Metrics: Helping HR Communicate with Management Effectively
In 2017, THINX was at the top of its game. The new brand of women’s underwear had started in 2013 via Kickstarter as “a more thoughtful pair of underwear.” It garnered $65,000 via Kickstarter and had grown to a $39.6 million company in 2017.
However, all that changed when an employee filed a complaint against THINX CEO, and self-proclaimed feminist “She-E-O,” Miki Agrawal. The employee alleged that Agrawal had created an environment of fear, ageism and sexual abuse. She alleged that Agrawal had touched employees inappropriately, exposed herself in the workplace, and even referred to all employees under the age of 20 as “children.” Agrawal abruptly resigned as CEO.
After two years of legal battles, the case against Agrawal was eventually dropped. In a blog post written at the time of her resignation, Agrawal admitted that she “was maniacally focused on top and bottom line growth and on our mission to break the taboo … Like any Co-Founder/CEO, all I did was the best I could under these crazy circumstances. Yes, I have made a TON of mistakes along the way but I can proudly say that our company has grown from an idea in my head to an innovation that is worn by millions of satisfied women globally in a few short years.” She does admit to a mistake though: “I didn’t put HR practices in place because I was on the road speaking, doing press, brand partnerships, editing all of the creative and shouting from the rooftops about THINX so we can keep going.” The company didn’t have HR managers, HR training or HR policies.
Why Companies Don’t Invest in HR
How did this happen? Agrawal was obviously concerned about the voice and representation of minorities. Sadly, THINX is not alone, companies like Uber and Zenefits have had similar issues, even with founders who had backgrounds in HR and cultural representation.
As noted by Agrawal, the problem is that many small- and medium-sized businesses forego installing an HR department or postpone HR strategy because they are so focused on growth. Companies are understaffed when it comes to HR professionals too. The average HR employee to 100 employee ratio is 2.57. This number shrinks in larger businesses. In fact, 13% of small- and medium-sized businesses are not using any type of HR measurement to measure the impact of HR initiatives in their organization and 15% say they use just their “gut or intuition” to make HR decisions (source). The Society for Human Resource Management recommends that new companies hire an HR professional when there are 15 employees or more since interpersonal issues begin to get complex enough at that level.
The best way to approach Human Resource management is to view it as an investment in the future of the company. It’s odd that managers would use every statistic and metric they could find in an investment of a physical asset such as a building or machine, but don’t spend an equal amount of time on the larger investment of their employees. It gives you pause that some of the largest companies like Facebook, Google, Apple and Amazon only have an average employee tenure of 1-2 years. (There might be some debate that the nature of their business is different, to be fair.) These employees are not being treated as valuable as a machine.
Measuring Human Resources
Where does that disconnect of human investment measurement come from? Most businesses spend 40-80% of gross revenues on employee salaries and benefits so why not measure that investment? In fact, 67% of employees say that it’s very important to measure the HR initiatives while only 14% say that it’s not important at all (source).
“When we talk about talent design,” Wouter Jean-Paul Vermeulen, a HR talent search and development consultant wrote, “we’re constantly met with the same lament: ‘We don’t know how to show the value of this to our CFO.’ ‘Our CEO needs to see financial results.’ What’s happening here is that HR has been trained to speak the language of human capital. The decision-makers at the company are speaking the language of financial capital. What our human resources partners need is a translator, because effective people spend does produce immediate financial results.” That means of translation is HR metric.
Logically, managers need to be able to prove their efforts and initiatives worked. They need something concrete that can be presented to show their value.
In Douglas Hubbard’s book How to Measure Anything: Finding the Value of Intangibles in Business, he dedicates a chapter addressing what most business managers would call the “intangibles” - the idea that some employees or businesses have an indescribable quality that naturally helps them succeed ahead of others.
He debates that, “We have all been taught several misconceptions about measurement and what it means from our earliest exposure to the concept. We may have been exposed to basic concepts of measurement in, say, a chemistry lab in high school, but it’s unlikely we learned much besides the idea that measurements are exact and apply only to the obviously and directly observable quantities. College statistics, however, probably helps to confuse as many people as it informs. When we go on to the workplace, professionals at all levels in all fields are inundated with problems that don’t have the neatly measurable factors we saw in high school and college problems. We learn, instead, that some things are simply beyond measurement. However, ... ‘intangibles’ are a myth. The measurement dilemma can be solved. The ... most controversial issues of measurement in business, government, or private life can be addressed when the consequences of not measuring are understood.”
