“Without data, you’re just another person with an opinion”, is arguably Edward Deming’s best-known quote.
It is impossible to improve at managing your human resources if you do not measure the results of your work. If you do not define what ‘good performance’ looks like and how you can measure it, how will you find out if you’re doing well?
So in business, if you don’t measure your progress towards your HR goals, how will you know how successful you are? To measure success, you need performance indicators.
In this article, we will dive into the nitty-gritty of HR key performance indicators. We will explore what they are, how they are used, and provide a framework for creating them yourself!
What are HR KPIs?
To answer this question, we should first look at key performance indicators (KPIs). KPIs are strategic metrics. This doesn’t mean that anything that you can measure in HR is a KPI. Only metrics that have a direct link with the organizational strategy can be called KPIs.
Human Resources key performance indicators (HR KPIs) are metrics that are used to see how HR is contributing to the rest of the organization. This means that HR KPIs measure how successful HR is in realizing the organization’s HR strategy.
The HR strategy follows the organizational strategy. In other words, HR KPIs mirror organizational performance for HR, as they are defined based on the HR outcomes that are relevant to achieve business goals. These business goals are often formulated in the Balanced Scorecard.
Let’s use an example to illustrate how this works.
Dodgers is an organization trying to innovate in a very competitive landscape. For this reason, the board of directors decided that they will cut costs everywhere, except in the product innovation department. The question is, how will this goal be translated into HR KPIs?
The entire organization needs to save money, including HR. This reduction could be applied to recruitment cost, for example. The cost is currently at $500,000 and needs to be reduced to $400,000. In this case ‘Recruitment cost in Dollars’ is the KPI, the current score is $500,000 and the target for this KPI is $400,000.
A second people KPI could be ‘innovative behavior’ which is measured annually in the annual engagement survey. Its score on a 10-point scale is currently 6.2. The target is set at 7.5 or higher. Achieving this will require quite some work!
The HR KPI template could look as follows.
HR can add multiple KPIs to reach a specific business goal. Each of these KPIs can be broken down into smaller goals.
To realize the HR strategy, it’s best if these KPIs align. However, sometimes, they conflict.
For instance, if you have to cut cost in your learning & development budget, while also trying to stimulate innovation, you are confronted with a difficult choice. The strategic challenge is to stimulate innovation while reducing your training budget. This is a good example of how HR KPIs help HR to realize its strategic goals and contribute to the objectives of the rest of the organization.
List of HR KPIs
A lot of articles that you’ll find online will list tens, sometimes close to a hundred KPIs. Don’t be fooled: most of these are simple HR metrics that are not important to track, as they usually don’t align with organizational strategy.
A few examples of metrics that are NOT HR KPIs:
- Average interview cost
- Average duration of placement
- Average tenure
- Average salary
- Average number of training hours per employee
- Average number of vacation days per employee
- Average number of unpaid leave per employee
- Average retirement age
- Compensation cost as a percentage of revenue
- Employee training satisfaction
- HR-to-FTE ratio
Why are these not KPIs? All of these measurements say something about how efficient HR is. For example, do we need 1 HR per 100 employees, or 1.5? This says nothing about effectiveness. None of these metrics will directly contribute to reaching the organization’s strategy.
The KPIs used in an organization are unique. Every organization is different – and the KPIs should reflect that uniqueness.
Here is a list of example KPIs:
- Absence rate
The absenteeism rate in the organization is usually calculated by dividing the number of working days in which the employee was absent by their total number of working days.
- Absence cost
The total cost of absence is calculated by including employee pay, the cost of managing absence, and replacement cost. This KPI is especially relevant for European countries with strong labor unions and a high degree of employee protection.
- Benefits satisfaction
Satisfaction with employment benefits is usually measured through an employee engagement survey. These can be very relevant to reducing employee turnover.
- Employee productivity rate
Although this metric is hard to calculate, it says something about the capacity of growth in terms of production of human capital.
- Employee satisfaction index
Employee satisfaction is measured through employee attitude and engagement surveys. Dissatisfaction is an important cause of employee turnover.
