Ch. 4: Human resource metrics and measures

Chapter 4 deals with measuring HRM. HR is often seen as the 'soft side' of the organization, but to be taken seriously by top management and financial stakeholders, HR must be able to show its added value in numbers. The chapter covers: (1) the relevance of metrics, (2) reasons to measure, (3) the history of metrics and measurement, (4) what can be measured and how, (5) measurement scales, and examples of measuring HR.

1. Relevance of metrics: but isn't HR the 'soft side'?

There are two 'languages' in organizations: the language of numbers (quants) and the language of stories (quals). The chapter contrasts them:

Stories are powerful because they give meaning and convince people, but decision makers such as the CEO and CFO speak the language of numbers. HR professionals therefore need to speak two languages: stories and numbers. The reasons are:

• Convincing 'the rest': being part of the 'quants' and speaking their language.
• Measurement: evidence and 'proof'.
• Valorisation: return on investment, 'monetisation' of HR interventions.
• The organization's strategy leads to strategic objectives; these must be translated into Key Performance Indicators (KPIs); HR measures are needed to predict these KPIs.
• The overall aim: making the added value of HR measurable.

2. Reasons to measure

There are three types of outcomes that should be balanced:

There are strong relationships between the three, but they are not always aligned: e.g., cutting staff can raise short-term financial outcomes while lowering HR outcomes. HR outcomes are a long-term and uncertain investment: the return comes later and is harder to prove.

Why measure?

• For making (HR) management decisions: evidence-based decision-making.
• Convincing others of the need for evidence-based decisions: setting up new interventions or shutting down other interventions.
• Assessing the effectiveness of (HR) interventions.
• Tracking, monitoring, gaining insight, predicting and modifying HRM practices and performance and career development paths.

Hard outcomes are objective but backward looking and far removed from HR practices (many other factors influence profit). Soft outcomes are closer to what HR influences and say more about the future (e.g., turnover intention predicts actual turnover), but they require interpretation.

3. History of metrics and measurement

Over time there has been an increasing focus on performance improvement through measurement: Human Resource Accounting (HRA) in the 1970s and 1980s, the Balanced Scorecard (BSC) in the 1990s, and HR scorecards from the 1990s until now. Today, Human Resource Accounting is called Human Capital Valuation (HCV) or HR metrics, focused on creating added value through people.

Criticism of HRA: it seems to forget that employees are people. Employees are not owned by the organization: human capital is not owned and employees can leave. Measurement complications: HRA does not take into account multiple perspectives, only the accounting/financial value, and it is very backward looking (the past and current value, not the potential value).

Advantages and disadvantages of the BSC: it connects goal setting with concrete measures; it was developed by Harvard Business School and consultants; it is popular and applied by many organizations; it is generic and easy to apply; 'when used correctly, it reveals the real drivers of long-term success'. However, there is not much space for employee attitudes and behaviour.

HR scorecards were developed as an answer to the BSC. Early versions focused on the HR function, roles, practices and systems, took HR as the starting point and had no link between HRM and strategy. The next generation bridges the BSC with the older, narrow HR scorecards and takes culture and context into account.

Development over time: more attention for non-financial indicators of performance and value; a large number of models and tools measuring intellectual capital; bridging the accounting and control literature with the HR literature. This created a need for HR to also measure how HR practices influence HR outcomes.

4. What can be measured and how?

Are you measuring what you intend to measure? Distinguish between concept, intervention, indicators and measurement:

Take care: are you measuring the intervention or the outcome? Measuring the intervention: was the training of our staff successful (did they learn)? Measuring the outcome: did sales increase?

Direct measures ('hard' outcomes): net labour costs per employee, labour productivity, change in net labour costs per employee, efficiency ratios, sales volumes, net profits, employee turnover rates. Ideally with an experimental design (is that possible in organizations?).

Indirect measures ('soft' outcomes): perceptions, attitudes, behaviours and intentions, measured with survey instruments, interviews, informal talks, feedback, fora, intranet, etc.

