HR Benchmarking: All You Need to Know to Get Started
Benchmarking is a practice used across industries to make comparisons between and within organizations. For HR professionals, it is no different. HR benchmarking helps make HR processes and policies at your organization more effective. This, in turn, has a positive impact on your bottom line.
There is an ever-increasing demand for organizations to continually evolve and remain competitive, and just about every HR practice can be benchmarked and improved. Truly valuable benchmarking looks at the nuances of your organization and geography. Let’s look at what HR benchmarking is, why it’s useful, and what the best practices for HR benchmarking are.
What is HR benchmarking?
HR benchmarking uses both quantitative and qualitative data to make comparisons between and within organizations, sectors, industries, roles, practices, and processes. It is used to provide feedback to organizations for continuous improvement to their people practices and challenge existing processes.
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Let’s, for example, say that there is a bank located in Germany. As a financial institution, it could compare its human resources practices (recruitment, retention, employee engagement, net promoter scores) to other similar institutions in Germany. This would be an indicator of how the organization is performing relative to the other organizations.
HR benchmarking is effective when you not only compare it to one organization but to multiple.
There are two types of HR benchmarks: internal and external benchmarking.
- Internal benchmarking – This type of benchmarking makes use of existing or provided data to understand how departments, teams, and groups within an organization compare to each other. This is an easy way to understand which teams are the most engaged, which departments perform the best, which locations have a higher engagement score, etc. The average of all data collected would result in the norm for the organization. As an example, if your organization measured engagement across all departments and teams, and the net promoter score was +50, that would be the average engagement across the organization. You’re then able to understand which teams fall below or above that. That will help you devise the right employee engagement plan for your organization.
- External benchmarking – This benchmark measures how your organization stacks up against other organizations. It provides good context for the industry norm and whether your organization is performing above or below that. These benchmarks are very useful when determining your HR strategy for the year. They help you position yourself favorably in whichever market you are operating in.
Based on an image by Best Practices.
With both internal and external benchmarks, the two data sets need to be comparable. For example, you cannot compare a team of five employees against a team of 150 employees. Similarly, you can’t compare a multinational organization with unlimited resources to a start-up organization with a limited number of employees and finances.
In addition, consider nuances when comparing across geographies. For example, there might be significant differences in what’s required by law with regard to employment policies. While many countries in Europe have laws law regulating paid vacation minimums, there are no such federal laws in the US.
That’s why you cannot always directly compare practices between countries, even if it’s the same organization.
What can you benchmark?
You can benchmark just about every aspect involving people in your organization, as long as you have the data to back it. Here are different types of benchmarks you can look into:
Organizational design and structure play a crucial role in translating business strategy into action. An organization can compare its internal structure to understand if it’s best geared for the goals trying to be achieved. Organizations can be structured in various ways, by function or product, or centralized vs. decentralized. PWC, for example, released a report which provided benchmarks for manufacturers in the Indian market. The specificity of the report allows for effective benchmarking for companies in that geography and industry.
Salary benchmarking allows organizations to make a comparison of their salaries offered and benefits provided within specific industries, organizations, and geographies. It is a crucial way to understand if your organization is under or overpaying employees. There are reports specifically produced per industry and geography to provide relevant data. For example, Robert Walters conducted this salary survey for the Netherlands. The report breaks down salary data per region, role, and industry.
HR costs cover a variety of metrics. This could include the cost of how much it is to run the HR function or to cover HR budget metrics, such as cost per hire. As with other metrics, it is essential to ensure the data is consistent and comparable with organizations with similar characteristics. As an example, see below an extract from a Deloitte report which compares HR process cost per employee for banks:
Based on data and comparisons, you’re able to make decisions on what HR costs might need to be reduced or increased.
Career development throughout the staff life cycle
Another important metric to compare is career development. This can be quantified in various ways, including number of lateral or vertical movements, frequency of talent and leadership development programs and opportunities provided to all employees. As an example of a known metric to compare, you might want to compare promotion rate. It measures how frequently employees are promoted within the organization. SHRM did a study of the Accommodation and Food Services industry and found that the average promotion frequency is 12%.
Work schedule & environment
This indicator measures how you are treating employees and the environment in which they operate. It’s a great way to understand if your work schedules and the accompanying environment are optimal to achieve the business strategy. This is highly valuable in industries that have fixed schedules, such as contact centers and customer services. It is also an important measurement for organizations that have a specific requirement to provide a hazard-free work environment (both from scheduling and health perspective). A benchmark report by SHRM, for example, shows that 24% of organizations provide percentage programs specifically targeting employees with chronic health conditions.
