HR PERFORMANCE AND BENCHMARKING

When information on HR performance has been gathered, it must be compared to a standard. A standard is a model or measure against which something is compared to determine its performance. For example, it is meaningless to know that organizational turnover rate is 75% if it is not known what the turnover rates at comparable organizations might be. One approach to assessing HR effectiveness is benchmarking, which compares specific measures of performance against data on those measures in other “best practices” organizations.

Benchmarking = Comparing specific measures of performance against data on those measures in other “best practices” organizations.

HR professionals attempting to benchmark try to locate organizations that do certain activities very well and thus become the “benchmarks.” One means for obtaining benchmarking data is through telephone calls, which then may be followed up with questionnaires and site visits to benchmarking partners. The most commonly benchmarked performance measures in HR management are:

·         Total compensation as a percentage of net income before taxes

·         Percent of management positions filled internally

·         Dollar sales per employee

·         Benefits as a percentage of payroll cost

     1. PROFESSIONAL ORGANIZATIONS AS INFORMATION        SOURCES FOR BENCHMARKING

HR specialists can gain information and insights from managers and specialists in other organizations by participating in professional groups. The most prominent professional organizations are the Society for Human Resource Management (SHRM) and the International Personnel Management Association (IPMA). These organizations publish professional journals and newsletters, conduct annual meetings and conferences, and offer many other services, often through local chapters. SHRM is composed primarily of private-sector HR professionals, whereas members of IPMA primarily are HR managers from local, state, and federal government agencies.

Professional HR journals and publications of professional organizations are a useful communication link among managers, HR specialists, researchers, and other practitioners.

Surveys done by various professional organizations can also provide useful perspectives. Some organizations, such as the Bureau of National Affairs and the Conference Board, sponsor surveys on HR practices in various communities, states, and regions. The results are distributed to participating organizations.

Finally, private management consulting firms and local colleges and universities can assist in HR research. These outside researchers may be more knowledgeable and unbiased than people inside the organization. Consultants skilled in questionnaire design and data analysis can give expert advice on HR research.

2. DOING THE BENCHMARKING ANALYSIS

A useful way to analyze HR involves calculating ratios. The ratios can be calculated and compared from year to year, providing information about changes in HR operations. For example, one suggested series of ratios and measures to consider is shown in figure bellow.

Effectiveness is best determined by comparing ratio measures with benchmarked national statistics. The comparisons should be tracked internally over time. For instance, the Society for Human Resource Management (SHRM) and the Saratoga Institute have developed benchmarks based on data from over 500 companies, presented by industry and by organizational size. The Saratoga Institute in Santa Clara, California, surveys employers annually and compiles information that allows individual employers to compare HR costs against national figures.

HR Ratios and Measures for Assessment

RETURN ON INVESTMENT (ROI) AND ECONOMIC VALUE ADDED (EVA)

Return on investment (ROI) and economic value added (EVA) are two related approaches to measuring the contribution and cost of HR. Both calculations are a bit complex, so they are just highlighted here.

Return on investment (ROI) can show the value of expenditures for HR activities. It can also be used to show how long it will take for the activities to pay for themselves. The following formula can be used to calculate the ROI for a new HR activity:

(A-B)-C +D-ROI

 A-current operating costs for the time period

B-operating costs for a new or enhanced system for the time period

C-one-time cost of acquisition and implementation

D-value of gains from productivity improvements for the time period

Return on investment (ROI) = Calculation showing the value of expenditures for HR activities.

 Economic value added (EVA) is a firm’s net operating profit after the cost of capital is deducted. Cost of capital is the minimum rate of return demanded by shareholders. When a company is making more than the cost of capital, it is creating wealth for shareholders. An EVA approach requires that all policies, procedures, measures, and methods use cost of capital as a benchmark against which their return is judged. Human resource decisions can be subjected to the same analyses. Both of these methods are useful, and specific information on them is available from other sources.

Economic value added(EVA) = A firm’s net operating profit after the cost of capital is deducted

UTILITY OR COST/BENEFIT ANALYSES

In utility analysis, economic or other statistical models are built to identify the costs and benefits associated with specific HR activities. These models generally contain equations that identify the relevant factors influencing the HR activity under study. Formulas and measures should be derived from a listing of activities and the variables associated with those activities. An example that quantifies selection interviewing costs follows.

Continuing efforts to cost-justify expenditures will require HR professionals to be versed in research and assessment approaches and methods. To face the challenges outlined throughout this text, effective HR management will be essential in organizations both in the United States and globally.

Utility analysis=Analysis in which economic or other statistical models are built to identify the costs and benefits associated with specific HR activities.