He provides three reasons why most people believe something is immeasurable. First, they have a general misunderstanding of what it means to measure. When asked to define measurement, most people would probably respond with “to understand the quantity of something,” “to understand an exact value,” or “to represent something with an amount.” Hubbard explains, “Implicit or explicit in all of these answers is that measurement is certainty—an exact quantity with no room for error. If that was really what the term means, then, indeed, very few things would be measurable. But when scientists, actuaries, or statisticians perform a measurement, they seem to be using a different de facto definition. In their special fields, each of these professions has learned the need for a precise use of certain words sometimes very different from how the general public uses a word. Consequently, members of these professions usually are much less confused about the meaning of the word ‘measurement.’ The key to this precision is that their specialized terminology goes beyond a one-sentence definition and is part of a larger theoretical framework. … For all practical purposes, the scientific crowd treats measurement as a result of observations that quantitatively reduce uncertainty. A mere reduction, not necessarily elimination, of uncertainty will suffice for a measurement.” This concept can help managers see that they will never understand the whole complexity of the emotions of their employees, but that shouldn’t stop them from trying to measure what they can.
Second, many times the object that needs to be measured seems ambiguous. This is particularly true in measuring the results of HR. Hubbard debates that most objections to measurement based on ambiguity are based on the fact that the manager doesn’t completely understand what they are measuring.
“In my seminars, I often ask the audience to challenge me with difficult or seemingly impossible measurements. In one case, a participant offered ‘mentorship’ as something difficult to measure. I said, ‘That sounds like something one would like to measure. I might say that more mentorship is better than less mentorship. I can see people investing in ways to improve it, so I can understand why someone might want to measure it. So, what do you mean by “mentorship”?’ The person almost immediately responded, ‘I don’t think I know,’ to which I said, ‘Well, then maybe that’s why you believe it is hard to measure. You haven’t figured out what it is.’” Once managers figure out what they mean and why that issue is important to the business, the measure tends to become a lot more measurable.
Lastly, many methods of measurement are unknown to managers. Later in this article, I will address ways that current HR departments are measuring success and what specifically they are using.
Determining What to Measure
While 87% of employees say that HR reporting plays a role in the organization’s management strategy, far fewer are decided on what to measure.
When deciding what to measure, the Society for Human Resource Management recommends asking a few questions that should be addressed including:
What metrics help our overall company goals? HR managers need to understand the long-term goals of the business to help facilitate aggregate planning.
Are C-suite executives aligned with these goals? Do they see how they will help contribute to overall company goals?
What data does the company currently have and what data would we need to start collecting?
Can we agree on the formula for the metric? Some businesses define metrics differently.
What benchmark levels of these metrics are defined as “success”?
In what format are these metrics to be reported?
How frequently will they be reported and benchmarked?
As mentioned previously, there are many companies that are currently using HR metrics to measure their investment into human resources. These can be broken down into multiple categories.
Full-time equivalent (FTE). FTE represents the total labor hours invested. One of the best ways to compare apples to apples is by leveling the playing field. Divide out the total number of hours worked by part-time employees by the total available hours for the year. Converting all employee metrics to FTE will help provide a more accurate representation of what is happening in the organization.
Revenue per FTE. Now that you’ve determined the number of FTEs in your organization, you can create a ratio of overall company revenue divided by FTE. This will help benchmark how effective the organization is overall. If Revenue per FTE increases, you can assume that productivity and efficiency increased.
Net income before taxes per FTE. You can also compare other revenue indicators such as net income per FTE which would provide a more granular look.
HR Department Contributions
Of course, the purpose of most metrics is to determine value. It’s natural that a cluster of metrics would be designed to help prove the value of the HR department generally.
HR-to-employee ratio. This metric is the number of HR department FTEs per 100 total FTEs supported by HR FTEs. This will help in further metrics to benchmark how effective other HR department metrics are.
HR expenses. This is calculated as HR's total costs for a given fiscal year. This might seem obvious, but the best way to communicate with upper-level management is to speak their language of fiscal currency.
HR expense-to-operating-expense ratio. This metric is calculated by dividing all HR expenses from a given timeframe by all operating expenses for that same timeframe. While this helps the HR department determine what percentage of organizational investment is directed towards HR, it also can show how effective HR is with their dollar.
HR expense-to-FTE ratio. Now that we’ve calculated expenses and FTEs for the company, calculating a ratio of HR expenses to FTEs in the company can demonstrate how many dollars of human resource campaigns are being spent per employee. To calculate this, total all HR expenses for a timeline divided by the number of FTEs in the organization.
