Evidence-Based Human Resources

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1 Evidence-Based Human Resources research report E RR A Primer and Summary of Current Literature Trusted Insights for Business Worldwide

2 The Conference Board creates and disseminates knowledge about management and the marketplace to help businesses strengthen their performance and better serve society. Working as a global, independent membership organization in the public interest, The Conference Board conducts research, convenes conferences, makes forecasts, assesses trends, publishes information and analysis, and brings executives together to learn from one another. The Conference Board is a not-for-profit organization and holds 501 (c) (3) tax-exempt status in the United States.

3 Evidence-Based Human Resources A Primer and Summary of Current Literature by John Gibbons & Christopher Woock contents 4 Introduction: Setting the Context 5 Evidence-Based Human Resources: What Makes this Approach Different 6 Part I. The Evolution of Human Resources Management Literature 10 Part II. The Paralell Evolution in Labor Economics 13 Part III. The Emergence of Evidence-Based Human Resources 17 References 20 Appendix 1 21 About the Authors

4 4 The Conference Board Introduction Setting the Context Human capital is possibly the most vital, yet overlooked, means of establishing competitive advantage for companies today. Business periodical have featured the global war for talent, the need for better ways to encourage innovation, the complexities posed by the maturing workforce, or the preparedness of the talent pipeline. Further, rarely can one look through a company s annual report or listen to a CEO presentation without being reminded that people are our greatest asset. Regardless of how well executives may genuinely extol the necessity to attract, grow, motivate, and retain talent, the means of measuring the management of talent and, more importantly, empirically demonstrating its impact continues to lag behind. A 2007 study by The Conference Board (Strategic Human Capital Metrics: Orientation, Accountability, and Communication by Stephen Gates) reveals some encouraging signs. It found that human capital analytics are being used by many companies to establish performance goals.. However, it is not clear whether these human capital measures are being linked to meaningful company financial or operational performance outcomes, or are simply being used to evaluate how efficiently the human resources function is managing itself. Since more than half of the participants in the study also said that their HR department plays no role at all in developing their company s strategy, it stands to reason that these advances in the use of human capital analytics are less focused on business strategy and more on department efficiencies. Advancing the study of human capital analytics and the profession of human resources in general, faces challenges: Human resources leaders should not be satisfied with simply demonstrating the efficient use of human capital and begin to work on empirically demonstrating how talent drives the performance of their organization. Human resources professionals need to learn that being at the table is just the beginning. New tools and competencies are necessary for leading the conversation once they get the seat. If business leaders genuinely believe that people are our greatest asset, human resources leaders have the mandate to move the management of human capital beyond simply being aligned with their companies strategies and discover how talent can be powerfully integrated into them. This literature review of Evidence-Based Human Resources marks the beginning of what is anticipated to be a series of reports dedicated to exploring the application of rigorous empirical methods and standards of evidence to assist executives in integrating strategy and talent. The central purpose of this report is to demonstrate that, as a result of the convergence of technological advances, academic research, and economic necessity a new evidence-based approach to measuring and managing talent is emerging.

5 Evidence-Based Human Resources 5 Evidence-Based Human Resources What Makes this Approach Different Faith is the substance of things hoped for, the evidence of things not seen. New Testament, Hebrews 11:1 All credibility, all good conscience, all evidence of truth come only from the senses. Friedrich Nietzsche (1886) For generations the field of human resources has been a discipline of faith, embedded in a business/economic system dependant on hard evidence. For human resources practitioners, the two statements above, aligned side by side, resonate with how they work every day. HR professionals know that intangible assets, such as talent, drive the performance of their business. They have faith in things not seen. Yet, they also understand that business cases are built on empirical demonstrations of how strategy gets implemented into action, and how that action subsequently leads to observable (and predictable) outcomes. They know that, in business truth comes from the senses. Fortunately, advances in research, technology, and techniques for measuring intangibles along with a timely convergence of academic disciplines may have produced a solution that allows Human Resources practitioners to stay true to their faith, yet gives them the means of producing business cases that appeal to the senses. Evidence-Based Human Resources applies scientific standards of causality to demonstrate how intangible human capital can be observed and shown to add tangible business results. Evidence-Based HR State of the Art This evidence-based approach to managing talent uses both empirical methods of analysis and standards for evaluating evidence to build the argument that talent drives business performance. This new movement toward using evidence to guide decision making holds great promise, and does not require HR to discard its scorecards, strategy maps, or other modes of reporting measures. Instead, this evidence-based movement compliments, and indeed enhances existing practices, by providing factual evidence as a foundation for decision making. Evidence- Based Human Resources, rests on two key characteristics: 1. Focus on Business Strategy: HR professionals start with the financial and organizational performance measures that are most critical to their business. Then they use quantitative methods to identify the human capital strategies that drive those outcomes. 2. Standards of Evidence: Researchers and practitioners apply a set of criteria to determine the presence and strength of a causal relationship. Such critical evaluation will allow practitioners to design human capital strategies that have predictive heft. The latest developments in HR management are about changing the way HR managers think and the questions they ask. It also is changing the way they gather, process, and (most importantly) evaluate information. These developments hold the promise of helping the profession move beyond chasing fads and looking for the next great plug-and-play, to getting to the real work of helping their organizations improve business results through more effective management of people. This report documents the evolution of the field of human resources and, in particular, the advances in techniques and technologies for measuring human capital dynamics. It also serves as a review of the current literature from an array of the social sciences, providing an overview of the achievements in measuring the impact of talent on business performance. Finally, it specifically reviews examples in the literature that employ evidencebased approaches to human capital management.

