SHRM Human Capital Benchmarking Study 2005 EXECUTIVE SUMMARY

2005 EXECUTIVE SUMMARY

2005 EXECUTIVE SUMMARY JOHN DOONEY / Manager, Strategic Research NOËL SMITH / Strategic Research Specialist Also introducing SHRM Customized Human Capital Benchmarking Service Database of more than 1,500 organizations To order a complete analysis of the results, customized to your organization, please see page 55

This report is published by the Society for Human Resource Management (SHRM). The interpretations, conclusions and recommendations in this report are those of the author and do not necessarily represent those of SHRM. All content is for informational purposes only and is not to be construed as a guaranteed outcome. The Society for Human Resource Management cannot accept responsibility for any errors or omissions or any liability resulting from the use or misuse of any such information. 2005 Society for Human Resource Management. All rights reserved. Printed in the United States of America. This publication may not be reproduced, stored in a retrieval system or transmitted in whole or in part, in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without the prior written permission of the Society for Human Resource Management, 1800 Duke Street, Alexandria, VA 22314, USA. For more information, please contact: SHRM Research Department 1800 Duke Street, Alexandria, VA 22314, USA Phone: (703) 548-3440 Fax: (703) 535-6432 Web: www.shrm.org/research 2

CONTENTS 4 Introduction 7 About the Authors 8 Acknowledgements 8 Methodology 10 Using Benchmarking Data 14 Key Findings 15 HR Departments and Expenses 19 HR-to-Employee Ratios 22 Employment 28 Health Care 31 Compensation 34 Organizational Data 36 Profile of Organizations Responding to the Survey 38 Conclusion 40 The Future of HR Metrics 48 Glossary 55 Special: SHRM Customized Human Capital Benchmarking Service 3

INTRODUCTION

The importance of human capital is increasing dramatically as the United States and other industrialized nations rapidly shift to a knowledge-based economy. Key Metrics and Data Collected (Number of organizations responding = 702) Employment Time-to-fill Cost-per-hire Number of positions filled* HR Departments and Expenses Total HR staff HR-to-employee ratio* HR expense HR expense to operating expense ratio HR expense per FTE* Human capital the collective knowledge, skills and abilities of people that contribute to organizational performance is no longer just a cost to be managed. Executives now see human capital as an asset to be leveraged; one that can be used to drive value and optimize firm performance. In 1995, a study comprehensively linked systems of highperformance work practices and company performance. The results, based on a national sample of nearly 1,000 firms, indicated that these practices had economically and statistically significant impact on both intermediate employee outcomes (turnover and productivity) and short- and long-term measures of corporate financial performance. 1 Health Care Health care expense per all employees Health care expense per covered employees* Percentage of premiums organization pays for employee-only coverage* Percentage of premiums organization pays for employee and dependent coverage* Projected increases in health care expenses* Compensation Annual salary increases* Annual turnover rate Salaries as a percentage of operating expense* Organizational Data Revenue Revenue per FTE* Net income Net income per FTE* *Metrics reported in this executive summary. 5

Human capital management is also comprehensive. It includes not only human resource (HR) practices, but also other work practices and people management strategies that increase organizational performance. The important distinction is that human capital extends well beyond the HR function to encompass the total people strategy of the organization. Human capital is owned by all of the business leaders and resides with everyone in the organization. 2 The advantage of this is that businesses are starting to understand what HR professionals have known for years that human resource programs and activities contribute to the bottom line. With this type of attention on human capital, Industries Surveyed Agriculture, forestry and fishing Construction and mining Educational services Financial services Government Health High-tech Insurance Library Manufacturing (durable goods) Manufacturing (nondurable goods) Oil and Gas Publishing and broadcasting Real estate Service (nonprofit) Service (profit) Transportation Utilities Wholesale/retail trade Other HR professionals are in an ideal position to work with other business executives to lead the way organizations measure their human capital. But before an organization calculates metrics, it must first show how its human capital and human resource activities logically flow to support its business strategy. Making sure that HR links its activities to strategic outcomes can best be done by mapping the relationships between HR practices, HR deliverables and business outcomes. Such The purpose of the SHRM Human Capital Benchmarking Study is to provide HR professionals with key human capital measures. In business, where the need to measure is strong, benchmarking can help identify an organization s human capital strengths and weaknesses, create a framework for managing change and encourage employees toward continuous improvement. linkages position HR as a strategic asset. They provide the organizational logic to transform HR from a transaction-oriented function to an organizational asset with strategic impact. In short, mapping shows what causes what in the business and how the firm can win in the marketplace. 3 6

Yet for some HR professionals, when it comes to measuring activities around human capital, concrete measures can feel elusive. Numbers that relate to the context of a specific business, particularly the same industry, employee size, organizational revenue and geographic location, are usually difficult to find. But it is precisely this organizational profiling that is most beneficial in order to enable similar organizations to compare themselves to each other. This executive summary contains key metrics from more than 700 organizations on HR departments and their expenses, employment, health care, compensation, and organizational revenue and size. In addition, SHRM s database collection initiative in early 2005 yielded more than 800 additional organizations for a combined total of more than 1,500 organizations that are part of the SHRM Customized Human Capital Benchmarking Service, which is detailed on page 55. This executive summary and the SHRM Customized Benchmarking Service provide more than 20 human capital metrics for many industries, so that comparisons can be made, when possible, within a similar industry. For information about additional metrics, please see a sample customized report at the end of this publication. A glossary of metric terms, definitions and calculations is available on page 48. ABOUT THE AUTHORS John Dooney is the Manager of Strategic Research for SHRM. Mr. Dooney is responsible for producing quantitative and qualitative research that enables members and other customers to make concrete business decisions, evaluate how HR can strategically contribute to an organization s objectives and develop organizational benchmarks. He also conducts outreach efforts to ensure that SHRM research has concrete impact on organizations, HR departments and other venues that relate to the HR profession. In addition, he develops content material related to HR education and human capital measurement. Mr. Dooney has a graduate degree in industrial psychology and more than 15 years of experience in HR management roles in the United States, Asia and Europe. Noël Smith is the Strategic Research Specialist for SHRM. In her role, Ms. Smith designs, collects, analyzes and disseminates research that will help HR professionals and other customers apply qualitative and quantitative research to unique situations within their organizations in order to make sound business decisions. In addition, she conducts research in HR education and develops content related to human capital measurement. She has a graduate degree in psychology from the University of Maryland, College Park, and over 10 years of research experience. 7

ACKNOWLEDGEMENTS This study represents a collective effort of many professionals, including SHRM members who provided the rich and detailed data used in this executive summary. Steve Williams, Ph.D., SPHR, Jennifer Schramm, Jessica Collison, SHRM s Survey Program staff and Katya Scanlan also provided valuable expertise in HR content, survey design, data collection and editorial review. Lisa Horn, Mary Mohney and Angela Terry provided technical guidance on health care, finance and art design, respectively. METHODOLOGY Purpose The was conducted in order to collect human capital metrics across various industries. This survey collected data on human resource departments and expenses, hiring trends, compensation, and health care options and costs. In addition, organizational data, such as revenue, expenses and employee size, were obtained. Data were collected for 2004, along with expectations for change in 2005. A special note of thanks is also extended to members of the SHRM Human Capital Measurement/HR Metrics Special Expertise Panel. This team of experts in human capital measurement and metrics reviewed the survey instrument and provided insights into future trends of HR metrics, found on page 40. Survey The survey was created by SHRM s Strategic Research Program and was reviewed by an internal survey review committee as well as by the SHRM Human Capital Measurement/HR Metrics Special Expertise Panel. The SHRM Human Capital Benchmarking Study was based on a pilot study conducted in December 2004, which was undertaken to determine whether the survey accurately yielded the desired data and to gauge the ease at which HR professionals were able to provide information on behalf of their organizations. The results of the pilot study led to minor revisions to the questions asked, as well as to the reformatting of several questions. 8

Participants SHRM members who were HR managers, assistant or associate directors, directors, assistant or associate vice presidents, vice presidents or presidents were included in the sample. The members had to meet the following criteria: have a valid e-mail address and business phone number, have not been selected to participate in a survey with SHRM in the past six months, and be residents of the United States. Procedure In January 2005, an e-mail that included a link to the SHRM Human Capital Benchmarking Study was sent to 5,000 randomly selected SHRM members who were senior HR professionals. Of these, 3,994 e-mails were successfully delivered, and 702 senior HR professionals responded on behalf of their organizations, yielding a response rate of 18%. The survey was accessible for a period of four weeks. In an effort to encourage participation in the study, respondents were informed that they would be entered in a drawing for a $100 gift certificate to the SHRMStore. Four e-mail reminders were sent over a one-month period, and 2,000 individuals were randomly selected to receive follow-up telephone calls. Over a two-week period, 1,661 HR professionals were contacted. Quality Control At the completion of data collection, the data were checked for duplicate responses. When a respondent submitted a survey more than once, the survey with the latest time was retained and all prior submissions were deleted. The data were then put through a rigorous accuracy check process. 4 The survey included many quantitative questions that were checked to ensure that they were understood by respondents and that the data submitted were consistent. For example, the number of HR full-time equivalent employees (FTEs) had to equal the sum of the categories of HR FTEs; the number of HR FTEs had to be less than the total FTEs in the organization; and HR expenses had to be less than the total organizational expenses. Overall, there were few inconsistencies identified within the data. When inconsistencies were identified, steps were taken to resolve the discrepancy. If the data could not be verified and appeared inaccurate, they were excluded from the analysis. This was done to ensure that the highest quality data were included in the study. 9