Time to Hire. The average number of days between when a job is posted and when a candidate accepts your offer. This metric can help managers understand if they need to redesign the hiring process to exclude unnecessary interview steps such as education requirements, referrals or in-person interviews.
Offer Acceptance Rate. The number of offer letters your organization extends divided by the number of candidates who accept an offer. This metric could help the organization understand where their pay structure chart might be off with classes or steps. It could also go hand-in-hand with a low eNPS in identifying cultural issues that need to be addressed in the company.
Cost per Hire. Calculating the average cost of hiring a new employee can help you determine how efficient your recruitment process is. Remember to calculate both internal and external hiring costs. Divide all recruiting costs by the number of employees you hired in a given period.
Time to Productivity. The time it takes for new hires to become acclimated at your organization and start working at full productivity. This might seem like an easy metric but you also need to understand how you’re going to measure whether the employee is at full productivity levels. This metric can help managers know if they need to spend time in developing more criterion-based hiring methods that would help qualified people get working faster.
New-Hire Turnover. The number of new hires who leave within a set period of time, such as within their first year of employment. This metric can help managers identify if there are alpha or beta errors potentially arising through your hiring process.
Engagement and Retention Metrics
Employee Satisfaction. Unsurprisingly, 20% of managers said they wanted to know more about employee engagement with the organization. However, these levels of satisfaction should also be reported alongside efficiency levels to provide a more holistic view of productivity in the company. Academically, satisfaction is measured as a relationship between outcomes and expectations. But in the real world, employee satisfaction surveys ask questions about teamwork, levels of trust with leaders and coworkers, alignment of values and confidence in the future. Employees are typically asked to answer on a scale how much they agree with statements such as “If I contribute to the company’s success, I will be recognized for my efforts” or “I have all the resources I need to do my job successfully.” (See more examples here.)
eNPS. Because these surveys can require a lot of analysis, segmentation and skills (such as R-language) to interpret, many companies are adopting a marketing metric known as Net Promoter Score and are now using Employee Net Promoter Score (eNPS). The basic concept is that a satisfied employee is more likely to promote or encourage others to use the company’s services or work at the company. Therefore, you ask the employee on an 11-point (1-10) scale how much they would encourage others to work at the company. Those in the top tier (9-10) are labeled “promoters” of the business. HR departments can report what percentage of employees are considered “promoters.” The bottom results (0-5) are employees who are considered “detractors.” It should be noted, however that there are some notable flaws in eNPS. (*Net Promoter, NPS, and the NPS-related emoticons are registered trademarks, and Net Promoter Score and Net Promoter System are service marks, of Bain & Company, Inc., Satmetrix Systems, Inc. and Fred Reichheld.)
“Engagement is highly shaped by local factors, including an employee’s team and manager,” writes Steven Buck, of Glint Inc, a company redesigning how employee satisfaction is measured. “People might recommend their organization because they feel that it’s a great place to work overall. However, they might not be happy with their own team, manager, how they are enabled in their job, or opportunities for career development. All of those factors are highly correlated to personal employee engagement. What’s more, the eNPS uses a large scale where the distinction isn’t clear. Two teams could foster similar employee experiences but result in two very different eNPSs. This is because the eNPS question has an 11-point scale. If employees can’t differentiate among the scale options, their responses may not reflect their attitudes, and that will impact the quality of the results.”
Turnover Rate. While employees can be viewed as an investment, they also have their free choice to leave the company or stay. The number of employees who leave your organization within a given period of time divided by the average number of total employees (then multiplied by 100 to come up with a percentage), is the turnover rate. This can be further broken down into Voluntary Turnover Rate: A rate of those who choose to leave of their own accord; Non-Voluntary Turnover Rate: The rate of those who are terminated, and even Talent Turnover Rate: Turnover rates for specific groups of employees such as upper-level managers, high-performers or high-potential employees.
Retention Rate. The inverse of your turnover rate is dividing the number of employees who stayed in your organization over a period by the number of total employees. This can also be broken down into talent groups or even by departments, teams and to specific managers. This can identify problem areas in the company if a certain manager has low retention rates. Or inversely, it can help the company try and duplicate the efforts of a manager with a high retention rate and good satisfaction scores with his or her team.
Time Tracking Metrics
Utilization. This metric can be very specific to your organization. Overall, what you’re trying to track is how much time is being utilized by an employee. For example, if you know that an employee takes 20 phone calls a day and those phone calls, on average, take 10 minutes each, then you know they were most likely on the phone for 200 minutes. Divide that by the total minutes they worked in that day, and you have a Utilization percentage - basically, what percentage of their day where they were on the phone. This can help identify if teams are overworked or under-utilized.