6 6 The Conference Board Part I. The Evolution of Human Resources Management Literature The application of analytics to human resources is not new. For decades statistics have been used to track such things as the costs of labor and employee benefits, manufacturing downtime, and worker productivity. However, the use of measurement in human resources was revolutionized in 1984 when pioneer Jac Fitz-enz and his firm, The Saratoga Institute, produced the first national study on HR metrics. His book How to Measure Human Resources Management, which was released in the same year, quickly became the field s standard text for metrics, and is now in its third edition. Fitz-enz s work was revolutionary, applying basic formulae to everyday HR functions to measure their efficiency and effectiveness. His research sought to identify basic formulas for identifying the costs and benefits resulting from employee turnover, recruiting methods, training learning curves, etc. The application of metrics to HR was a critical step forward, demonstrating that it is possible to measure some of the key aspects of the human side of a company. The research by Fitz-enz and the Saratoga Institute during the 1980 s introduced measurement into how human resources departments are managed. Nonetheless, most firms continued to view HR primarily as an overhead expense. Since Fitz-enz introduced measurement to the HR function in the 1980 s most of the focus has been primarily on measuring the efficiency of HR functions. This focus fails to address the more meaningful issues of o how human capital creates value and how HR interventions serve as catalysts for improving business outcomes. In his 1997 book, Human Resource Champions, Dave Ulrich challenged HR professionals to show the value they deliver to a firm. He argued that human resource practices must be viewed as a source of competitive advantage, or else the HR function will be treated as a cost that must be minimized (likely resulting in outsourcing). The Importance of Talent to Competitiveness As the U.S. economy continued to transition toward a greater emphasis on services and innovation in the midand late 90 s, the business community began to place greater emphasis on the strategic use of human capital. In particular, the high-tech boom and the rise of international competition from Asia led to a realization that global competitiveness depended upon a company s ability to compete in the marketplace of talent. David Lewin and Daniel Mitchell (1995) advocate segmenting the workforce into two groups: a core and a periphery. The core segment is essentially the group of workers who are considered a valued resource to be invested in (they receive training, promotion, and promotion based pay, and often participate in decision-making processes), while the periphery are viewed as a basic input whose costs should be minimized. Under this framework, Lewin and Mitchell (1995) and Lewin (2003, 2005) suggest targeting high-involvement HR management practices (such as employee involvement/ teams, variable pay tied to performance, training, selective hiring, and employee decision making) at the core, while targeting low-involvement HR management practices (characterized by part-time and temporary employment, contract employment, and outsourcing) at the periphery. These high-involvement HRM practices are investments in human capital that will (ultimately) yield net economic return (value added) to the entity making the investments. 1 The publication of the book The Service Profit Chain (Heskett, Sasser, and Schlesinger, 1997) was an important milestone in recognizing the importance of human capital on customer satisfaction and loyalty. While the authors primarily emphasized customers and their central role in growth and profit strategies, they posited that employee productivity and work quality also had a bearing on how companies create a lasting relationship with their customers. While The Service Profit Chain promotes a conceptual model for understanding how 1 Lewin (2003).

7 Evidence-Based Human Resources 7 employees drive customer value (which ultimately drives business performance), the authors find that in practice firms are only monitoring a small subset of the links. As a result, The Service Profit Chain is filled with examples of each link, but none that demonstrate a complete chain. Ed Gubman s book The Talent Solution (1998), focuses in on the employee relationship to demonstrate that talent is critical to the success of business. Gubman calls for human capital strategies to be aligned with the various components of the company s overall strategies, and included guidance on how to implement HR metrics. Viewed together, The Service Profit Chain and The Talent Solution represent the natural progression toward a conceptual model of the talent-customer-profit relationship. This framework was expanded by John Boudreau and Peter Ramstad (2002), who advocated a new decision science Talentship. They emphasized providing strategic decisions based on the talent within the firm. The responsibilities of Talentship within the firm, as defined by Boudreau and Ramstad, is as a strategic business partner akin to finance and marketing, while the traditional operational functions of HR play supporting roles similar to accounting and sales. Another important perspective on the impact of human capital on organizational performance was contributed by Dave Ulrich and Norm Smallwood in their book Why the Bottom Line Isn t (2003). Ulrich and Smallwood asserted that enterprise-level HR capabilities such as the ability to attract and retain talent, to recognize and adapt to new market conditions, or to innovate quickly and deliver new goods and services in a timely way are, by nature, intangible human capital assets of an organization, yet they obviously have a direct impact on a firm s overall value. Their perspective essentially called for the human resources function to move away from simply providing support for executing the organization s strategy, and toward actually driving the strategy itself. Technology Changes HR s Capabilities The work of Jac Fitz-enz and the Saratoga Institute during the 1980 s introduced measurement to HR, but it was the computer revolution, with its delivery of greater storage capacity and speed, that brought these measurements to the broader HR community. From the early 1980 s through the mid-1990 s, U.S. businesses invested over $1.1 trillion in computers and peripheral equipment. 2 This investment in computers, along with the exponential increase in computing capabilities, the development of and access to the internet, and the development of HR information systems (PeopleSoft, Lawson, Oracle, SAP, etc.) greatly expanded most large organization s capacity to collect, tabulate, and report a myriad of measures. Benchmarking, which began over 25 years ago in the Xerox Corporation, 3 has advanced dramatically since the advent of the information age. While comparing an organization s human capital strategies against the best in class companies is not a new concept, the sophistication with which benchmarking now takes place has been revolutionized by the advent of massive databases maintained by leading research and consulting firms such as Gallup, Mercer, SAS, Hewitt, and Price Waterhouse Coopers. Companies can now compare themselves to other companies using any number of financial and human factors with a speed, precision, and richness that was not available ten years ago. While capacity for computing HR metrics has been dramatically improved by the creation of these database services, the basic technique of benchmarking continues to have its limitations. First, benchmarking is a method of generating a rich, vivid mirror which, although increasingly accurate, only reflects the practices of one s competitors. It does little to provide insights into how or why financial and human strategies should be aligned. Moreover, if misused, benchmarking can serve as a disservice to HR departments, since there is typically an underlying assumption that benchmarks serve as the fuel in a continuous process of doing more with less while failing to recognize how human capital serves as a means for generating value for the company. 2 Sichel (1997); investment amount expressed in 2007 constant dollars. 3 Tucker, Zivan, and Camp, 1987.