USING BENCHMARKING DATA Benchmarking is rapidly becoming an indispensable tool for HR professionals. It is a mechanism for measuring processes, practices and results against the competition in order to improve performance. Used wisely, it can transform a company s HR and people management strategies by showing how human capital practices influence organizational performance. HR professionals can use benchmarking data to compare their organization against their competitors or other similar organizations. For example, the HR professionals can compare their organization s health care costs with similar organizations to see if the discrepancy is large enough to warrant further analysis. Benchmarking also protects areas or programs that are performing well. To illustrate, if line executives want recruiting costs lowered, benchmarking data may show that their current recruiting costs are in line with their industry. In fact, to lower costs far below their competitors might actually jeopardize their organization s ability to find the right talent to compete in the market. Benchmarking can also create support and momentum for organizational change. For example, making changes to existing pay practices may be difficult, unless there is objective benchmarking data that can support otherwise. For example, if the HR professional wants to alter an organization s long-standing practice of not offering employee bonus plans, making that argument alone, without benchmarking data, is very difficult. Benchmarking data can help make the case. CEOs and board-level executives also depend on quality benchmarking data to make strategic decisions that affect their organizations. In fact, benchmarking is more effective when used as part of an overall business strategy. It is less effective, however, when companies use benchmarking only for short-term cost reductions and not as part of a long-term strategy. An example of this occurs when an organization lowers training budgets to meet short-term budget goals. While this may achieve a short-term objective, it has a negative impact on developing the skills of the organization s workforce. Thus, over the long term, the knowledge and skills of its human capital start to lag behind the market, and the organization loses its competitive advantage to successfully compete. 10

Understanding the Data As you compare your own data against the other organizations, keep the following in mind: 1. A deviation between your figure for any human capital measure and the comparative figure is not necessarily favorable or unfavorable; it is merely an indication that additional analysis may be needed. Human capital measures that relate more closely to the context of your organization s industry, revenue size, geographic location and employee size are more descriptive and meaningful than information that is more generic in nature, such as all industries combined. The larger the discrepancy between your figure and those found in this report, the greater the need for additional scrutiny. 2. In cases where you determine that potentially serious deviations do exist, it may be helpful to go back and calculate the same human capital measure for your organization over the past several years to identify any trends that may exist. 3. The information in this report should be used as a tool for decision-making rather than an absolute standard. Because companies differ in their overall business strategy, location, size and other factors, any two companies can be well managed, yet some of their human capital measures may differ greatly. No decision should be made solely based on the results of any one study. Working With the Data The information in this report is designed to be a tool to help you evaluate decisions and activities that affect your organization s human capital. When reviewing these data, it is important to realize that business strategy, organizational culture, leadership behaviors and industry pressures are just a few of the many factors that drive various human capital measures. For example, an industry that generally hires nonskilled labor, such as construction, may have less costly benefit packages than the high-tech industry that hires specialized knowledge workers. This is because organizations in the high-tech industry may need to have richer, more attractive benefit plans to make themselves more enticing in order to attract hard-to-find knowledge workers. 11

Absolute measures are not meaningful in isolation they should be compared with one or more measures to determine whether a satisfactory level exists. Other measures, for example, might be your organization s past results in this area or comparatives based on organizational size, industry or geographic location. Notes and Caveats Number of organizations: The number of organizations (indicated by n ) is noted in each table and indicates the number of organizations (not individuals) that provided data relevant to a particular table. The number of organizations varies from table to table because some organizations did not respond to all of the questions. Organizations may not have responded to a question on the survey because all or some part(s) of the question were not applicable or because the requested data was unavailable. This also accounts for the varying number of responses from one table to another or within a table. Confidence level and margin of error: A confidence level and margin of error give readers some measure of how much they can rely on survey responses to represent all of SHRM member organizations. Given the level of response to the survey, SHRM Research is 95% confident that responses given by all responding organizations can be generalized to all SHRM member organizations, in general, with a margin of error of approximately 4%. For example, 73% of the responding organizations reported that they were for-profit. With a 4% margin of error, the reader can be 95% confident that that between 69% and 77% of SHRM member organizations are for-profit. It is important to know that as the sample size decreases, the margin of error increases. Minimum respondents for summary calculations: No summary calculations were made for items with fewer than 10 responding organizations. Tables illustrating 25th percentile, median and 75th percentile should be interpreted with caution when the number of responding organizations is small. 12

Extreme values dropped: Due to the nature of the data in the current study, data that were three standard deviations above the average were excluded. In other words, 0.5% of the data were omitted from the analysis. The extreme outliers or data anomalies can skew the results, leading to much higher averages among the measures. Other categories: In some cases, participating organizations included other as a response to a survey question. Efforts were made to examine the verbatim content of the other responses and recategorize them into the categories listed. Oftentimes, verbatim content was distinctive to the organization, making it impossible to recategorize. Table and figure percentages: Where relevant, data depicted in tables and figures may not add to exactly 100% due to rounding. In addition, percentages may exceed 100% due to multiple response options (i.e., several organizations may respond to more than one category for the same question). 13

KEY FINDINGS

HR DEPARTMENTS AND EXPENSES There is no typical HR department. While external factors such as organization size and industry type drive the structure, size and scope of activities for the human resource function, internal factors also play a role. Factors such as organizational culture, leader behaviors, operational and technological constraints are but a few of the dynamic reasons why HR departments vary from one organization to another. While the median number of full-time equivalents (FTEs) for the HR department was three, the average was 12. The large difference between the median and average values indicates that some HR departments reported a large number of HR staff. Nineteen percent of the responding organizations expected to hire additional HR staff in 2005. This number also parallels an overall increase in the employment market for HR professionals. HRJobs, SHRM s job board that advertises job openings for HR professionals, noted a 54% jump in the number of human resource advertisements during the early months of 2005, compared with the same time period in 2004. HR department expenses are also on the rise. Of the 50% of firms that expected their HR department expenses to increase, 11% were manufacturing (durable goods) organizations. However, 9% of responding organizations projected a decrease in department expenses, and 41% expected their expenses to remain the same. HR expense per FTE, which represents the amount of HR dollars spent per FTE in the organization, is shown in Table 1. For all industries, the median for HR expense per FTE was $1,077, with the high-tech industry reporting the highest expense at $1,806. 15

Table 1: HR Expense per Number of FTEs (by Industry) Industry n 25th Percentile Median 75th Percentile All industries 418 $612 $1,077 $2,275 Educational services 21 $363 $495 $1,430 Financial services 33 $833 $1,333 $3,759 Government 24 $590 $992 $1,750 Health 36 $583 $847 $1,818 High-tech 26 $1,101 $1,806 $2,304 Insurance 15 $909 $1,750 $5,294 Manufacturing (durable goods) 54 $600 $1,034 $1,571 Manufacturing (nondurable goods) 21 $875 $1,130 $1,941 Service (nonprofit) 27 $571 $1,395 $3,488 Service (for-profit) 36 $571 $773 $1,786 Transportation 10 $520 $1,256 $3,590 Wholesale/retail trade 19 $413 $767 $3,497 For-profit (all industries) 283 $636 $1,053 $2,182 Nonprofit (all industries) 134 $571 $1,200 $2,289 Note: Industries with less than 10 organizations responding were omitted from the table. They were: agriculture, forestry and fishing; construction and mining; library; oil and gas; publishing and broadcasting; real estate; and utilities. Source: 16

Additional Findings Hires for recruiting and benefits positions will account for 60% of all HR hiring in 2005.There is no doubt that growth in the economy and high health care costs are driving organizations to hire HR professionals with benefits and recruiting expertise. But for many organizations, getting approval to hire additional HR staff is often a challenge. Sometimes HR positions are not approved because there is a lack of understanding of the HR function or how additional HR staff can benefit the organization. Requesting additional staff because there is too much work to do is often ineffective. A potentially successful approach, however, is to show the return on investment that the organization will gain by hiring additional HR staff. For example, if hiring an HR professional to create retention programs can reduce turnover costs by $500,000, then additional HR resources are a compelling investment. HR professionals will find it helpful to use metrics to discuss return on investment when making the case for additional headcount. Table 2 lists the areas of HR in which hiring was expected in 2005, as indicated by 19% of organizations that reported plans to hire HR staff. Table 2: Areas of HR in Which Hiring Is Expected in 2005 (n = 702) Areas of HR Recruiting 36% Benefits 24% Training 20% Compensation 16% Organizational development 15% Generalist 13% Administrative support 10% Other HR* 19% *This category included, but was not limited to, employee relations, payroll and executive HR functions. The representation of each position that fell in the other category was too small to include as a separate category. Note: Percentages do not total 100% as multiple responses were allowed. Source: 17