Absence Rate. The average number of days employees are absent in a given time period, not including approved PTO. This can help managers identify employee issues using a medical model of needs. Also, lower absenteeism is associated with higher intrinsic motivation for the job. This can also be broken down by teams, departments or managers.
Overtime Hours. The number of overtime hours worked by employees in a given time period. You can calculate an average number or break it down by individual employees. This metric, could help identify a company's moral symptom if employee satisfaction levels are low.
Benefits Program Metrics.
Benefit or program costs per employee. This is calculated using the total cost of employee benefits divided by FTEs. This can help upper-level managers understand the benefit to each employee instead of just seeing the expense on their financial report.
Benefits as a percent of salary. Along those same lines, you can calculate an employee’s annual benefits cost divided by her or her annual salary. This can place a value next to the employee’s benefits and help managers relate how important those benefits can be to employees.
Compensation as a percent of total compensation. More summarily, you can calculate annual salary divided by total compensation (salary + benefits + additional compensation).
Compensation or benefit revenue ratio. Calculate employee compensation or benefit cost divided by company revenue.
Employee Value & Performance Metrics
Revenue per Employee: The total company revenue divided by FTEs.
Performance & Potential. This is a nine-box matrix that allows you to categorize employees according to their performance and potential levels for better succession and leadership planning.
Return on investment (ROI). This is calculated by looking at the total benefit of the employees minus total costs multiplied by 100. If we adopt the belief that employees are an investment and not just a cost, then we must prove that employees are creating more value than they cost.
Training & Development Metrics
Training Expenses per Employee. The total cost of your organization’s training courses and programs divided by the total number of FTEs. This can provide context and understanding to how adding or terminating employees will affect HR budgets.
Training Completion Rate. The number of employees who completed a given training divided by the total number of employees, then multiplied by 100 to get a percentage. Also, you might consider calculating Training Time to Completion. This is the average amount of time it takes for an employee to complete a training program.
Training Effectiveness. At face value, this might seem an impossible metric to analyze. However, there are several methods for measuring training program effectiveness, for example, tests or assessments can be given to employees after the training to determine an effectiveness rate.
Succession and Performance Planning. HR departments might choose to calculate the percentage of departments with succession plans in place or the percentage of employees with a succession plan. Leading up to these metrics, it would be helpful to calculate the percentage of employees who have employee evaluations in the last 60 or 90 days.
Percentage of employees recruited internally vs externally. This metric provides valuable insights into the advantages and disadvantages of hiring internally and externally. Managers will be able to easily identify if there are more internal hires. If that’s the case, they can address issues such as generating fresh ideas (assuming employees are primarily internal hires) or training for company policies (assuming employees are primarily external hires).
Metrics offer assistance not the answers
You may have noticed that a few of these metrics were listed in conjunction with other metrics. This is because most of these metrics are not final answers but rather indicators to be considered together.
“You can’t look at metrics in isolation. They have to be looked at holistically,” Rishi Agarwal, people analytics leader for PricewaterhouseCoopers told SHRM HR Magazine. That’s why most data scientists believe HR measurements by themselves rarely provide much value to the organization as a whole. Ben Yurchak, president of KnowClick points out that HR metrics are helpful if used together with other business metrics. For example, cost-to-hire is only part of the equation, he said, “Really, cost-to-hire should be cost-to-good-hire. One’s an operational metric, and the other’s a quality metric.” Yurchak continued that cross-functional measurements offer the best insights but are typically harder to implement in a company.
Some companies, like GTE, a Texas-based telecommunications company that was acquired by Verizon in 2000, realized that some metrics weren’t helpful by themselves.
"HR would record 250,000 hours of training and conclude they must have been doing a good job," Garrett Walker, director of human resources planning, measurement and analysis, told SHRM Magazine. "In fact, it indicates you were busy, not whether your [employees] were satisfied and more effective in their jobs." Because of metrics like this, GTE decided to develop a HR metrics scorecard that gave weights and balances to the different metrics to help them see a more holistic view of the company.
Other methods like the Saratoga survey provide benchmarks of employee impact to the company overall and compare them against the market.
With time and money, any competitor will eventually be able to replicate a business practice or any success that your company has found. The only thing that they can’t duplicate is company culture. That culture is a unique blend of your employees and the environment.
HR has a growing responsibility to create and maintain an effective environment. With most C-level executives beginning to learn this importance too, it is the perfect time to take HR metrics to the forefront of the business and help prove the HR departments value to the company.