6. Respond in a timely manner?
___ 7. Develop human resource objectives in the context of business priorities?
___ 8. Do its homework?
___ 9. Provide competent advice and support?
___ 10. Explore alternative solutions to problems?
___ 11. Find ways to balance its functional interests with other needs of the business?
___ 12. React quickly to changes in the needs of the business?
___ 13. Anticipate business problems?
___ 14. Help more than hinder the organization in attaining its business objectives?
___ 15. Have people seek its advice?
___ 16. Set high standards for evaluating its own effectiveness?
___ 17. Bring a competitive global perspective to the HR function?
___ 18. Design solutions to business problems that meet the needs of the business?
.
Page 14 of 20
Figure 4
Elements of White-Collar Productivity
(Janssen Pharmaceutica)
Effectiveness
1. A strong, clear connection between corporate strategy and work activities
Organization
1. Overlap / duplication
2. Fragmentation
3. Inappropriate groupings or functions or alignments of functions
4. Inefficient reporting relationships
5. Excessive management layers
6. Clarity of mission
7. Appropriateness of job design
Motivation
1. Turnover
2. Performance feedback
3. Contribution visibility and recognition
4. Group identity
5. Teamwork
6. Management style
7. Career planning and development
8. Training
9. Communication
Process
1. Value-added activities, operations, and steps
2. Scheduling and backlog control
3. Degree of automation
4. Control and transfer points
.
Page 15 of 20
Figure 5
White-Collar Performance Measures
(Janssen Pharmaceutica)
Productivity
1. Units of output / Number of employees
2. Units of output / Cost to produce
3. Value-added work operations / Non-value-added operations
4. Costs to manage / Number of subordinates
Throughput Time
1. Time required to process work or complete work products
Quality
1. Number of errors / Unit of time
2. Error-Free work product transactions / Work product transactions with errors
Others
1. Deadline accomplishments percentage
2. Customer satisfaction index
3. Degree of employee commitment / involvement (organizational climate)
Figure 6
Measuring the Costs of Exit Interviews
Total cost of exit interviews during a given

period = costs of interviewer and interviewee time.
1 Cost of interviewer time = (time required prior to interview + time required for interview)
X (interviewer's pay rate per period) X (number of turnovers per period)
2 Cost of terminating employee's time = (time required for the interview) X (weighted
average pay rate for terminating employees) X (number of turnovers per period)
.
Page 16 of 20
Figure 7
Key HR Performance Indicators
Recruitment and Selection

1. Number of long-term vacancies (over 6 months) / total number of jobs
2. Average length of time to fill vacancies
3. Proportion of vacancies filled internally through promotion, demotion or lateral
movements of personnel
4. Average time spent in a job or function per employee
Training and Development

1. Number of trainee days / number of employees
2. Total training budget / total employment expenditure
Compensation and Rewards

1. Total compensation cost / total revenues
2. Basic salary / total remuneration
3. Number of salary grades / employees
Employee Relations
1. Number of resignations / Total headcount per year
2. Average length of service per employee
3. Rate of absenteeism
4. Average length of absence per employee
5. Number of supervisors and managers per employee
.
Page 17 of 20
Figure 8
A Three-Tier Approach for
Assessing Performance in the HR Function
Phase 1: Gather Fundamental Data

1. Specify current activities in the HR department
2. Identify the structure of the HR department
3. Determine the costs of providing HR services in seven key functional areas:
a. staffing
b. development
c. employee relations
d. organizational evaluation
e. reward systems
f. administration
g. health and safety
4. Determine HR contribution to the "bottom line"
Phase II: Assess HR Service Delivery

1. Determine internal clients' needs for services in each of the key functional areas
2. Determine internal clients' reactions to services delivered in each of the seven
functional areas
Phase III: Establish Standards

