Human Resources Key Performance Indicators: An In-depth Explanation

Human Resources Key Performance Indicators: An In-depth Explanation of HR KPIs

What are HR KPIs? Human Resources key performance indicators (HR KPIs) are HR performance metrics that are strategically aligned with the business. HR KPIs mirror organizational...

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What are HR KPIs?

Human Resources key performance indicators (HR KPIs) are HR performance metrics that are strategically aligned with the business.

HR KPIs mirror organizational performance for HR. They’re defined based on HR outcomes that are relevant to achieve business goals.

Let’s use an example to illustrate how this works.

Doegé is an organization that’s trying to innovate in a very competitive landscape. For this reason, the board has decided that they will cut costs everywhere, except for the product innovation department. The question is, how is this mission translated to HR KPIs?

Since the entire organization needs to save money, so does HR. This can 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 the ‘Recruitment cost in Dollars’ is the KPI, the current score is $500,000 and the target for this KPI is $400,000.

A second KPI could be ‘innovative employee behavior’ which is measured annually in the engagement survey. Their score on a 10-point scale is currently 6.2. The target is defined as a 7.5 or higher. Quite a notable improvement!

The HR KPI template could look as follows.

HR KPI template - KPI for HR department
HR KPI template
This is, of course, a simple illustration. HR can add multiple KPIs to reach one specific business goal. For instance, maybe the learning and development expenses are over budget and also need to be decreased.

When these are added to the scorecard, we see a strategic challenge: stimulating innovative behavior while reducing the training budget. This is a good example of how Human Resources KPIs help to further define HR strategy into very concrete targets.

In addition, working with such an HR KPI scorecard helps to assess the effectiveness of the HR department in a very transparent way.

The difference between HR metrics and HR KPIs

We’ve written a lot about metrics in the past. What’s the difference between HR metrics and HR KPIs?

The term ‘metric’ is used as a measurement of any business activity.

For example: What’s the percentage of employee turnover last year? How much did turnover increase since the year before? What’s our absence percentage? The answers to all these questions are metrics, as they keep track of business activity.

These numbers are interesting to measure. In line with this, KPIs are also metrics. However, not all metrics are KPIs. It’s only when we talk about performance metrics that are strategically aligned with the business, that we’re talking about KPIs.

Characteristics of good Human Resources key performance indicators

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 described a number of characteristics of “good” KPIs.

  • Sparse: 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.
  • Drillable: 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.
  • Simple: Users need to understand the KPI. If it’s not simple, it’s hard to communicate and focus on.
  • Actionable: The reason why HR only focuses on KPIs related to HR outcomes is because they can influence these. HR is not responsible for revenue or sales success. Only focus on the KPIs which outcomes you can affect.
  • Owned: 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.
  • Correlated: 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.
  • Aligned: 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), has the well-known SMART acronym. This stands for

  • Smart
  • Measurable
  • Attainable
  • Relevant
  • Time-Bound

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 is good performance for HR?

I still remember the answer of the first HR manager I asked this question to. She was Head of HR of a top-5 accountancy organization in the Netherlands and her answer was: “we don’t have that in HR” (remember, it was an accountancy organization!).

When I asked her what she meant, she explained that she did her job and ran everything efficiently. When I then asked her how her performance as an HR manager was measured, she said: “it’s not”. This surprised me. What suprised me even more was the fact that this didn’t seem strage to her at all.

I think this illustrates the state of HR KPIs for some, i not mostt organizations. Even a data-driven professional service firm like this accountancy had no pre-defined KPIs and targets for their HR department and manager. So how would they ever improve their HR performance or align HR with the business? In order to become strategic in HR, you need this alignment.

If you want to read more about this, I would heartily recommend the writings of Dave Ulrich. He has shown repeatedly that HR practices relate to business performance through productivity, people, and process indicators.

Leading vs. lagging HR KPIs

An important distinction made in literature, is the one made between leading and lagging KPIs. Kaplan and Norton (2007) 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 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 is 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 % of training courses matching company requirements.

As you can see in these examples, the leading indicators are often less precise but do offer insight into the ongoing performance of a KPI. The lagging indicator is more precise but only after the fact.

Human Resources KPI examples

We’ve already provided a few Human Resources KPI examples above. The following situation is in line with the HR KPI template provided below.

An organization has four key strategic goals. These goals are related to the following areas:

  • Financial: the organization aims to reduce recruitment costs.
  • Customer: the organization aims to increase internal customer satisfaction.
  • Process: the organization aims to increase efficiency of recruitment. On top of this, the organization aims to decrease the number of administrative errors.
  • Organizational capability: the organization aims to increase analytical competencies. Internally, it aims to implement HR analytics within the organization.

As you might have already noticed, some goals are more internally oriented, while others are externally oriented. This is visually represented by splitting them up in two columns in the Human Resources KPI template included below. Furthermore, the goals are also inter-related. This is represented in the following picture.

Human Resources KPI template - HR KPINote: This excellent example of connected HR KPIs is translated from Toine Al & Irma Doze’s excellent book ‘HR-Analytics’ (2015, in Dutch).
 

The blue arrows in the template show the internal relationships between the KPIs. These are decided on by the executive board.

This step is to create a limited set of HR KPIs that will help to achieve these goals. Multiple KPIs can be defined to reach one goal – but remember the KPI criteria: fewer is better. In this HR KPI example, we can define the following HR KPIs.

  • Financial: Recruitment cost in euros. These will be lowered.
  • Customer: Internal customer satisfaction. This needs to be increased.
  • Customer: Time to hire. This needs to be lowered. Note: this KPI is in line with the first one.
  • Process: Average number of administrative errors per week. This needs to be lowered.
  • Process: % of employees meeting ‘analytical job demands’. This needs to be increased.
  • Organizational capability: % HR-employees applying HR-analytics practices. This needs to be increased.

The next step is to analyze the current score on these KPIs and to set targets for next year. The scores and targets are described in the Human Resources KPI template below

Human Resources KPI template

HR KPI template in Excel - HR KPIsToine Al & Irma Doze, 2015

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 goals. We’ve made them concrete by measuring our current score and by setting a target. With this target, our KPI is specific, measurable, attainable and time-bound.

Creating HR KPIs that are consistent and that add value to the business is a challenge. However, when done right they can enable HR to add tremendous value to the business in a very data-driven way. Setting goals using HR KPIs provides us with a framework which helps to make better decisions and, more purposefully, drive strategic business outcomes.


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