Where the Head of HR Reports 100% 80% 60% 54% 40% 20% 12% 10% 6% 6% 12% 0% CEO* CFO** Head of Operating Unit CHRO*** Head of Administration Other *CEO = Chief Executive Officer **CFO = Chief Financial Officer ***CHRO = Chief Human Resource Officer Note: Other category included, but was not limited to, vice presidents, managers and directors. Source: Fifty-four percent of surveyed HR departments reported to the CEO, COO, president or owner of their organizations. HR professionals at the corporate level were more likely to report to the CEO/COO/president. HR professionals at the business unit or facility level, however, were more likely to report to the chief human resource officer or the head of the operating unit. The reporting structure for the head of HR does not impact the type of health care plans the organization chooses to offer. This may dispel myths that HR professionals who report to the chief financial officer (CFO) may experience undue pressure to choose lower cost health care plans for their organizations. Although CFOs may have once doubted the value of human capital, a recent survey suggests those days are gone. In a study of CFOs perceptions of human capital, many indicated that human capital was a central factor in their companies abilities to achieve outcomes that drove shareholder value. Finance executives also reported that the ideal structure was for both finance and HR to report to the CEO and for these functions to work collaboratively. 5 18

HR-TO-EMPLOYEE RATIOS While the median and average number of HR employees in an organization were discussed previously, a more manageable way to compare HR staffing levels between organizations is to use the HR-to-employee ratio. This ratio represents the number of HR staff per 100 employees in an organization supported by HR. The number is calculated by dividing the number of HR FTEs by the total number of employees (FTEs) in the organization and multiplying the outcome by 100: HR-to-Employee Total number of HR FTEs = Ratio Total number of employee FTEs X 100 Table 3 shows how HR-to-employee ratios change by organizational size. The data suggest that the primary driver in HR-to-employee ratios is organizational size. This ratio can be helpful in understanding the number of HR FTEs that are typically supporting a specific size organization. The way to use the HR-to-employee ratios in Table 3 is to first locate the size of the organization that is being compared and then find the corresponding ratios located in the same row. The ratios are listed by the 25th, median and 75th percentiles. Although the median ratio will be used in this example, if the HR department has a larger scope of responsibilities, then using the ratio for the 75th percentile may be considered. Conversely, if the HR department has a narrow scope of responsibilities, then using the ratio for the 25th percentile may be appropriate. Here is an example of how to compute the number of HR FTEs for a typical organization with 150 employees. Table 3 indicates that the median HR-to-employee ratio that corresponds to an organization with 150 employees is 1.26. The actual calculation is as follows: 150 (FTEs) X 1.26 (median HR-to-employee ratio) = 1.89 (HR FTEs) 100 This calculation indicates that for an organization with 150 FTEs the median number of HR FTEs is 1.89. While this approximates that two HR FTEs may be appropriate for some organizations of this size, it is not always the case. For example, if the HR department has significant initiatives to undertake or if the organization must increase its recruiting efforts to hire a large number of employees, then more HR staff may be required. 19

Table 3: HR-to-Employee Ratios (by Organizational Size) Organizational Size n 25th Percentile Median 75th Percentile All sizes 665 0.75 1.22 2.08 Fewer than 100 191 1.61 2.70 5.00 100 to 249 163 0.85 1.26 1.74 250 to 499 113 0.73 1.07 1.41 500 to 999 79 0.50 0.82 1.26 1,000 to 2,499 58 0.47 0.79 1.13 2,500 to 7,499 34 0.27 0.53 1.02 7,500 or more 27 0.19 0.42 0.70 Source: As organizations become larger in total employee size, HR-to-employee median ratios become smaller. Although the median ratio is smaller for larger organizations, the actual number of HR FTEs is higher. High HR-to-employee ratios in smaller organizations may be interpreted to mean that it takes a minimum baseline amount of HR FTEs to deliver the primary HR services of recruiting, benefits, employee relations, compensation, etc. But once this baseline is met, the incremental amount of HR staff that is required to support more employees in an organization does not increase at the same rate. This may occur because when there is more staff in HR, there is more flexibility to offset peak work demands in one HR area with staff from another. For example, during the labor-intensive process of performance reviews, if extra help is needed, it is easier to temporarily pull HR FTEs from other functional areas, such as recruiting or benefits, for additional support. 20

In addition, the roles for HR professionals in firms with large numbers of employees usually have a higher degree of specialization. For example, in large organizations HR departments not only have many benefits professionals, but even within the benefits area there may be one FTE solely dedicated to managing retirement planning. Such role specificity allows for greater efficiency and economies of scale. From a job analysis perspective, efficiencies are gained when like tasks are grouped together. But when job responsibilities require many different types of tasks to be performed, efficiencies are lost. This is because it takes more effort and more time to switch between tasks that are different from each other. 6 The statement I m wearing too many hats is often heard from HR professionals in smaller departments where they juggle the diverse tasks of recruiting, benefits and employee relations simultaneously. The number of HR FTEs for small- to mid-sized organizations may vary widely for several reasons. This may occur because HR departments in these organizations may not be as well established as HR departments found in larger organizations. As HR departments evolve, some may assume a wide variety and scope of responsibilities supporting line organizations, while others may have little or very narrow involvement. For example in some small- to mid-sized organizations, mentoring programs and other training initiatives are managed directly by line managers without much involvement from HR professionals. In these organizations, the number of HR FTEs is usually lower than in organizations where HR is extensively involved in developing and managing companywide professional development programs for their employees and management staff. 21

EMPLOYMENT Employee recruitment and retention are important issues for business executives in HR and other disciplines. As the economy rises out of its slumber over the last several years, organizations are now responding with pent-up demand to rebuild themselves with talent. In fact, 36% of responding organizations indicated that recruiting and retaining talent were their top HR challenges in 2005. The SHRM/Rutgers Leading Indicator of National Employment (LINE ) also supports this view. Based on monthly feedback from HR professionals, LINE tracks unique indicators, such as difficulty in recruiting and new employment compensation. Both of these indicators have shown to be early predictors of economic activity. Could it be that HR professionals really do have a crystal ball into the economy? Additional Findings Organizations that expected revenue to be higher in 2005 also expected their organizations to hire more people in 2005 than in 2004. Seventy-two percent of the organizations expected to see an increase in revenue in 2005. Of those expecting to see an increase, 47% also expected to see an increase in hiring over 2004. While this relationship holds true when referring to the hiring of all employees, it does not hold true when compared with the hiring of additional HR staff in 2005. There was a strong relationship, however, between the hiring of HR staff in 2005 and the number of employees firms hired during the previous year. Firms that hired many employees in 2004 also indicated that they intended to hire additional HR staff. The hiring lag of HR staff in 2005 may occur because organizations might first take a wait-and-see approach before committing resources to hire regular, full-time HR employees. A possible solution when regular, full-time HR staff cannot be hired is for the organization to bring on board an HR consultant on a temporary basis. This option not only provides HR with the resources required, but also serves as a way to try out the consultant in the event a full-time position becomes approved. 22

Cost-per-hire and time-to-fill data have been collected since the printing of this executive summary. If you are interested in the median cost-per-hire and time-to-fill information, it is available for free on SHRM s Human Capital Benchmarking Service Web site at www.shrm.org/research/benchmarks. The number of positions filled in 2004 varied by organization and industry type. In Table 4, the percentage of positions filled represents the number of positions filled as a proportion of total employees. Filled positions include both internal and external hires. For example, if an organization of 200 FTEs fills 10 positions, the percentage of positions filled is 5%. When used in combination with the actual number of positions filled, the data let an organization compare its hiring activity level with others in its industry. Health, wholesale/retail trade and for-profit service industries had the top three highest medians for percentage of positions filled in 2004. Health, publishing and broadcasting and government, however, were the industries with the highest number of actual hires. For 2005, the top three responding industries that expected to hire more employees in 2005 than in 2004 were high-tech, transportation and for-profit services, as indicated in Table 5. 23

Table 4: Industry Hiring Activity for 2004 Industry Percentage of Positions Filled in 2004 Actual Number of Positions Filled in 2004 25th 75th 25th 75th n Percentile Median Percentile n Percentile Median Percentile All industries 633 6% 16% 29% 651 8 28 85 Construction and mining 11 14% 18% 34% 11 10 15 45 Educational services 24 4% 14% 34% 24 10 50 100 Financial services 50 12% 20% 36% 50 14 31 79 Government 32 6% 13% 35% 32 9 70 150 Health 49 15% 24% 35% 49 25 115 252 High-tech 40 9% 20% 31% 40 10 36 67 Insurance 25 7% 13% 14% 25 3 20 80 Manufacturing (durable goods) 87 4% 7% 17% 89 10 20 54 Manufacturing (nondurable goods) 38 3% 9% 17% 38 6 22 53 Publishing and broadcasting 11 7% 12% 26% 12 8 76 150 Service (nonprofit) 34 8% 15% 29% 34 4 10 30 Service (for-profit) 56 9% 21% 44% 61 4 25 60 Transportation 12 4% 9% 17% 12 18 54 98 Utilities 13 5% 8% 24% 13 8 29 57 Wholesale/retail trade 34 14% 22% 58% 37 13 60 287 For-profit (all industries) 460 6% 16% 29% 474 8 26 75 Nonprofit (all industries) 173 7% 16% 29% 177 6 30 115 Note: Industries with less than 10 organizations responding were omitted from the table. They were: agriculture, forestry and fishing; library; oil and gas; and real estate. Source: 24