1. Set acceptable standards in each of the seven functional areas
2. Audit HR performance in each functional area over time, and make necessary
adjustments
.
Page 18 of 20
References
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Summer, 40-54.
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Development and Evaluation (2nd ed.), Boston: PWS-Kent.
Brogden, H. (1949) "When Testing Pays Off." Personnel Psychology, 2, 171-183.
Cascio, W. (1991) Costing Human Resources, third edition, Boston: PWS-Kent Publishing Company.
Burn, D. and L. Thompson. (1993) "When Personnel Calls in the Auditors." Personnel Management,
January 1993, 21-23.
Camp, R.. (1989) Benchmarking: The Search for Industry Best Practices That Lead To Superior
Performance, Milwaukee: ASQC Quality Press.
Cronbach, L. and G. Gleser. (1965) Psychological Tests and Personnel Decisions (2nd ed.), Urbana,
IL: University of Illinois Press.
Dailey, L. (1992) "United Technologies Corporation." Human Resource Management, Spring &
Summer, 15-17.
Eccles, R. and N. Nohria. (1992) Beyond the Hype: Rediscovering the Essence of Management,
Cambridge: Harvard Business School Press.
Eccles, R. (1991) "The Performance Measurement Manifesto", Harvard Business Review, January-
February, 131-137.
European Foundation for Quality Management. (1993) Total Quality Management: The European
Model for Self-Appraisal 1993. Eindhoven, The Netherlands: The European Foundation for Quality
Management.
Fitz-Enz, J. (1984) How to Measure Human Resource Management, New York: McGraw Hill.
Fitz-Enz, J. (1990) Human Value Management: The Value-Adding Human Resource Management
Strategy for the 1990s, Oxford: Jossey - Bass.
Flamholtz, E. (1985) Human Resource Accounting, San Francisco: Jossey-Bass.
Glanz, E. and L. Daily. (1992) "Benchmarking", Human Resource Management, Spring, 31, 9-20.
Geanuracos, J. (1994) "The Global Performance Game." Crossborder. Winter, 18-21.
Hora, M., and M. Schiller. (1991) "Performance Measurement". In Rock, M. and Berger, L., (Ed.), The
Compensation Handbook, New York: MacGraw-Hill.
Humble, J. (1988) "How to improve the personnel service", Personnel Management, February, 30-3.
Kaplan, R. and D. Norton. (1992) "The Balanced Scorecard-Measures that Drive Performance",
Harvard Business Review, 70, January-February, 71-79.
Kravetz, D. (1988) The Human Resources Revolution: Implementing Progressive Management
Practices for Bottom-Line Success, San Francisco: Jossey-Bass.
Liebfried, K. and C. McNair. (1992) Benchmarking: A Tool for Continuous Improvement. New York:
Harper Business.
Mackay, L., and D. Torrington. (1986) The Changing Nature of Personnel Management, London: IPM.
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for Human Resource Management, London: Kegan Page.
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Schuler, R. (1984) "Gaining Competitive Advantage through Human Resource Management Practices".
Human Resource Management, Fall, 23 (3), 241-255.
Schuster, F. (1986) The Schuster Report: The Proven Connection Between People and Profits. New
York: Wiley.
Storey, J. and Sissons, K. (1993) Managing Human Resources and Industrial Relations, Buckingham:
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Benchmarking HR Practices:

Approaches, Rationales and Prescriptions for Action

IMD: The International Institute for Management Development

Hlltrop, J. & Despres, C. 1995. Benchmarking HR Practices: Approaches,

Contact information Charles Despres

Introduction consequently, produces little perceived

2. Measures of non-financial variables United Technologies, for example,

resource management? According to Second, a recent approach to performance

they see no reason to evaluate outcomes EFFECTIVENESS CRITERIA FOR HR

for more detailed and comprehensive number of completed HR activity cycles),

staff or support functions? Employee standards, and monitors performance over

between HR practices and overall Change programs require clarity of

Leadership ...how managers take positive steps to:

Policy and Strategy ...how the organizations' policies:

Resources ...how resources are deployed in support of strategy, including:

Always: 1 Usually: 2 Sometimes: 3 Rarely: 4

To what extent does the Human Resource organization ...

Total cost of exit interviews during a given

Recruitment and Selection

Training and Development

Compensation and Rewards

Phase 1: Gather Fundamental Data

4. Determine HR contribution to the "bottom line"

Phase II: Assess HR Service Delivery

Phase III: Establish Standards

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