8 8 The Conference Board In 2001 Brian Becker, Mark Huselid, and Dave Ulrich published The HR Scorecard. This book was a human resources extension of Robert Kaplan and David Norton s The Balanced Scorecard (1996), which moved beyond benchmarking and advocated individual firms choose the measures appropriate for monitoring their execution against strategy. The HR Scorecard provided a wide array of Human Resources metrics that could be applied and integrated into a Balanced Scorecard methodology. In 2005 Huselid, Becker, and Richard Beatty followed up with The Workforce Scorecard, expanding the metrics to include overall human capital measures in addition to Human Resources functional measures. The scorecard technique 4 is valuable it serves as a means by which human capital metrics are viewed in alignment with the execution of the company s overall strategy. It also elevates human capital issues as meaningful to the entire organization, not simply the HR department. However, while the scorecard approach serves as a valuable means of determining how to use human capital metrics, it doesn t provide the more important insight into why metrics are important, which metrics to choose, or what they represent in terms of how human capital generates value. Somewhat paradoxically, these more recent techniques for analyzing data demonstrate how little ground has been covered in the past two decades. Benchmarking is akin to the original human resources measurement work in that, despite its sophistication, it is simply a tool for measuring the efficiencies of particular HR functions. Certainly, scorecards have moved human resources toward the C-suite, providing HR practitioners with measures and means of presenting their function in ways that are more consistent with finance, operations, and marketing. As a result, HR has become a strategic partner in a growing number of firms. However, none of the previously mentioned concepts or practices go beyond using intuition to determine which levers HR can pull to impact the firm s overall success that is, providing concrete evidence of the true drivers of the firm, and how can HR influence those drivers. 4 The scorecard technique originated at Analog Devices. See Kaplan and Norton (1992 & 1993) for background. Existing Evidence in the Academic Literature The late 1980 s and 1990 s brought the first serious attempts to link HR practices to a company s financial performance. A number of early studies looked at the impact of specific human resources functional areas such as training, 5 selection and staffing, 6 performance appraisals, 7 and compensation 8 on various financial performance indicators of individual companies. These studies 9 based their (sometimes bold) conclusions on the intuitive appeal that an HR practice (or group of practices) causes the performance outcome. With few exceptions, however, the empirical rigor of these studies was limited to finding correlations between two variables (e.g. incentive compensation and increased sales). In other words, they failed to meet more rigorous standards of evidence to show that these practices actually caused the business performance outcome. As shift in focus within the Human Resources Management literature from the impacts of individual HR management practices to the interrelations and impacts of groups, or bundles, of HR management practices began to take hold in the early 1990 s. The research supporting this shift consistently found that the impacts of implementing a group of HR management practices are larger than the combined individual effects of the practices (e.g. MacDuffie, 1995). The focus on groups of HR management practices also began to (oftentimes implicitly) make the link between HR management practices and firm strategy. As MacDuffie (1995) observed, it is not the bundle of HR management practices alone that creates a competitive advantage for the firm. Innovative HR management practices designed to increase motivation, involvement in the production process, and the accumulation of skills must be matched to a production process for discretionary effort to be appropriately channeled toward performance improvement (p. 199) Russell, Terborg & Powers (1985). 6 Terpstra & Rozell (1993). 7 Borman (1991). 8 Gerhart & Milkovich (1992). 9 The research on Human Resources Management practices has been primarily empirical. For an overview of the theoretical underpinnings of HR management, see Delery and Doty (1996). 10 For example: If a manufacturing plant switches to a lean production process, the HR management practices must be adjusted to compliment an environment which provides a larger role for employee influence.

9 Evidence-Based Human Resources 9 More recently, Wright et al. (2005) evaluated 66 studies from the HR management and Organizational Psychology disciplines that examine the relationship between a system of HR practices and organization-level performance measures. They apply a rigorous set of criteria to identify the studies that have provided a compelling case for a causal relationship between HR-related measures or actions and performance outcomes. 11 As a result, Wright et al. reduce these 66 studies down to 10 that they describe as true predictive designs. The 10 studies identified by Wright et al. as having a truly predictive design all address the same basic question: What is the impact of multiple HR management practices on firm performance? Despite the wide range of HR measures and firm performance measures, nine of these studies present (at least some) evidence that HR strategy has an impact on firm performance. In most cases, the HR measures are indices or scales created by the authors to measure the degree of presence. The downside of creating indices to measure HR management practices is that there is no clear, practical interpretation of the coefficients. As a result, practitioners can find confirmation in what they already believe: HR management systems have a significant positive relationship with firm performance measures. But there are no definitive actions for the practitioner to take away from studies that measure HR management practices using an index number. Another finding that emerges from these studies is that once past performance is controlled for, many of the relationships between HR management practices and firm performance are reduced and in some cases disappear. Huselid, Susan Jackson, and Randall Schuler (1997) survey senior executives in HR management and line positions to assess HR management effectiveness across a wide range of practices and the capabilities of the HR staff. Their results suggest that HR capabilities are significantly correlated with future performance, while HR effectiveness is not a significant predictor. However, when the contemporaneous performance measure is included as a control variable, the magnitude and significance of HR capabilities are reduced. Like Huselid, Jackson, and Schuler (1997), David Guest et al. (2003) also find a strong positive association between their HR management index and firm performance, but the relationship disappears once previous firm performance was included as a control. Finally, Benjamin Schneider et al. (2003) look at the temporal relationship between employee attitude and firm performance. Using seven different employee attitude scales, the authors find some positive relationships between employee attitudes and future firm performance. However, there were more significant and strong relationships between employee attitudes and past firm performance. These results highlight an important limitation in many studies: including prior firm performance takes into account the possibility that previous firm success could influence both HR management practices and future firm performance. 11 Combs et al. (2006) use a meta-analysis of 92 studies to determine the magnitude of the relationship between High Performance Work Practices and firm performance. Their metaanalysis highlights a strong relationship between HPWP and firm performance, but does not allow them to determine causal order.