Table 5: Industry Hiring Projections for 2005 Industry n 2005 Hiring Projections 2005 Hiring Projections for All Industries Increase 41% All industries 681 Decrease 18% Stay about the same 41% 0% 20% 40% 60% 80% 100% Percentage of Respondents 2005 Hiring Projections for Construction and Mining Construction and mining 11 Increase Decrease 18% 18% Stay about the same 64% 0% 20% 40% 60% 80% 100% Percentage of Respondents 2005 Hiring Projections for Educational Services Increase 15% Educational services 26 Decrease 27% Stay about the same 58% 0% 20% 40% 60% 80% 100% Percentage of Respondents 2005 Hiring Projections for Financial Services Increase 49% Financial services 51 Decrease 14% Stay about the same 37% 0% 20% 40% 60% 80% 100% Percentage of Respondents 2005 Hiring Projections for Government Increase 41% Government 32 Decrease 3% Stay about the same 56% 0% 20% 40% 60% 80% 100% Percentage of Respondents 2005 Hiring Projections for Health Increase 37% Health 51 Decrease 16% Stay about the same 47% 0% 20% 40% 60% 80% 100% Percentage of Respondents 25

Industry n 2005 Hiring Projections 2005 Hiring Projections for High-Tech Increase 58% High-tech 43 Decrease 16% Stay about the same 26% 0% 20% 40% 60% 80% 100% Percentage of Respondents 2005 Hiring Projections for Insurance Increase 36% Insurance 25 Decrease 8% Stay about the same 56% 0% 20% 40% 60% 80% 100% Percentage of Respondents 2005 Hiring Projections for Manufacturing (Durable Goods) Increase 48% Manufacturing(durable goods) 92 Decrease 22% Stay about the same 30% 0% 20% 40% 60% 80% 100% Percentage of Respondents 2005 Hiring Projections for Manufacturing (Nondurable Goods) Increase 20% Manufacturing(nondurable goods) 40 Decrease 30% Stay about the same 50% 0% 20% 40% 60% 80% 100% Percentage of Respondents 2005 Hiring Projections for Publishing and Broadcasting Publishing and broadcasting 12 Increase Decrease Stay about the same 33% 33% 33% 0% 20% 40% 60% 80% 100% Percentage of Respondents 2005 Hiring Projections for Service (Nonprofit) Increase 34% Service (nonprofit) 35 Decrease 20% Stay about the same 46% 0% 20% 40% 60% 80% 100% Percentage of Respondents 26

Industry n 2005 Hiring Projections 2005 Hiring Projections for Service (Profit) Increase 50% Service (for-profit) 64 Decrease 20% Stay about the same 30% 0% 20% 40% 60% 80% 100% Percentage of Respondents 2005 Hiring Projections for Transportation Increase 54% Transportation 13 Decrease 23% Stay about the same 23% 0% 20% 40% 60% 80% 100% Percentage of Respondents 2005 Hiring Projections for Utilities Increase 47% Utilities 15 Decrease 13% Stay about the same 40% 0% 20% 40% 60% 80% 100% Percentage of Respondents 2005 Hiring Projections for Wholesale/Retail Trade Wholesale/retail trade 38 Increase Decrease 29% 29% Stay about the same 42% 0% 20% 40% 60% 80% 100% Percentage of Respondents 2005 Hiring Projections for For-Profit Industries Increase 44% For-profit (all industries) 500 Decrease 18% Stay about the same 38% 0% 20% 40% 60% 80% 100% Percentage of Respondents 2005 Hiring Projections for Nonprofit Industries Increase 31% Nonprofit (all industries) 181 Decrease 19% Stay about the same 0% 20% 40% 60% 80% 100% Percentage of Respondents Note: Industries with less than 10 organizations responding were omitted from the table. They were: agriculture, forestry and fishing; library; oil and gas; and real estate. Source: 49% 27

HEALTH CARE Employee benefits and health care specifically play a key part of the total rewards strategy to attract and retain talent. Yet the future of health care is a concern for many employers, medical care providers and employees. SHRM s recently published Workplace Forecast notes that the continuous rise in health care costs is the most important economic trend, as well as the most important overall trend that concerns HR professionals. 7 In 2004, the median health care expense per covered employees was $6,000. Eighty-two percent of responding organizations also expected, on average, an 11% increase in health care costs in 2005. Rising health care expenses were cited by the manufacturing industry as one of the main reasons why structural costs in the United States were now outpacing even those of high-wage countries such as Canada and the United Kingdom. If increases in health care continue as expected, bringing with them higher structural costs that undercut U.S. competitiveness, the debate about health care in the political and business arenas could change radically. At the policy level, SHRM s Governmental Affairs Department is actively representing SHRM members concerns to the 109th Congress to help continue the debate on issues affecting health care affordability, access and costs. 28

Additional Findings The top three medical plans used by organizations were preferred provider organization (PPO) (78%), health maintenance organization (HMO) (48%) and point of service (POS) (23%). Organizations that had 250 or more FTEs offered more health care options than those that were smaller in size. This may be because an organization with a large workforce usually has a greater diversity of health care needs. In addition, it also has the organizational size and buying power to offer insurance companies enough participation to make it cost-effective. Nonprofit organizations contributed a larger percentage toward employee health care premiums, compared with for-profit organizations (88% and 78%, respectively). This occured because nonprofits generally provided lower cash compensation to its employees than did for-profit organizations (Table 6). By providing benefits at lower costs to its employees, however, nonprofits increased their success at recruiting and retaining talent in a competitive market. Yet this finding only applied to employees who elected medical coverage only for themselves. When employees elected to have coverage for themselves and their dependents, there was no difference in how nonprofit or for-profit organizations paid for health care premiums. 29

Table 6: Average Percentage of Health Care Premiums Paid by the Company and the Employee Industry Employee Only Employee and Dependents n Company Employee n Company Employee All industries 568 81% 19% 544 67% 33% Educational services 22 83% 17% 21 64% 36% Financial services 40 79% 21% 38 62% 38% Government 22 88% 12% 23 72% 28% Health 46 83% 17% 44 63% 37% High-tech 37 81% 19% 36 67% 33% Insurance 22 88% 12% 22 71% 29% Manufacturing (durable goods) 76 79% 21% 73 71% 29% Manufacturing (nondurable goods) 34 80% 20% 36 75% 25% Publishing and broadcasting 12 79% 21% 12 64% 36% Service (nonprofit) 33 87% 13% 30 61% 39% Service (for-profit) 52 75% 25% 45 59% 41% Transportation 13 87% 13% 13 82% 18% Utilities 12 83% 18% 12 72% 28% Wholesale/retail trade 32 74% 26% 32 64% 36% For-profit (all industries) 406 78% 22% 394 66% 34% Nonprofit (all industries) 162 88% 13% 150 69% 31% Note: Industries with less than 10 organizations responding were omitted from the table. They were: agriculture, forestry and fishing; construction and mining; library; oil and gas; and real estate. Source: 30

COMPENSATION Well-managed compensation programs strategically connect employee behaviors and performance to the goals and objectives of the organization. Compensation, the driving component of an organization s total rewards strategy, is not only used to motivate and retain productive employees, but also to attract new employees to the organization. Compensation programs can also support changes to the corporate culture. For example, Motorola altered the bonus plans of its senior managers, executives and the CEO as a way to hold them accountable for developing and retaining women and employees of color. 8 The results of this multiyear effort were dramatic. When the plan first started, there were two women vice presidents and six vice presidents of color. Nine years later, the company increased its number of women vice presidents to 43, and the number of vice presidents of color grew to 41. Compensation programs can also drive specific results at all levels in the organization. For example, Children s Hospital in Boston found that it was taking more than 100 days to receive payments after bills were sent out. 9 Determined to improve cash flow by lowering the billing cycle, the hospital s accounting manager worked with the human resource department to institute a team-based incentive program for its accounts receivable staff. The team-based incentive plan was a success. The average number of days to receive payment dropped from 100 to 65. Such incentive programs are an excellent way to show employees the link between their work and company success, with the payoff benefiting both the organization and its employees. 31