Engagement and retention
Employee engagement and retention are two of the most critical metrics for any organization. It is a direct measure of the people’s practices and consistency thereof. Peakon, for example, found that 60% of employees with up to three months of tenure are engaged. On the other hand, employees with a tenure of two to five years have an engagement of 37%. You can measure engagement and retention scores internally (between departments and geographies) and make appropriate adjustments to improve these scores. It also serves as a learning opportunity for other departments to determine what is working vs. what is causing disengagement or high retention rates.
Health and productivity
Employee wellness programs have grown increasingly important with remote working, COVID-19 affecting employees, and more awareness around mental health. This is a must for any organization to assess whether their health and wellness programs measure up to other organizations and their impact on productivity. As an example, Mercer Marsh found that only 68% of organizations in Australia have a formal wellness program in place. See below an extract from that report:
Benefits of HR benchmarking
- Increasing business impact – Benchmarking ensures HR leaders are connecting people’s practices to business outcomes. For instance, if your employee engagement score is below the industry average, you need to look into how much this affects overall business performance. It thus ensures you’re making data-backed decisions instead of following just pure gut or instinct.
- Identifying trends – Understanding your benchmarks allows you to stay on top of developments in your industry. It provides information needed to make decisions to remain competitive as an employer and helps you design effective HR programs. For example, if benchmarks indicate that similar organizations with a wellness program have greater productivity, it would be a good idea to develop a wellness program.
- Improve existing practices – You’re able to honestly assess your recruitment, retention, compensation, talent and leadership development processes, and identify areas of improvement. Leaders and HR leaders are also held accountable in this way.
- Assessing and enhancing employee experience and employee engagement – It also has an overall effect on your employer brand, as employees spread word of mouth about how their employee experience is. Improving your HR processes and being the best-in-class employer help you elevate your employee experience and engagement.
All of these HR metrics are not just for the sake of it or to have the best HR program in the industry or the country. It is to move the business in the right direction and improve the impact of people on the business bottom line.
Drawbacks to HR benchmarking
- Comparing apples with apples – One of the problems you may encounter is that it is not always possible to directly compare your data with other organizations or even internally. As a result, you need to take HR benchmarking as one of the data points in improving your processes and not as the only indicator. For example, an organization focusing on hiring high-quality employees may spend considerably more time and money on finding them than an external benchmark. If you spend less money on getting the same number of employees, does that mean that you are better? Or does it mean that you may be hiring lower-quality employees? Similarly, for an internal benchmark, some departments may have a higher employee turnover rate than others. However, this might be due to the focus of the specific department or the type of positions.
- Lack of agreed taxonomy – Not every organization calls all the HR metrics by the same name or even measures them in the same way. Employee engagement and employee satisfaction or often used interchangeably, for example. Some organizations measure cost per hire from the date a position becomes vacant, whereas others measure it from the date of resignation of the employee.
Best practices in HR benchmarking
Understand what you want to compare and improve
Where does the biggest potential for improvement lie? If you’re collecting external benchmarks, you need to identify which companies you want to compare yourself to. Don’t pick too many, only the most relevant – competitors similar in size, location, for example. Follow the principle that less is more if you’re collecting the data yourself.
Determine how you’re going to collect data
Is it going to be internal historical data from your HR analytics systems? And if it’s external data, it might be confidential, so what kind of data can you actually gather from comparable organizations? For instance, you might use publicly accessible company data like benefits information from competitors’ job postings or industry benchmark reports from reputable research institutions.
Analyze the data and define best-in-class practices
Remember to define what is best for your organization and not what works for another organization. Your people are unique, and you need to consider this. As an example, you’ve noticed that one of the key aspects missing from your employee benefits program is favorable parental leave. Then, by using benchmarks, you could present a business case to management of its importance.
Set goals for improvement
You should have a certain time frame in mind when setting your improvement goals. Don’t focus solely on beating the benchmarks. They serve as more of a guidance. Don’t try to achieve all your goals in one quarter or even one year, as processes in your organization usually take some time to change.
Revise the benchmarks regularly
Set a period in which you revisit the benchmarks. See what’s changed and what you need to further work on; it’s a continuous process. This is also important to understand what the latest practices are. For example, many organizations have moved to remote work due to the COVID-19 pandemic, and they have to rework their flexible or remote work policies.