10 10 The Conference Board Part II. The Parallel Evolution in Labor Economics In his book, The Wealth of Nations (1776), Adam Smith espoused the general concepts behind what economists refer to as human capital the acquired skills and innate abilities of an individual that make them productive. 12 Smith identified the influence of human capital, and more specifically investments in it, on productivity and economic progress. 13 However it was Gary Becker 14 in the 1960 s who laid out the fundamental conceptual framework for the modern economic treatment of human capital, which included the distinction between general (or transferable) human capital and firmspecific human capital. Becker was also one of the first economists to apply economic methods to topic areas that had previously been the domain of sociologists and psychologists. 15 The Development of Personnel Economics In the years following the publication of Human Capital (1964), many labor economists set out to test and expand the theories laid out by Becker. By the early 1990 s the area of personnel economics had begun to take shape. Personnel economics, which is the application of economic theory and principles to the human resources problems of the firm, provides a solid theoretical foundation to the rules and strategies of human resources management with much of this theoretical foundation backed by rigorous empirical analyses. Much of this early work was done by Edward Lazear, 16 who is recognized as the founder of personnel economics. The role of economists in studying human resource management practices is becoming increasingly important, since researchers and practitioners are sensing an urgency to move away from casual observation and toward causal evidence. The statistical tools used by economists offer ways to control for individual worker ability, firm (or plant) specific characteristics, simultaneity of events, and prior conditions to establish a causal relationship. Much of the work by economists has focused on individual components of HR management, 17 such as piece rates 18 and other pay-for-performance measures, 19 pensions and mandatory retirement, teams, 20 promotion schemes, training, 21 turnover, and screening. 22 But as 12 See Hamermesh and Rees (1993). 13 Smith also recognized how human capital accumulation impacted the individual s earnings capability. 14 The seminar work by Becker is his book Human Capital, originally published in In 1992 Becker won the Nobel Prize in Economics for having extended the domain of microeconomic analysis to a wide range of human behaviour and interaction, including nonmarket behaviour. (http://nobelprize.org) 16 See Lazear (1991). 17 See Lazear (1995) and Lazear and McNabb (2004) for reviews. 18 Lazear (2000) finds the piece rate pay system implemented by Safelite Glass Corporation increased productivity and attracted more productive workers. 19 Knez and Simester (2001) find on-time performance improved at Continental Airlines once the airline introduced monthly bonuses tied to firm-wide performance. 20 Hamilton, Nickerson, and Owen (2003) found that when a garment manufacturing facility switched from an individual to a team based pay system, productivity increased. 21 See Bassi and McMurrer (2006) for a review. 22 Huang and Cappelli (2006) find that screening results in hiring workers who are more productive under systems with less monitoring, but firms also gain from implementing the low monitoring systems that complement these independent workers.

11 Evidence-Based Human Resources 11 economists have begun to gather insights from other HR researchers, recent work has evolved to consider a system of HR management practices that acknowledges their potential complimentary roles and interactions. Casey Ichniowski and Kathryn Shaw (2003) have introduced an approach they call insider econometrics, where they combine extensive field work with rigorous econometrics to address the effects of HR management on firm performance. The field work is focused on a specific production process, allowing the researcher to produce a detailed model of the production process and collect the appropriate data needed to estimate the model. To date, Ichniowski and Shaw have used this approach to study steel finishing lines 23 and valve manufacturing, 24 but also recognize several other existing studies that fit their model of insider econometrics. 25 Economists can also provide broad macroeconomic (national or global) information, in addition to analyses of firm-specific phenomena. The macroeconomic information helps provide a background and context in which the HR policies and practices take place. For example, global trends, such as increasing demand for high-skill labor, without a countering increase in the supply of high-skill labor, will result in fiercer competition (and thus higher prices) for the high-talent workers. Moreover, because supply of skilled labor has been shown to catch up to demand with a significant lag, firms can expect to pay a large premium for talent for at least the near future. Broad information and insights such as these may not be of great interest to the traditional HR managers, but those who participate in the strategic decisions of their organization should be careful not to ignore them. Evidence of the Relationship between HR Management Practices and Firm Performance in the Economic Literature The growing body of work addressing clusters of HR management practices 26 often refers to and focuses on high-performance work practices. 27 Economic theory says the transfer of (at least some) decision-making power to employees leads to higher labor costs per employee (with employees benefiting from higher wages and benefits) while employers gain from increased productivity. Thus, the implementation of high-performance work practices increases both labor costs and productivity, resulting in a theoretically ambiguous impact on profitability. Using monthly data collected on 36 steel finishing lines in the United States, Casey Ichniowski, Kathryn Shaw, and Giovanna Prennushi (1997) investigate the productivity effects of innovative employment practices. In their analysis of the impact of HR management on productivity, they find that those plants with the most sophisticated HR systems have the highest uptime, and productivity is sequentially lower as you move toward the traditional HR system. Further, by measuring the prime-yield rates 28 for the plants, the authors estimate that the adoption of more innovative HR management practices also resulted in improved quality (as measured by an increase in the prime-yield rate). 23 Ichniowski, Shaw, and Prennushi (1997), Boning, Ichniowski, and Shaw (2001) 24 Bartel, Ichniowski, and Shaw (2005) 25 See Ichniowski and Shaw (2003), p Black and Lynch (2005) highlight some of the findings in the economics literature and address the difficulties that arise when trying to measure organizational capital such as work design and employee voice. 27 Cappelli and Neumark (2001) note the confusion introduced through the use of this phrase. For many studies, what is meant by high performance work systems depends on what is measured. Cappelli and Neumark cite Becker and Gerhart (1996) who count 27 different variables used as high performance work practices across 5 studies, with only 4 of those practices common in 3 or more studies. 28 The percent of total production that met the standards to be designated prime finished steel.