Additional Findings The median expected annual percentage increase for salaries was 3.5% in 2005. Organizations with fewer than 1,000 employees reported a slightly higher percentage increase than those with more employees. This may have occurred because larger companies usually have more extensive compensation, rewards and benefits programs outside of base pay. These may include annual bonuses, high-demand skill pay, retention bonuses, pay for performance plans and other incentive compensation programs that can be used to attract and retain talent. This often allows larger organizations to compete in the market without solely relying on offering higher base salaries. Table 7: 2005 Projected Annual Salary Increases (by Organizational Size) Organizational Size n 25th Percentile Median 75th Percentile All sizes 532 3.0% 3.5% 4.0% Fewer than 100 141 3.0% 4.0% 5.0% 100 to 249 135 3.0% 3.5% 4.0% 250 to 499 90 3.0% 3.5% 4.0% 500 to 999 59 3.0% 3.5% 4.0% 1,000 to 2,499 45 2.5% 3.0% 4.0% 2,500 to 7,499 27 3.0% 3.0% 4.0% 7,500 or more 35 3.0% 3.0% 4.0% Source: 32

Salaries as a percentage of operating expense are related to two important factors that drive any business. These are the base salary costs associated with human capital and all other costs that are required to operate the business and keep it running. While operating expenses do include salary, they also include other expenses, such as parts and supplies, rent, printing, travel and capital depreciation. Industries that had a higher proportion of specialized workers and low operating expenses, such as educational services, high-tech, government and service (for-profit), had the top median percentages of salaries as a percentage of operating expense. Utilities, manufacturing (nondurable goods) and manufacturing (durable goods) had the lowest percentages. Table 8: Salaries as a Percentage of Operating Expense in 2004 Industry n 25th Percentile Median 75th Percentile All industries 429 28% 40% 59% Educational services 20 35% 54% 76% Financial services 36 30% 42% 60% Government 23 38% 50% 70% Health 45 39% 46% 59% High-tech 25 35% 53% 61% Insurance 15 12% 45% 60% Manufacturing (durable goods) 52 15% 30% 39% Manufacturing (nondurable goods) 19 20% 32% 42% Service (nonprofit) 28 40% 48% 62% Service (for-profit) 42 30% 50% 65% Utilities 10 14% 17% 25% Wholesale/retail trade 20 15% 41% 60% For-profit (all industries) 288 24% 39% 56% Nonprofit (all industries) 141 34% 46% 60% Note: Industries with less than 10 organizations responding were omitted from the table. They were: agriculture, forestry and fishing; construction and mining; library; oil and gas; publishing and broadcasting; real estate; and transportation. Source: 33

ORGANIZATIONAL DATA Revenue and net income are strategic financial indicators of performance for most organizations. When total revenue is divided by total employees (FTEs), the resulting number is a marker of efficiency. 10 This ratio, termed revenue per FTE, conceptually links the time and effort associated with the firm s human capital to its revenue output. To illustrate, for an organization that has $100 million in revenues and 300 employees (FTEs), the calculation yields a ratio of $333,333 per FTE. If the revenue-per-fte ratio increases, it indicates that there is greater efficiency and productivity because more output is being produced per FTE. If the ratio decreases, it indicates there is less efficiency and productivity. Table 9: Revenue per FTE (by Industry) Industry Revenue per FTE n 25th Percentile Median 75th Percentile All industries 422 $77,778 $145,455 $241,667 Educational services 19 $74,667 $94,070 $152,376 Financial services 37 $53,045 $156,190 $197,878 Government 19 $57,692 $109,874 $147,368 Health 39 $70,542 $92,000 $140,541 High-tech 33 $135,545 $167,500 $241,667 Insurance 19 $154,545 $444,444 $846,407 Manufacturing (durable goods) 55 $107,692 $178,182 $261,250 Manufacturing (nondurable goods) 15 $157,143 $185,328 $278,261 Service (nonprofit) 29 $58,286 $69,767 $140,500 Service (for-profit) 35 $40,000 $114,286 $223,100 Transportation 11 $81,464 $151,515 $249,558 Utilities 10 $251,986 $404,444 $554,522 Wholesale/retail trade 24 $97,902 $333,333 $505,451 For-profit (all industries) 288 $98,361 $167,939 $317,204 Nonprofit (all industries) 134 $65,022 $102,179 $159,091 Note: Industries with less than 10 organizations responding were omitted from the table. They were: agriculture, forestry and fishing; construction and mining; library; oil and gas; publishing and broadcasting; and real estate. Source: 34

The ratio of net income per FTE also follows a similar logic. It calculates efficiency by taking net income before taxes, which is the difference between gross revenue and expenses, and divides that by the number of FTEs. Since net income per FTE comprises two factors, it is best looked at over time. 11 Both metrics, however, are basic measures that look at productivity in terms of employees and financial performance. Although one isn t a better indicator than the other, revenue per FTE is a more sensitive indicator because it consists of only one factor revenue. Standing alone, without comparisons within a specific industry, these metrics may not have much value. But used over time, they are a way for HR professionals to track relationships in operational issues and financial performance to employee productivity. The overall median for revenue per FTE was $145,455, and the three industries with the highest medians for revenue per FTE were insurance, utilities and wholesale/retail trade. Net income per FTE for all industries was $12,450. Insurance, utilities and wholesale/retail trade were also the industries with the highest median net income per FTE. Tables 9 and 10 provide a breakdown of revenue per FTE and net income per FTE for all industries. Table 10: Net Income Before Taxes per FTE (by Industry) Industry Net Income Before Taxes per FTE n 25th Percentile Median 75th Percentile All industries 346 $501 $12,450 $45,385 Educational services 19 -$19 0 $6,000 Financial services 34 $4,508 $41,557 $54,782 Government 17 0 0 $333 Health 36 0 $2,613 $7,823 High-tech 23 $8,557 $33,833 $116,267 Insurance 18 $28,571 $68,182 $127,726 Manufacturing (durable goods) 35 $962 $14,545 $37,358 Manufacturing (nondurable goods) 13 $7,096 $21,333 $49,180 Service (nonprofit) 28 0 $2,815 $9,869 Service (for-profit) 24 $2,452 $18,835 $50,000 Transportation 11 $57 $2,532 $53,649 Utilities 10 $29,087 $59,028 $139,796 Wholesale/retail trade 15 $7,846 $52,000 $333,497 For-profit (all industries) 221 $6,000 $27,273 $60,060 Nonprofit (all industries) 125 0 $1,825 $10,761 Note: Industries with less than 10 organizations responding were omitted from the table. They were agriculture, forestry and fishing; construction and mining; library; oil and gas; publishing and broadcasting; and real estate. Source: 35

PROFILE OF ORGANIZATIONS RESPONDING TO THE SURVEY The make-up of organizations that responded to the survey varied greatly. Factors such as workforce size, industry, revenue and geographic location all impact the way in which HR departments align their activities to support their particular organization. Tables 11 through 17 provide a breakdown of the range of employers that responded to this survey. Table 11: HR Department Level (n = 700) Corporate (organization-wide) 66% Business unit/division 17% Facility/location 15% Other 2% Table 12: Industry (n = 702) Agriculture, forestry and fishing 1% Construction and mining 2% Educational services 4% Financial services 7% Government 5% Health 8% High-tech 6% Insurance 4% Library <1% Manufacturing (durable goods) 13% Manufacturing (nondurable goods) 6% Oil and gas 1% Publishing and broadcasting 2% Real estate 1% Service (nonprofit) 5% Service (profit) 9% Transportation 2% Utilities 2% Wholesale/retail trade 6% Other* 17% *This category included, but was not limited to, hospitality, food and beverage, landscaping, zoology, and entertainment. The representation of each industry that fell in the other category was too small to include as a separate category. Note: Percentages may not total 100% due to rounding. 36

Table 13: Number of FTEs for the Organizational Level (n = 702) Fewer than 100 27% 100 to 249 23% 250 to 499 16% 500 to 999 11% 1,000 to 2,499 8% 2,500 to 7,499 5% 7,500 or more 8% Note: Percentages may not total 100% due to rounding. Table 14: Organizational Revenue in Fiscal Year 2004 (n = 441) Under $5 million 20% $5 million to $24.9 million 29% $25 million to $99.9 million 26% $100 million to $999.9 million 20% Over $1 billion 5% Table 15: Region (n = 692) Pacific West (Alaska, California, Hawaii, Idaho, Montana, Nevada, Oregon, Washington, Wyoming) Southwest Central (Arizona, Arkansas, Colorado, Kansas, Louisiana, Missouri, New Mexico, Oklahoma, Texas, Utah) North Central (Illinois, Indiana, Iowa, Michigan, Minnesota, Nebraska, North Dakota, Ohio, South Dakota, Wisconsin) Southeast (Alabama, District of Columbia, Florida, Georgia, Kentucky, Mississippi, North Carolina, South Carolina, Tennessee, Virginia, West Virginia) Northeast (Connecticut, Delaware, Maine, Maryland, Massachusetts, New Hampshire, New Jersey, New York, Pennsylvania, Rhode Island, Vermont) Note: The above regions are based on the SHRM member regions. 15% 18% 24% 20% 23% Table 16: Organizational Sector (n = 700) Public/government sector 22% Private sector 78% Table 17: Profit Status (n = 700) For-profit (all industries) 73% Nonprofit (all industries) 27% 37