- Employee engagement index
Employee engagement is also measured through attitude or engagement surveys. High employee engagement predicts higher productivity, better customer service, lower turnover, and many other relevant and positive outcomes.
- Employee innovation index
Innovation is also measured through attitude or engagement surveys. Innovation is more and more often a key driver of business success. It’s the role of HR to enable this innovation.
- Internal promotion rate
This KPI is measured by dividing the number of senior functions that were filled through internal promotion by the total number of senior positions filled. Internal hires are often up to speed faster, reduce the risk of a bad hire, and stay longer in the job.
- Net Promoter Score
A Net Promoter Score (NPS) is an excellent way of measuring to what degree someone would recommend a service or business to another person. To find out how satisfied employees are with HR’s services, you can measure the NPS of HR. Using the NPS, you can also measure to what degree people recommend working for the organization. Depending on your strategic goals, NPS can be a solid HR KPI.
- Percentage of cost of the workforce
This is a metric that takes the cost of the workforce and divides it by the total cost faced by the organization. This KPI, although not often employed, could be used for cost reduction purposes or to help improve automation/robotization in an organization.
- Quality of hire
The quality of hire is the percentage of new hires that are given a good rating by their manager during their performance review. Quality of hire indicates how effective HR is in recruiting and selecting candidates. Consistently maintaining a high quality of hire rating enables the organization to reach its strategic goals.
- Turnover rate
Turnover is a very common metric and also an important KPI, as high turnover can be very costly.
- Involuntary turnover rate
Not all turnover is voluntary. This is the number of employer-led resignations as a percentage of the total resignations.
- Voluntary turnover rate
This is the number of employee-led resignations as a percentage of the total resignations.
- Unwanted turnover rate
Not all turnover is bad. It’s usually positive when bad performers leave. This is the number of good performers leaving as a percentage of all performers.
- Training effectiveness
Training has to be effective to reach its goal(s).
- 90-day quit rate
Sometimes also the 360-day quit rate. This is the number of hires that leave within 3 months or a year. A double-digit percentage is already very bad. It’s the job of HR to recruit the right people. Failing to do so will have a negative measurable impact on organizational effectiveness. This is a key recruitment KPI.
Creating an HR KPI Scorecard: A Real-Life Business Case
As we have previously learned, not all KPIs are relevant. In this section, I will share an example of how to create an HR KPI template for a recruitment department. This example is based on a real company in the maritime sector.
The Western maritime sector is in difficult waters. Where 50 years ago, most ships were being built locally, these days it is much cheaper to build large cargo ships and tankers in East Asia.
Competing with cheap labor and steel from China proved to be hard for this US-based shipbuilding company. A cost-differentiation strategy was therefore not viable.
This specific company decided to invest heavily in technology and innovation, knowing that most of their current client portfolio was interested in their high-tech shipbuilding skills (mostly smaller vessels) at a much higher price point.
Strategic goals never happen in isolation. This example organization has to cut cost while becoming more innovative through smarter hiring.
- They have to decrease recruitment cost
- They want to hire more qualified professionals
The recruitment strategy map is shown in the following picture.
The blue arrows in the template show the internal relationships between the different goals. The executive board decides the strategic goals. The HR manager establishes HR goals.
In the next step, we need to create one or more KPIs for each goal. How do you measure a decrease in lead-time? And how about your attractiveness as an employer?
After defining KPIs for each goal, you need to identify your current score and your target. The resulting KPI template could look like the following.
Human Resources KPI template
And there it is, our completed Human Resources KPI template. Based on the organization’s strategy, we’ve defined a number of KPIs that will help us reach our strategic HR goals. We’ve made them concrete by measuring our current score and by setting a target.
Creating HR KPIs that are consistent and that add value to the business is a challenging exercise. However, when done right, they enable HR to add tremendous value to the business in a proven and very data-driven way. Setting goals using HR KPIs provides us with a framework that helps to make better decisions and, more purposefully, drive strategic business outcomes.