12 12 The Conference Board Ann Bartel (2004) observes that prior studies on the impact of HR management on productivity and performance focus on the goods-producing sector. Yet the service-providing sector continues to increase in significance and employment (in 2006 over 80 percent of employees were in the service-providing sector of the U.S. economy). 29 She addresses this gap in the existing literature by collecting data on bank branches, and finds variation in the applications of HR policies across branches, in spite of a company-wide formal mandate for these policies. Once prior performance is controlled for; performance and reward is a significant factor in the percentage change in loans balances, but not a significant factor in the percentage change in deposits. Bartel (2004) concludes that the incentives dimension of a high-performance work system in the most important predictor of performance in the banking industry. Peter Cappelli and David Neumark (2001) attempt to solve the difficulty in the existing literature in establishing whether observed links between work practices and organizational performance are causal or merely reflect pre-existing differences among firms. Using data from the National Employer Surveys and the Census Bureau s Longitudinal Research Database, Cappelli and Neumark find evidence that suggests high-performance work practices increase sales per worker (productivity) and labor costs, but no evidence that synergies between practices reduce costs. 30 Because these HR management practices appear to increase both productivity and costs, the authors also estimate their impact on sales per labor costs, or labor efficiency. The majority of the effects point to offsetting relationships. As a result, implementing high-performance work practices results in higher labor costs and higher productivity, resulting in no net effect on labor efficiency. Finally, macro-level research by Laurie Bassi and Daniel McMurrer (2004) shows that firms investing in employee education and training (employee development) experience extraordinary shareholder return. They constructed both hypothetical and actual investment portfolios comprised of firms that invested heavily in employee development in a given year, tracked them for several following years, and found these indices to outperform the S&P 500 over the same time horizon. More recently, Bassi and McMurrer (2007) use information from several dozen firms to look for human capital measures that predict organizational performance. Using the literature as their guide, Bassi and McMurrer were able to discover which metrics consistently predict organizational performance (leadership, employee engagement, knowledge accessibility, workforce optimization, organizational learning capacity) and which metrics do not (turnover rate, time to fill, total hours training). They conclude, however, that while it is possible to use a single framework to identify the most important human capital drivers of organizations performance, it is not possible to identify a single set of human capital metrics that are equally important drivers of performance across organizations (or even within a single organization at various points in its evolution). 29 Authors computation based on Bureau of Labor Statistics, Current Employment Statistics program, Historical Table B Using firm level panel data, Black and Lynch (2001, 2004) also find high performance work practices significantly increase productivity, and find no evidence that more productive firms implement high performance work practices.

13 Evidence-Based Human Resources 13 Part III. The Emergence of Evidence-Based Human Resources The advances in the sophistication of analytics in the field of Human Resources Management, along with a convergence of work coming from Personnel Economics, has led to a new approach to the practice of HR. This new approach, Evidence-Based Human Resources, capitalizes on these new analytic capabilities and the causal empiricism of economics. Evidence-Based Human Resources is a philosophical and pragmatic approach to the management of human capital. Practitioners of Evidence-Based Human Resources focus squarely on the impact of management practices on observable financial and organizational outcomes; and their decisions are guided by the best available evidence. Much of the work in HR metrics to date has been focused on improving efficiency or proving the value of the HR function. Evidence-Based Human Resources extends beyond this focus. In particular, practitioners of Evidence-Based Human Resources are motivated by the desire to find the critical human levers for improving business results. This approach has been advanced in the academic literature beginning with the work of Brian Becker and Mark Huselid (1998), and more thoroughly expounded by Patrick Wright and colleagues (2005). Meanwhile, the need for the use of empirical evidence in decision making is being promoted in the popular press by Jeffrey Pfeffer and Robert Sutton s book, Hard Facts, Dangerous Half-Truths, and Total Nonsense: Profiting from Evidence-Based Management (2006). The future is indeed promising. Boudreau and Ramstad s most recent book, Beyond HR (2007), advocates for the emergence of a talent decision science. They assert that, for HR to truly be a strategic partner, it must evolve into a bimodal structure similar to the relationship between accounting and finance, or sales and marketing. According to Boudreau and Ramstad, human resources practitioners currently have measures that are similar to the tactical functions of accounting and sales. But the strategic future lies in HR s success in developing a set of decision science standards comparable to those that serve as the foundation for the fields of finance and marketing. In particular, Finance and marketing use measures that focus on delivering firm-level strategic outcomes, rather than focusing on how well the (finance and marketing) departments operate. As mentioned earlier in this report, this approach rests on two key characteristics: 1. Focus on Business Strategy; and 2. Standards of Evidence Focus on Strategy First and foremost, Evidence-Based Human Resources places strategy at the forefront. In their book Strategy Maps, Kaplan and Norton (2004) define strategy as describing how the company intends to create value for its stakeholders. The increasing reliance on intangible assets to create and sustain firm value magnifies the importance of a firm s strategy. 31 A key component of intangible assets is the firm s people the existing employees, knowledge base, customer relationships, and organizational relationships thus creating a critical strategic role for human capital management. 31 Bassi and McMurrer (2007)