CONCLUSION

Capturing the value of human capital and measuring how human resource practices affect firm performance are gaining widespread attention among business executives in HR and other disciplines. As industrialized nations switch to a knowledge economy, executives realize that the knowledge, skills and abilities of their employees are their firms defining advantage in the market. Therefore, efforts to measure, quantify and link human capital management practices to financial performance are occurring at an increasing rate. More than 20 metrics were collected on topics relating to HR departments and expenses, employment, health care, compensation, and organizational financial data. The high-quality HR metrics collected in this study, along with SHRM s Customized Human Capital Benchmarking Service, arm HR professionals with important benchmarking data that they can use to compare their organizations human capital measures against similar organizations within the same industry. When used wisely, benchmarking data can protect programs that are performing well, create support for organizational change and help executives in HR and other disciplines make strategic decisions that affect their organizations. Care must be taken, however, not to use benchmarking data as merely justification for cutting costs. For example, while cutting costs in recruiting and training will save dollars in the short term, doing so may negatively impact human capital measures such as quality of hire or workforce skills. The HR benchmarking metrics discussed in this executive summary represent the first step to uncovering the links between human capital management practices and firm performance. While knowing the average cost-per-hire can help benchmark an HR department s performance against industry practices, admittedly using this metric alone is not enough. In addition, linking human capital results to a firm s business strategy is another step HR professionals must take. Thus, research on human capital may be helpful in discovering the intermediate operational drivers that significantly affect a firm s financial success. Once these are identified, further research can then focus on the identification and measurement of human capital activities and HR programs that support these operational drivers. 39

THE FUTURE OF HR METRICS

This section reviews key future trends in the area of human capital measurement that will have the biggest impact on the HR profession, as identified by SHRM s Human Capital Measurement/HR Metrics Special Expertise Panel. This Panel is comprised of SHRM members who are subject matter experts in the topic of human capital measurement and metrics. In fact, many of the results from the SHRM Human Capital Benchmarking Study with regard to staffing and development, workforce planning and health care support the Panel s perspectives. This section gives HR professionals an overview of the potential impact that the forces of demographics, globalization, technology and health care will have on the way organizations measure and value their human capital. The future of HR metrics is exciting and wideopen. It is anticipated that future HR metrics will not only include benchmarking data that have already been discussed in this executive summary, but research in human capital measurement will lead to better measures that closely relate HR practices and human capital activities to business outcomes. As companies continue to grasp the financial impact that human capital has on firm performance and shareholder value, pressure to find better ways to measure these intangible assets will grow. A recent survey indicates that 76% of HR professionals predict an increase in top-level executive backing for investing in human capital measurement over the next three years. 12 Use of HR measurement techniques can profoundly affect how organizations view human capital in the future. In 2005, members of SHRM s Human Capital Measurement/HR Metrics Special Expertise Panel were asked to come up with a list of key future trends in the area of human capital measurement that they believed would have the biggest impact on the HR profession. The panel was asked to consider how these trends would play out in a one-year time frame as well as five years and beyond. When developing each trend, panel members were also asked to consider not only the factors that were contributing to the growth of the trend but also the factors that could actually work against the trend. Finally, panel members were asked to think about the implications the trends they identified had for HR professionals, the profession itself and the Society for Human Resource Management as the leading body advancing the profession and serving the human resource professional. Members of the panel were: Melvin L. Asbury, SPHR; Philip O. Benham, Jr., Ph.D., SPHR; Don M. Davis; Virginia C. Hall, SPHR; Keith A. Mason; Steve McElfresh, Ph.D., J.D., SPHR; Brian F. Ray; Grant A. Schneider, SPHR; William D. Young, SPHR; and Steve Williams, Ph.D., SPHR, Panel Leader. 41

SHRM s Human Capital Measurement/HR Metrics Special Expertise Panel identified the following key trends in human capital measurement. 1. Staffing and development 2. HR outsourcing 3. Medical health care/cost management 4. Workforce planning 5. Using HR technology 6. Elevating HR to a decision science 7. Educating the HR profession 1. Staffing and development Over the coming year, reliance on testing is expected to increase with a focus on the growing use of personnel assessment, skills and competency testing in the recruitment and selection process, as well as in the career development process. Emphasis will be on measuring quality of hire and improving the sourcing, recruitment and selection processes with an increase in the use of HR metrics to track progress. Using a structured approach to leadership development to ensure consistency of organizational philosophy and values throughout the organization will be critical. This may involve the use of learning content management systems, corporate universities, etc., if economically feasible. There is also likely to be an increase in the long-term use of independent contractors and/ or contingent workers through outsourcing agencies to fill critical positions due to the scarcity of labor with the right skill sets in certain technical and/or professional job categories. However, if the economy is in good shape or if the borders to the United States were opened to allow the free passage of skilled workers back and forth for work across the borders on a daily or weekly basis, this would act counter to this trend. 42

2. HR outsourcing Finding ways to measure business readiness will be crucial to the ability to make appropriate outsourcing decisions. Setting standards and measuring success will involve HR practice leaders establishing baseline standards and ensuring periodic follow-up to evaluate progress; provisions for remedial action would be stipulated in the agreement with the supplier of the service(s). Selecting an outsourcing vendor is a skill HR practice leaders will need to develop. They are encouraged to research this process carefully and/or seek advice from those within the organization with contract administration expertise. A formal request for proposal (RFP) is recommended, and it should include a comprehensive requirements definition to ensure that expectations are clearly detailed for the vendor of the service(s) to be performed. Negotiation of contract terms and the final agreement require special skill sets and competencies and should not be entered into lightly. To ensure a positive customer impact, every effort should be made to guarantee a seamless transition, i.e., the change should either be transparent, or if the change is designed to result in a significant improvement in service, then the employee base should be educated well in advance of the transition. In either instance, the organization should have a measurement system in place to track the performance of the outsourcing vendor, including service level agreements and a provision for periodic feedback. The trend for greater use of outsourcing could be challenged by anti-outsourcing legislation or by the potential strengthening of unions. 43

3. Medical health care/cost management Medical health care and cost management issues will continue to be a primary focus for organizations, both in the short and long term. This trend will involve the collection of baseline information on health status and the analysis of medical plan experience based on ICD Codes (International Classification of Diseases Codes) and/or CPT-10 Codes (Current Procedural Terminology Codes), in conjunction with census data. As a result of this analysis, recommendations regarding the modification of health care plans and products would be made as a means of influencing employee behavior in relation to positive and/or less costly health care practices and/or plan options for example, offering preventive care at 100% coverage, (i.e., no deductible and no copay) and providing incentives to individuals with chronic medical conditions (i.e., diabetes, rheumatoid arthritis) to use mail-order prescription drug programs for generic injectibles. Over the longer term, measuring behavioral outcomes based on plan design changes will grow increasingly important. This will involve establishing measurement systems to track the effects of plan design changes. Although some progress can be measured with existing systems in the short term, the number of variables involved with plan design changes from year to year and the number of changes in plan participants each year are likely to require more sophisticated human resource information systems (HRIS) support than exists currently. Additional factors include employees assuming more responsibility for making cost-effective health care choices (consumerism). This, in turn, requires an ongoing commitment on the part of employers to educate employees about health care options and what it means to be a wise consumer. Lastly, designing medical plans to drive employees toward more appropriate health care choices, i.e., generic prescription drug programs, wellness programs, preferred providers, etc., is another factor to be considered. Alternatively, measuring outcomes could be influenced by intervention from the federal government, i.e., some form of universal health care. 44

4. Workforce planning Workforce planning involves anticipating or forecasting supply and demand demographics developing expertise in environmental scanning as it relates to workforce trends, with special focus on competitors for key human capital assets and an ability to understand the volatility of the job market as it relates to a specific industry. Another factor involves the measurement of latent capability within organizations. This is achieved through the use of in-house tools (developed and/or purchased) for identifying candidates with high growth potential. These individuals are offered career development opportunities within the organization and, in turn, their progress is measured against the business plan. Measuring the linkage with the business plan to evaluate the short- and long-term workforce planning requirements of the organization, preparing a gap analysis and making recommendations and implementing a plan to bridge gaps, if any, against the business plan to track and measure progress is, in essence, a brief summary of workforce planning. 5. Using HR technology Use of HR technology is likely to focus on several areas: Gap analysis/workforce readiness The use of HR technology to maintain up-to-date information regarding employee competencies, skill sets, training records, certifications, etc., to ensure a comprehensive understanding at all times of labor availability and/or shortages by job category and industry. HR software such as employee satisfaction indices Current state-of-the-art HRIS systems include the capability for employer-developed, customized surveys. This capability allows employers to poll employees based on key issues confronting the organization with increased frequency. Polls can be limited to just a few questions at any given time. In the future, anticipating population shifts or forecasting gaps related to training and development in both the short and long term and the impact of these gaps on local businesses may become more important. This will require an understanding of demographics (i.e., availability of qualified labor), how they might change over time and how they will be influenced by other economic factors, especially employment levels. 45