Characteristics of a good KPI
Now you know the difference between metrics and KPIs, and you know how to come up with Human Resources key performance indicators. The question that remains is “What are the characteristics of good HR KPIs?”
In a 2009 paper, Eckerson describes a number of characteristics of “good” KPIs.
You should only focus on a few HR KPIs. They are called key performance indicators for a reason. Focus on the essential ones and leave the rest out. The general rule remains “the fewer, the better.”
You should be able to drill into detail. Why aren’t we meeting our recruitment cost target? What groups are the costliest to recruit? By drilling down you can more easily predict your future success and see where progress is lacking.
Users need to understand the KPI. If it’s not simple, it’s hard to communicate and focus on.
The reason why HR only focuses on KPIs related to HR outcomes is that they can influence these. HR is not responsible for revenue or sales success. Only focus on the KPIs whose outcomes you can affect.
In line with the previous points, KPIs need to have an owner. This owner will be rewarded in case of success and will be held responsible if they fail to hit the target.
The KPI should be related to the desired outcome. When we speak about business targets, the HR KPIs need to be related to these business outcomes. You will not directly achieve cost savings by hiring better performers.
Hiring good performers is vital, but this shouldn’t be your main focus when the company needs to cut costs to survive. Maybe you can reduce recruitment cost by 30% without really reducing the quality of hire. This is more important as it helps fulfill the company’s strategy.
Griffin (2004) stated that there should be a direct link from KPI to goals, from goals to objectives, and from objectives to strategy.
Alignment of HR KPIs is something we briefly touched on before. KPIs shouldn’t undermine each other.
There’s a simpler framework that we are all familiar with that summarizes the above. I didn’t want to start with this because simpler alternatives are not always better.
The alternative, defined by Hursman (2010), is the well-known SMART acronym. This stands for:
Knowing these criteria should help you in creating the relevant Human Resources key performance indicators you need for success.
During my graduate studies, I did an interview series with different HR managers. One of the questions I asked them was: what does good performance for HR look like?
I still remember the answer of the first HR manager I asked this question to. She was the Head of HR in a top-5 accountancy organization in the Netherlands and her answer was: “we don’t have that in HR”.
When I asked her what she meant, she explained that she did her job and ran everything efficiently. When I then asked how her performance as an HR manager was measured, she said: “it’s not”.
This surprised me. What surprised me, even more, was that she didn’t find this strange at all. On top of that, this was an accountancy organization, numbers should be in their DNA!
Leading vs. lagging KPIs
A final distinction I want to dive into is the one between leading and lagging KPIs. Kaplan and Norton (2007), the researchers who came up with the Balanced Scorecard, explain the difference in their paper.
A leading indicator refers to future developments and causes. These indicators precede an event. For example, productivity is a leading KPI for labor cost.
A lagging indicator refers to past developments and effects. This reflects the past outcomes of KPIs. If productivity is a leading HR KPI for labor cost, sickness rate would be a lagging KPI. An alternative lagging KPI would be the labor cost per employee.
What would be the relevant leading and lagging indicator when the business goal would be the support of employees’ qualification? This is, for example, relevant when constant (re)qualification is a must, to provide qualified services.
In this case, the leading indicator could be the average number of training hours per employee. The lagging indicator could be the percentage of employees who completed the qualification.
As these examples demonstrate, the leading indicators are often less precise but do offer interesting insights into the ongoing performance of a KPI. The lagging indicator is more precise, but only after the fact.
Including these different kinds of KPIs will help in creating a scorecard that can both predict future and track historical success.
Start Designing HR Metrics
To learn (much) more about how to create KPIs that align with the organization’s unique strategy, check out our Strategic HR Metrics Course.
This course teaches you a step-by-step process to develop, implement and align HR Metrics with your business’ strategic objectives. Because of the practical applicability and assignments, you will be able to immediately apply your new skills in your organization.
The Strategic HR Metrics Course is taught by three practitioners, René Klep who is a former HR manager at Philips and teaches HRM, David Creelman, arguably one of the most seasoned experts in this field, and Mark Lawrence, the People Analytics Director at GSK.