14 14 The Conference Board Inherent in the firm s strategy its plan for developing and sustaining competitive advantages is a set of goals, the achievement of which is synonymous with the success of the strategy. Key Performance Indicators (KPIs) are quantifiable measures that provide the firm with a way of measuring progress toward their strategic goals. KPIs are also useful because they are accepted across the enterprise as indicators of success. The usefulness and impact of KPIs will typically be greatest when they are: aligned with overall strategy; Wright and colleagues add a fourth requirement for establishing causation: data must be collected in a timely manner. This fourth requirement is especially important when measuring opinions and other subjective information. Research has shown that people s responses to subjective questions about past events or practices are skewed based on recent firm success or failure. 32 quantifiable and measurable; and recognized throughout the organization as indicators of success. Further, by establishing target values for each KPI, organizations create a transparent and ongoing mechanism for determining whether their strategic goals are being (or have been) reached. KPIs help facilitate the process by which each functional unit within the firm can prioritize its efforts and focus resources on those levers within its domain that impact the observable measures that indicate the firm s strategic success. Standards of Evidence The second characteristic of Evidence-Based Human Resources requires that information be rigorously evaluated. Only recently has the academic research on HR management practices paid explicit attention to the rigors and methodologies required to lay claim to a causal relationship. Patrick Wright and colleagues (2005) have drawn attention to the inability of past research to convincingly show a causal relationship. They highlight Cook and Campbell s (1979) three criteria for showing a causal relationship: a strong relationship exists between the two factors; How the Evolution of HR Management Impacts HR Professionals A recent publication by Phil Rosenzweig, The Halo Effect (2007a), underscores the need for Human Resources (and other business managers) to acquire the basic skills necessary to analyze and interpret statistical analyses. As Professor Rosenzweig states, evidencebased management can be a powerful tool but only if we re clear about what constitutes valid evidence. Unless we can distinguish hard facts from questionable data, we may not get very far, no matter how good our intentions may be. 33 He also echoes the sentiments of Boudreau and Ramstad, and Pfeffer and Sutton that it is crucial to measure what is important, not what is easy (to measure). As practitioners move forward, it is important not to let the management of human capital be paralyzed by a lack of consensus; an approximate answer to the right question is worth a great deal more than a precise answer to the wrong question. 34 There is likely no single, universal answer. Our evidence-based approach provides a framework that practitioners can use to find the right answer for their unique organization. Businesses that adopt the evidence-based framework must place the existing literature within the context of their unique situations, and evaluate the degree to which the existing evidence fits their problem. the cause factor occurs before the effect factor; and the analysis must account for other possible influences. 32 For greater detail, see the discussion and references in Wright et al. (2005), pages Rosenzweig (2007b) 34 Kennedy, 2003

15 Evidence-Based Human Resources 15 Observations Concerning the Current Literature/Future Research There are a number of ways that the body of research on evidence-based approaches to management needs to continue to advance. First, while there has been a great deal of research that identifies and reports the various metrics that are employed by HR departments, there is very little research or popular literature that has been designed to identify the KPIs across organizations within the same industry or (perhaps more importantly) publish these KPIs in a format that makes them easy for the average human resources practitioner to apply them to their own organization, design human capital strategies that are targeted toward them, and establish evidence-based standards to determine whether these strategies are having an impact. Second, nearly all of the studies that have met Cook and Campbell s standards for showing causality have been conducted within the context of a single enterprise. While these studies may have demonstrated the impact of HR management practices within a particular organization, there is little evidence to show that the results could be generalized to other organizations, let alone other industries. Therefore, there is a need for future research to focus on the impact of particular practices (or combinations of practices) across organizations while also meeting the standards of causation. Third, since there isn t a large body of literature that demonstrates the causal impact of human capital strategies on organizational performance across organizations, there is very little in terms of a paved road to identify a universal set of concepts, standards, practices, or principles that are necessary for creating a genuine decision science for human resources. Until this body of research is created, the field is limited to simply describing what the characteristics of the decision science are, without actually creating it. Finally, the impact of human capital extends beyond the collection of contributions by individuals. Ulrich and Smallwood (2003) make the important point that, collectively, human capital creates organizational capabilities that also create value. For example, organizational cultures that foster innovation, structures that encourage collaboration, or leadership teams that instill a feeling of trust among employees are all enterprise-level intangibles, yet their impact on a firm s performance (in the form of new ideas and products, higher quality goods and services, or a more dedicated workforce) are strategically important, and tangible. Future research should not overlook the impact of these enterprise-level human capital capabilities. The Need for Cross-Discipline Cooperation So how can economists, sociologists, and industrial psychologists gain from each others work? Lazear believes there is a mutually beneficial relationship between economists and sociologists and industrial psychologists that arises from the skills and approaches within each group. 35 The strength of economics is its rigorous and analytic approach. However, such an approach often requires the use of simplifying assumptions which, in turn, produce concrete, but narrow, solutions. Sociologists and industrial psychologists, on the other hand, have paid more attention to a deeper behavioral approach to the relevant questions. Traditionally this has resulted in findings that are less empirically rigorous, but offer much more detail in the way of identifying the problems, offering insights into individuals behavior at work, and providing courses of action for managers to follow. Lazear suggests that integrating economics into the discussion can result in research that provides practitioners with findings that combine the richness of sociology and industrial psychology literature with the empirical rigor of economics See Lazear (1991) for more discussion on the role of economists in addressing the practices within an organization. 36 Researchers in these fields have already begun to display benefits of integrated work, as sociologists and industrial psychologists are stressing empirical rigor, and economists are becoming more aware of underlying organizational behaviors. See Ichniowski and Shaw (2003) for a detailed discussion.

16 16 The Conference Board Conclusion Evidence-Based Human Resources is the natural outcome of the ongoing evolution of the field of HR management. However, this evolution would not be possible without simultaneous evolution of Organizational Psychology, Labor Economics, and other academic disciplines that provide direction and insight for the management of people in business. Additionally, advances in database technology, the emergence of the service-driven economy, and the globalization of the labor market have all served as catalysts for this transformation. While many of the evolutionary forces are relatively new, Evidence-Based Human Resources also applies longestablished standards for demonstrating causation using the scientific method. These are not new standards, but they are very new in their application to the field of human resources. Most importantly, Evidence-Based Human Resources uses business performance measures as its outcome units of analysis. By doing so, Evidence-Based Human Resources serves as a means of providing genuine insight into how talent drives the business. Evidence-Based Human Resources serves to inform the next generation of human capital analytics research and development. Specifically, for non-hr business leaders, it gives a better understanding of the human component of the equation of business performance. For HR practitioners, it sets the groundwork for making better business cases. And finally, for everyone in the business community, it provides greater appreciation for the traditionally intangible contributions of talent. Indeed, it appeals to the senses while keeping the faith.