HR self-service/multiple levels (employee, supervisory, management) The use of HR technology to allow employees, supervisors and managers direct access to information, based on level of authority, will expedite the flow of information for employees and line management alike and should relieve HR departments of routine transactional work that can be automated. Integration of HR systems with enterprisewide systems The full integration of HR systems with enterprisewide systems allows enhanced reporting capability by HR to senior management. The use of a Learning Content Management System (LCMS) Track training and development, distance learning, career development and related activities for individual employees. Support human capital decision analysis tools The next generation of HRIS decision analysis tools will be designed to support human capital strategic planning processes and related initiatives. 6. Elevating HR to a decision science HR will evolve to become a steward for human capital assets and will provide the decision tools to support them. Senior HR practice leaders will be responsible for working with senior management to express in both quantitative and qualitative terms the value of the human capital assets within the organization and for designing and developing decision support tools to demonstrate a return on investment (ROI) in human capital asset initiatives. This is likely to involve the development of criteria equivalent to CFO, Financial Accounting Standards Board, Marketing, etc. The HR practice leader and senior management will know that this works when HR is elevated to the level of a decision science, i.e., the criteria for a chief human resource officer is akin to that of a CFO, CIO, etc. But potential problems, such as erroneous data to support claims of HR as a decision science, any scandals surrounding the process, legislative issues that could put the process on hold or a lack of support from the business community, could make this a challenge and/or potentially delay this process. Though the need for such systems will probably always exist, they may no longer be called HR technology systems and may be absorbed by another function. 46

7. Educating the HR profession Educating students, both undergraduate and graduate, may eventually be standardized to include HR metrics, quantitative measures and HR technology. Educating subject matter experts in HR as a decision science may become more critical over the longer term as HR is re-evaluated as a discipline. The focus should be on elevating HR to the level of a decision science. This would require a standardized body of knowledge with a sharper focus on human capital, business analytics and HR technology. The education of HR practitioners in HR metrics may be accomplished through targeted professional development programs, a gradual shift in the certification process to include more emphasis on HR metrics, business analytics and HR technology, the SHRM Speaker s Bureau, SHRM Chapter Meetings, SHRM conferences, etc. Teaching HR professionals to be key business leaders may be accomplished through the establishment of a new executivelevel certification with a greater emphasis on strategic contribution and business analytics. For this to happen, the academic community must recognize the need to change course curriculum, and the HR profession itself must be willing to embrace this change or the window of opportunity may, in fact, be lost as the business community goes on to find alternative ways to resolve their HR challenges of the future (i.e., HR/BPO). 47

GLOSSARY

STATISTICAL DEFINITIONS Median (50th percentile) The median is the midpoint of the set of numbers or values arranged in ascending order. It is recommended that the median is used as a basis for all interpretations of the data when the average and median are discrepant. Average The average is the sum of the responses divided by the total number of responses. It is also known as the mean. This measure is affected more than the median by the occurrence of outliers (extreme values). Percentile This is the percentage of responses in a group that have values less than or equal to that particular value. For example, when data are arranged from lowest to highest, the 25th percentile is the point at which 75% of the data are above and 25% are below it. Conversely, the 75th percentile is the point at which 25% of the data are above and 75% are below it. ORGANIZATIONAL DATA FTE FTE is an abbreviation for full-time equivalent. Full-time equivalents represent the total labor hours invested. To convert part-time staff into FTEs, divide the total number of hours worked by part-time employees during the work year by the total number of hours in the work year (e.g., if the average work week is 37.5 hours, total number of hours in a work year would be 37.5 hours/week x 52 weeks = 1,950). Converting the number of employees to FTEs provides a more accurate understanding of the level of effort being applied in an organization. For example, if two employees are job-sharing, the FTE number is only one. Revenue In business, revenue is the amount of money that a company actually receives from its activities, mostly from sales of products and/or services to customers. To investors, revenue is less important than profit, or income, which is the amount of money the company has earned after deducting all of its expenses. n Letter n in tables and figures indicates the number of respondents to each question. Therefore, when it is noted that n = 25, it indicates that the number of respondents was 25. 49

Revenue per FTE Revenue per FTE is the total amount of revenue received during an organization s fiscal year divided by the number of FTEs. This ratio conceptually links the time and effort associated with the firm s human capital to its revenue output. If the revenue-per-fte ratio increases, it indicates that there is greater efficiency and productivity because more output is being produced per FTE. If the ratio decreases, it indicates there is less efficiency and productivity. Net Income Before Taxes Net income before taxes is the amount of revenue received during the fiscal year minus the operating expenses during the fiscal year. HR DEPARTMENTS AND EXPENSES Total HR Staff Total HR staff is the actual number of employees supporting the HR function for an organizational level. HR-to-Employee Ratio The HR-to-employee ratio provides a more manageable way to compare HR staffing levels between organizations. It represents the number of HR staff per 100 employees supported by HR in the organization. The number is calculated by dividing the number of HR FTEs by the total number of FTEs in the organization and multiplying the outcome by 100: Net Income Before Taxes per FTE Net income before taxes per FTE is the net income before taxes divided by the number of FTEs. It calculates efficiency by taking net income before taxes, which is the difference between gross revenue and expenses, and divides the outcome by the number of FTEs. Unlike revenue per FTE, which has only one factor revenue, net income per FTE comprises two factors, and it is best looked at over time. HR-to-Employee Total number of HR FTEs = X 100 Ratio Total number of FTEs in the organization Human Resource Expenses Human resource expenses represent HR s total costs for a given fiscal year. HR Expense to Operating Expense Ratio HR expense to operating expense ratio is calculated by dividing the organization s total HR expenses by the operating expenses for a given fiscal year. This ratio depicts the amount of HR expenses as a percentage of total operating expenses, which is an indication of the amount of dollars an organization invests in its HR function. HR Expense by FTE Ratio HR expense by FTE ratio represents the amount of human resource dollars spent per FTE in the organization. It is calculated by taking the HR expenses for a given fiscal year and dividing that by the number of FTEs in the organization. 50

COMPENSATION AND TURNOVER DATA Annual Salary Increase Annual salary increase is the percentage of increase in salaries that an organization expects to provide to its employees for a given fiscal year. Salaries as a Percentage of Operating Expense Salaries as a percentage of operating expense is calculated by dividing the total amount of employee salaries by the operating expense for a given fiscal year. Annual Turnover Rate Annual turnover rate is the rate at which employees enter and leave a company in a given fiscal year. Typically, the more loyal employees are to a firm, the lower the turnover rate. A 100% turnover rate from year to year means that as many employees left the company as were hired. To calculate annual turnover, first calculate turnover for each month by dividing the number of separations during the month by the average number of employees during the month and multiplying by 100: # of separations during month average # of employees during the month x 100. 13 The annual turnover rate is then calculated by adding the 12 months worth of turnover percentages together. HEALTH CARE DATA Health Care Expense per All Employees Health care expense per all employees is calculated by taking the total health care expenses paid by the organization in a given fiscal year and dividing that by the number of employees in that organizational unit. Total health care expenses include both employeeand company-paid premiums, stop-loss insurance and administrative fees. These expenses do not include dental costs. Health Care Expense per Covered Employees Health care expense per covered employees is calculated by taking the total health care expenses paid by the organization in a given fiscal year and dividing that by the number of employees who are enrolled in a health care plan in that organizational unit. Total health care expenses include both employee- and company-paid premiums, stop-loss insurance and administrative fees. These costs do not include dental costs. Percentage of Premiums Organization Pays for Employee-Only Coverage Percentage of premiums organization pays for employee-only coverage is calculated by dividing the amount the organization pays for employee-only coverage premiums by the total premium amount. 51

Percentage of Premiums Organization Pays for Employee and Dependent Coverage Percentage of premiums organization pays for employee and dependent coverage is calculated by dividing the amount the organization pays for employee and dependent coverage premiums by the total premium amount. Projected Increase in Health Care Expenses This percentage represents the expected increase in an organization s health care expenses for a given fiscal year. EMPLOYMENT DATA Number of Positions Filled Number of positions filled reflects the number of open positions for which individuals were hired during the fiscal year. Open positions could be filled either by internal or external candidates. Hired means the individual accepted the position during the fiscal year, but may not have started until the following year. Time-to-Fill Time-to-fill represents the number of days from when the job requisition was opened until the offer was accepted by the candidate. 14 This number is calculated using calendar days, including weekends and holidays. Cost-per-Hire Cost-per-hire represents the costs involved with a new hire. These costs include the sum of advertising, agency fees, employee referrals, travel cost of applicants and staff, relocation costs, and recruiter pay and benefits divided by the number of hires. 15 52