4a. Start with the definition: organizational commitment

Measuring starts with a clear definition. Mowday and associates defined organizational commitment as 'the relative strength of an individual's identification with and involvement in a particular organization' (Mowday et al., 1979, p. 226).

Process: conceptualize (define the concept) and then operationalize (translate it into indicators, e.g., survey questions about the intention to behave, observations, and measurements with existing psychometric survey instruments).

4b. Validity and reliability

Reliability and validity are different: a measure can be reliable (consistent) but not valid (consistently measuring the wrong thing), like a scale that always shows 2 kg too much. A valid measure must also be reasonably reliable.

4c. Who is the rater?

Performance ratings and evaluations of people are never objective; they are always biased (we are not machines). Questions to ask: who has the best insight? Is it about attitudes (the employee knows best) or behaviour (colleagues or supervisors may observe it)? Do multiple ratings make sense? Inter-rater reliability: are the raters (judges) consistent with each other?

5. Measurement scales

Concepts such as motivation, work engagement, satisfaction, in-role behaviour, extra-role behaviour and organizational citizenship behaviour (OCB) have already been defined and operationalized by researchers: there is no need to 're-invent the wheel'. Alternatively you can rely on consultants (who want to make money), so go for academic consultancy.

These concepts are latent: complex concepts that you cannot measure with one single question. Instead, you ask a set of specific questions that together represent the concept. Example, perceived organizational support: not 'Do you feel supported by your organization? Yes/No', but agreement on a scale from 1 to 7 with statements such as: 'My organization really cares about my well-being', 'My organization strongly considers my goals and values', 'My organization is willing to help me if I need a special favour', 'Help is available from my organization when I have a problem'.

Examples of scale development: the organizational commitment scale of Allen and Meyer (1990), developed with factor analysis in which the items for affective, continuance and normative commitment load on separate factors; a short scale (condensed versions with fewer items, e.g., three items per component, rated on a 6-point scale); and the unidimensional, target-free approach of Klein, Cooper, Molloy and Swanson (2014), who define commitment as 'a volitional psychological bond reflecting dedication to and responsibility for a particular target' and measure it with four items (How committed are you to [target]? To what extent do you care about [target]? How dedicated are you to [target]? To what extent have you chosen to be committed to [target]?) that can be applied to any target (organization, team, goal, supervisor).

How to decide which scale to use?

• Internally consistent: the definition is connected to the scale.
• Reliability: inter-item correlations and test-retest.
• Validity: measures what you set out to measure.
• Relevance: measures what is relevant in your setting.
• Up-to-date: measures develop over time; use a recent one or the seminal one.
• In short, seek substantive methodological synergy: substantive (develop a relevant and timely question) and methodological (seek the most fitting methodology that answers the question).

6. Measuring HR

HR 'input' can be measured in several ways:

There are also different perceptions, depending on who you ask: employee, line manager, top manager or HR manager. And there is a difference between intended policies and practices, actually implemented practices and perceived practices (Wright and Nishii, 2013).

An example of a validated measure of HR practices is Sun, Aryee and Law (2007). They developed a 27-item scale for high-performance HR practices, covering 8 domains: participation, mobility, training, staffing, job description, appraisal, job security and incentive reward. The items were based on an extensive literature review (including earlier measures by Bae and Lawler, Snell and Dean, and Delery and Doty) and interviews with HR managers of hotels in China.

Conclusions and take-aways

• Measuring, methods, metrics and analytics are important in HR.
• 'Hard' outcomes versus 'soft' outcomes: both have pros and cons.
• Financial, organizational and HR performance should be balanced.
• Employee attitudes, behaviours, perceptions and intentions can be quantified, but there are limitations.
• Distinguish between concept, indicators and measurements.
• Existing survey instruments are developed and validated: use existing psychometrically validated scales.
• Measure responsibly (e.g., be careful when relating personality to career success).