17 Evidence-Based Human Resources 17 References Bartel, Ann, Human Resource Management and Organizational Performance: Evidence from Retail Banking, Industrial and Labor Relations Review, Vol. 57(2) (January), p Black, Sandra E., and Lisa M. Lynch, Measuring Organizational Capital in the New Economy, in Carol Corrado, John Haltiwanger, and Don Sichel, eds., Measuring Capital in the New Economy, University of Chicago Press. Bartel, Ann, Casey Ichniowski, and Kathryn Shaw, How Does Information Technology Really Affect Productivity? Plant- Level Comparisons of Product Innovation, Process Improvement and Worker Skills, NBER Working Paper 11773, November. Bassi, Laurie, and Daniel McMurrer, How s Your Return on People? Harvard Business Review, March, p. 18. Bassi, Laurie and Daniel McMurrer, Employers Perspectives on Human Capital Development and Management, Submitted to OECD, Feb Bassi, Laurie, and Daniel McMurrer, Maximizing Your Return on People, Harvard Business Review, March, p Becker, Brian E., and Mark A. Huselid, High Performance Work Systems and Firm Performance: A Synthesis of Research and Managerial Implications, Research in Personnel and Human Resource Management, Vol. 16, p Becker, Brian E., Mark A. Huselid, and Dave Ulrich, The HR Scorecard: Linking People, Strategy, and Performance, Boston, MA: Harvard Business School Press. Becker, Brian, and Barry Gerhart, The Impact of Human Resource Management on Organizational Performance: Progress and Prospects, Academy of Management Journal, Vol. 39(4) (December), p Boning, Brent, Casey Ichniowski, and Kathryn Shaw, Opportunity Counts: Teams and the Effectiveness of Production Incentives, NBER Working Paper 8306, May. Borman, Walter C., Job Behavior, Performance, and Effectiveness, in Handbook of Industrial and Organizational Psychology, M. D. Dunnette & L. M. Hough, eds., Palo Alto, CA: Consulting Psychologists Press. Boudreau, John W., and Peter M. Ramstad, Strategic HRM Measurement in the 21 st Century: From Justifying HR to Strategic Talent Leadership, CAHRS Working Paper Series, Working Paper 02-15, Cornell University. Boudreau, John W., and Peter M. Ramstad, Beyond HR: The New Science of Human Capital, Boston, MA: Harvard Business School Pres. Cappelli, Peter, and David Neumark, Do High Performance Work Practices Improve Establishment-Level Outcomes? Industrial and Labor Relations Review, Vol. 54(4) (July), p Combs, James, Yongmei Liu, Angela Hall, and David Ketchen, How Much Do High-Performance Work Practices Matter? A Meta-Analysis of Their Effects on Organizational Performance, Personnel Psychology, Vol 59(3) (Autumn), p Becker, Gary S., Human Capital,2 nd Ed. (1975), New York, NY: Columbia University Press. Black, Sandra E., and Lisa M. Lynch, How to Compete: The Impact of Workplace Practices and Information Technology on Productivity, Review of Economics and Statistics, Vol. 83(3) (August), p Black, Sandra E., and Lisa M. Lynch, What s Driving the New Economy: The Benefits of Workplace Innovation, Economic Journal, Vol. 114(February), p Cook, Thomas D. and Donald T. Campbell, Quasi- Experimentation: Design & Analysis for Field Settings, Boston, MA: Houghton Mifflin Company. Delery, John E., and D. Harrold Doty, Modes of Theorizing in Strategic Human Resource Management: Tests of Universalistic, Contingency, and Configurational Performance Predictions, Academy of Management Journal, Vol. 39(4), p

18 18 The Conference Board Fitz-enz, Jac, and Barbara Davidson, How to Measure Human Resources Management,3 rd Ed., New York, NY: McGraw-Hill. Gerhart, Barry, and George T. Milkovich, Organizational Differences in Managerial Compensation and Financial Performance, The Academy of Management Journal, Vol. 33(4) (December), p Ichniowski, Casey, Kathryn Shaw, and Giovanna Prennushi, The Effects of Human Resource Management Practices on Productivity: A Study of Steel Finishing Lines, American Economic Review, Vol. 87(3) (June), p Kaplan, Robert S., and David P. Norton, The Balanced Scorecard Measures That Drive Performance, Harvard Business Review, January-February, p Gubman, Edward L., The Talent Solution: Aligning Strategy and People to Achieve Extraordinary Results, New York: McGraw- Hill. Kaplan, Robert S., and David P. Norton, Putting the Balanced Scorecard to Work, Harvard Business Review, September-October, p Guest, David E., Jonathan Michie, Neil Conway, and Maura Sheehan, Human Resource Management and Corporate Performance in the UK, British Journal of Industrial Relations, Vol. 41(2) (June), p Hamermesh, Daniel S., and Albert Rees, The Economics of Work and Pay, Fifth Edition, New York, NY: HarperCollins College Publishers. Hamilton, Barton H., Jack A. Nickerson, and Hideo Owan, Team Incentives and Worker Heterogeneity: An Empirical Analysis of the Impact of Teams on Productivity and Participation, Journal of Political Economy, Vol. 111(3) (June), p Kaplan, Robert S., and David P. Norton, The Balanced Scorecard: Translating Strategy into Action, Boston, MA: Harvard Business School Press. Kaplan, Robert S., and David P. Norton, Strategy Maps: Converting Intangible Assests into Tangible Outcomes, Boston, MA: Harvard Business School Press. Kennedy, Peter, A Guide to Econometrics,5 th Ed., Cambridge, MA: MIT Press. Knez, Marc and Duncan Simester, Firm-Wide Incentives and Mutual Monitoring at Continental Airlines, Journal of Labor Economics, Vol. 19(4), p Heskett, James L., W. Earl Sasser, and Leonard A. Schlesinger, The Service Profit Chain: How Leading Companies Link Profit and Growth to Loyalty, Satisfaction, and Value, New York: Free Press. Huang, Fali and Peter Cappelli, Employee Screening: Theory and Evidence, NBER Working Paper 12071, March. Huselid, Mark A., Brian E. Becker, and Richard W. Beatty, The Workforce Scorecard: Managing Human Capital to Execute Strategy, Boston, MA: Harvard Business School Press. Huselid, Mark A., Susan E. Jackson, and Randall S. Schuler, Technical and Strategic Human Resource Management Effectiveness as Determinants of Firm Performance, Academy of Management Journal, Vol. 40(1), p Ichniowski, Casey, and Kathryn Shaw, Beyond Incentive Pay: Insiders Estimates of the Value of Complimentary Human Resource Management Practices, Journal of Economic Perspectives, Vol. 17(1) (Winter), p Lazear, Edward P., Labor Economics and the Psychology of Organizations, Journal of Economic Perspectives, Vol. 5(2) (Spring), p Lazear, Edward P., Personnel Economics (The Wicksell Lectures), Cambridge, MA: MIT Press. Lazear, Edward P., Performance Pay and Productivity, American Economic Review, Vol. 90(5) (December), p Lazear, Edward P., and Robert McNabb, Personnel Economics, Northhampton, MA: Edward Elgar. Lewin, David, Human Resource Management and Business Performance: Lessons for the 21 st Century, in Human Resource in the 21 st Century, Marc Efron, Robert Gandossy, and Marshall Goldsmith, eds., Hoboken, NJ: John Wiley & Sons.

19 Evidence-Based Human Resources 19 Lewin, David, The Dual Theory of Human Resource Management and Business Performance: Lessons from HR Executives, in The Future of Human Resource Management: 64 Thought Leaders Explore the Critical HR Issues of Today and Tomorrow, Mike Losey, Sue Meisinger, and Dave Ulrich, eds., Hoboken, NJ: John Wiley & Sons. Lewin, David, and Daniel J. B. Mitchell, Human Resource Management: An Economic Approach,2 nd ed., Cincinnati, OH: South-Western. MacDuffie, John Paul, Human Resource Bundles and Manufacturing Performance: Organizational Logic and Flexible Production Systems in the World Auto Industry, Industrial and Labor Relations Review, Vol. 48(2) (January), p Pfeffer, Jeffrey, and Robert I. Sutton, Hard Facts, Dangerous Half-Truths, & Total Nonsense: Profiting From Evidence-Based Management, Boston, MA: Harvard Business School Press. Schneider, Benjamin, Paul J. Hanges, D. Brent Smith, and Amy Nicole Salvaggio, Which Comes First: Employee Attitudes or Organizational Financial and Market Performance? Journal of Psychology, Vol. 88(5), p Sichel, Daniel E., The Computer Revolution: An Economic Perspective, Washington D.C.: Brookings Institution Press. Smith, Adam, An Inquiry into the Nature and Causes of the Wealth of Nations, London: Methuen and Co., Ltd., ed. Edwin Cannan, Fifth edition. Terpstra, David E., and Elizabeth J. Rozell, The Relationship of Staffing Practices to Organizational Level Measures of Performance, Personnel Psychology, Vol. 46(1) (March), p Tucker, Frances Gaither, Seymour M. Zivan, and Robert C. Camp, How to Measure Yourself Against the Best, Harvard Business Review, January-February. Rosenzweig, Phil, 2007a. The Halo Effect and Eight Other Business Delusions that Deceive Managers, New York: Free Press. Ulrich, Dave, Human Resource Champions: The New Agenda for Adding Value and Delivering Results, Boston MA: Harvard Business School Press. Rosenzweig, Phil, 2007b. An Obstacle to Evidence-Based Management: The Halo Effect, posted to the Evidence-Based Management Website, February 5, 2007, Russell, James S., James R. Terborg, and Mary L. Powers, Organizational Performance and Organizational Level Training and Support, Personnel Psychology, Vol. 38(4) (December), p Ulrich, Dave, and Norm Smallwood, Why The Bottom Line Isn t, Hoboken NJ: John Wiley & Sons. Wright, Patrick M., Timothy M. Gardner, Lisa M. Moynihan, and Mathew R. Allen, The Relationship Between HR Practices and Firm Performance: Examining Causal Order, Personnel Psychology, Vol. 58(2), pp

20 20 The Conference Board Appendix 1 Evidence-Based Human Resources Advisory Panel John W. Boudreau Professor and Research Director Center for Effective Organizations Marshall School of Business University of Southern California Jac Fitz-enz Chief Executive Officer Human Capital Source Edward L. Gubman Partner Strategic Talent Solutions David Lewin Neil H. Jacoby Chair in Management Anderson School of Management University of California, Los Angeles Jeffrey Pfeffer Thomas D. Dee II Professor of Organizational Behavior Graduate School of Business Stanford University Jack Phillips Chairman The ROI Institute Peter M. Ramstad Vice President of Business and Strategic Development The Toro Company Kathryn Shaw, Stanford University Ernest C. Arbuckle Professor of Economics Graduate School of Business Stanford University David O. Ulrich Professor of Business Administration Director, Human Resource Executive Program Ross School of Business University of Michigan Patrick M. Wright Professor of Human Resources Studies Director, Center for Advanced Human Resources Studies School of Industrial and Labor Relations Cornell University Evidence-Based Human Resources Research Working Groups Participating Companies ABN AMRO/LaSalle Bank Corporation Aetna, Inc./Schaller Anderson, Inc. Alliant Energy Corporation Allied Irish Banks AMR Corporation/American Airlines A.P. Moller-Maersk A/S Avaya Inc. Bank of America Corporation Bank of Ireland Best Buy Company, Inc. BMO Bank of Montreal Capital One Financial Corporation The Clorox Company Deere & Company Deutsche Post World Net/Exel Inc. FedEx Corporation/FedEx Ground Fidelity Investments/Fidelity Management & Research Company GMAC ResCap Humana Inc. IBM Corporation Lockheed Martin Corporation McDonald s Corporation National Aeronautics and Space Administration (NASA)/Johnson Space Center Nationwide Financial Services, Inc. Navy Federal Credit Union PetSmart, Inc. Pharmaceutical Research and Manufacturers of America (PhRMA) The Royal Bank of Scotland Group SAP America, Inc Saudi Aramco/Aramco Services Company Science Applications International Corporation (SAIC) State Farm Insurance Companies Target Corporation Thrivant Financial for Lutherans UBS The Walt Disney Company Wells Fargo & Company The World Bank

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