ENDNOTES 1 Huselid, M. (1995, June). The impact of human resource management practices on turnover, productivity and corporate financial performance. Academy of Management Journal, 38, 3, 635. 2 Chartered Institute for Personnel and Development. (2004). Human capital reporting: An internal perspective. London: Author. 8 Digh, P. (1998, October). Holding people accountable. HR Magazine, 43, 11, 63. 9 Cadrain, D. (2003, May). Put success in sight. HR Magazine, 5, 84. 10 Fitz-enz, J., & Davison, B. (2002). How to measure human resources management (3rd edition). New York: McGraw-Hill. 11 Ibid. 3 Becker, B., & Huselid, M. (2003, December). Measuring HR? HR Magazine, 48, 12, 56. 4 Due to the nature of the data in the current study, only data that were three standard deviations above the average were excluded. In other words, this includes data in which 99.5% of the data fall below the given data point. Extreme outliers can skew the results, leading to higher (or lower) averages among the measures. 5 CFO Research Services. (2003). Human capital management: The CFO s perspective. Boston: CFO Publishing Corp. 6 Anderson, J., & Sohn, M. (2003, July). Stimulus-related priming during task switching. Memory & Cognition, 31, 5, 775. 12 Gates, S. (2004, February). Linking people metrics to strategy. New York: The Conference Board. 13 Society for Human Resource Management. HR metrics toolkit. Retrieved from www.shrm.org/metrics/library_published /nonic/cms_005910.asp. 14 Kluttz, L. (2003). SHRM/EMA 2002 staffing metrics survey: Time to fill/time to start. Alexandria, VA: Society for Human Resource Management. 15 Society for Human Resource Management. HR metrics toolkit. Retrieved from www.shrm.org/metrics/library_published /nonic/cms_005910.asp. 7 Schramm, J. (2004). SHRM 2004-2005 workplace forecast: A strategic outlook. Alexandria, VA: Society for Human Resource Management. 53

SHRM CUSTOMIZED HUMAN CAPITAL BENCHMARKING SERVICE Allows you to customize the HR metrics you need by: Industry Revenue Employee size Organizational data plus more More than 1,500 organizations in SHRM s database Step 1. An organizational profile can be created for you based on your organization s revenue, industry, employee size or geographic region. Additional categories may be ordered. Your profile is then compared against peer organizations with similar profiles so the HR metrics that you receive are from organizations just like yours. See the charts starting on the next page for examples of the types of metrics you can receive. Step 2. Customized reports are produced highlighting the following areas: HR departments Employee turnover HR expenses Health care Employment Organizational financial data Compensation Step 3. You receive your customized report within days. Pricing For a limited time, pick two of the six cuts of the data (instead of one cut): industry, revenue, employee size, geographic region, nonprofit or for-profit status and public/ government or private sector. SHRM members: $245 Nonmembers: $425 (Additional customized reports may be purchased) Contact www.shrm.org/research/benchmarks or 800-283-7476 ext. 6366 55

*** Fictitious Data Sample *** SHRM CUSTOMIZED HUMAN CAPITAL BENCHMARKING REPORT FOR [YOUR ORGANIZATION S NAME] This report includes Customized tables based on your criteria on page 6 Summary graphs for your entire industry on page 12 A glossary of terms on page 22 Prepared by Noël Smith, MA Society for Human Resource Management June, 2005 HR: Leading People, Leading Organizations SM

*** Fictitious Data Sample *** Thank you for ordering a SHRM Customized Human Capital Benchmarking Report! Your custom report is based on the following criteria Selection Criteria Industry Staff Size Manufacturing (Durable Goods) Under 100 HR: Leading People, Leading Organizations SM 2

*** Fictitious Data Sample *** Using Benchmarking Data Benchmarking is rapidly becoming an indispensable tool for HR professionals. It is a mechanism for measuring processes, practices and results against the competition in order to improve performance. Used wisely, it can transform a company s HR and people management strategies by showing how human capital practices influence organizational performance. HR professionals can use benchmarking data to compare their organization against their competitors or other similar organizations. For example, the HR professionals can compare their organization s health care costs with other similar organizations, to see if the discrepancy is large enough to warrant further analysis. Benchmarking also protects areas or programs that are performing well. To illustrate, if line executives want recruiting costs lowered, benchmarking data may show that their current recruiting costs are in line with their industry. In fact, to lower costs far below their competitors might actually jeopardize their organization s ability to find the right talent to compete in the market. Benchmarking can also create support and momentum for organizational change. For example, making changes to existing pay practices may be difficult, unless there is objective benchmarking data that can support otherwise. For example, if the HR professional wants to alter an organization s long-standing practice of not offering employee bonus plans, making that argument alone, without benchmarking data, is very difficult. Benchmarking data can help make the case. CEOs and board-level executives also depend on quality benchmarking data to make strategic decisions that affect their organizations. In fact, benchmarking is more effective when used as part of an overall business strategy. It is less effective, however, when companies use benchmarking only for short-term cost reductions and not part of a long-term strategy. An example of this occurs when an organization lowers training budgets to meet short-term budget goals. While this may achieve a short-term objective, it has a negative impact on developing the skills of the organization s workforce. Thus over the long term, the HR: Leading People, Leading Organizations SM 3

*** Fictitious Data Sample *** knowledge and skills of its human capital start to lag behind the market, and the organization loses its competitive advantage to successfully compete. Understanding the Data As you compare your own data against the other organizations, keep the following in mind: 1. A deviation between your figure (for any human capital measure) and the comparative figure is not necessarily favorable or unfavorable; it is merely an indication that additional analyses may be needed. Human capital measures that relate more closely to the context of your organization s industry, revenue size, geographic location and employee size are more descriptive and meaningful than information that is more generic in nature, such as all industries combined. The larger the discrepancy between your figure and those found in this report, the greater the need for additional scrutiny. 2. In cases where you determine that potentially serious deviations do exist, it may be helpful to go back and calculate the same human capital measure for your organization over the past several years to identify any trends that may exist. 3. The information in this report should be used as a tool for decision-making rather than an absolute standard. Because companies differ in their overall business strategy, location, size and other factors, any two companies can be well managed, yet some of their human capital measures may differ greatly. No decision should be made solely based on the results of any one study. HR: Leading People, Leading Organizations SM 4

*** Fictitious Data Sample *** Working with the Data The information in this report is designed to be a tool to help you evaluate decisions and activities that affect your organization s human capital. When reviewing these data, it is important to realize that business strategy, organizational culture, leadership behaviors and industry pressures are just a few of the many factors that drive various human capital measures. For example, an industry that generally hires nonskilled labor, such as manufacturing, may have less costly benefit packages than the high-tech industry that hires specialized knowledge workers. This is because organizations in the high-tech industry may need to have richer, more attractive benefit plans to make themselves more enticing in order to attract hard-to-find knowledge workers. Absolute measures are not meaningful in isolation--they should be compared with one or more measures to determine whether a satisfactory level exists. Other measures, for example, might be your organization s past results in this area or comparatives based on organizational size, industry or geographic location. Notes The n is comprised of the organizations that responded to the specific metric for which it is listed. Therefore, the number of peer organizations may vary from metric to metric. Some metrics are less frequently collected by organizations, or may be more difficult to obtain. Therefore some metrics show a smaller n than others. Due to the diverse nature of the organizations in the database, as more cuts are requested with each report, fewer peer organizations are provided. HR: Leading People, Leading Organizations SM 5

*** Fictitious Data Sample *** CUSTOMIZED HUMAN CAPITAL BENCHMARKING REPORT FOR [YOUR ORGANIZATION S NAME] ORGANIZATIONAL DATA 2004 2004 Revenue per FTE 2004 Net Income Before Taxes 2004 Net Income Before Taxes per FTE Organization Revenue Organization * $ 72,000,000 $ 720,000 $ 500,000 $ 5,000 Organization * $ 6,700,000 $ 111,667 $ 400,000 $ 6,667 Organization * $ 10,000,000 $ 111,111 $ 2,000,000 $ 22,222 Organization * $ 4,653,556 $ 110,799 $ 2,605,171 $ 62,028 Organization * $ 1,700,000 $ 80,952 $ (600,000) $ (28,571) All Peer Organizations n 24 24 17 17 25 th Percentile $ 7,321,252 $ 111,389 $ 400,000 $ 3,049 Median $ 23,456,706 $ 173,453 $ 816,000 $ 6,667 75 th Percentile $ 34,855,500 $ 309,183 $ 2,605,171 $ 28,571 Average $ 1,751,028 $ 496,840 $ 1,523,296 $ 15,398 *While individual organizational information is presented, due to the confidentiality of the data, the name of the organization is not provided. HR: Leading People, Leading Organizations SM 6

*** Fictitious Data Sample *** CUSTOMIZED HUMAN CAPITAL BENCHMARKING REPORT FOR [YOUR ORGANIZATION S NAME] HR DEPARTMENT AND EXPENSE DATA 2004 Total HR Staff 2004 HR-to- Employee Ratio 2004 HR Expenses 2004 HR Expense to Operating Expense Ratio 2004 HR Expense to FTE Ratio Organization Organization * 2.0 1.74 $ 130,000 0.42 % $ 1,130 Organization * 2.0 1.22 $ 140,000 0.35 % $ 854 Organization * 1.0 0.87 $ 550,000 2.50 % $ 4,783 Organization * 3.0 1.71 $ 421,000 1.89 % $ 2,406 Organization * 2.0 2.22 $ 150,000 1.88 % $ 1,667 All Peer Organizations n 51 51 30 16 30 25 th Percentile 1.0 1.33 $ 72,000 0.55 % $ 1,008 Median 1.5 1.59 $ 125,500 1.24 % $ 1,583 75 th Percentile 2.0 2.38 $ 200,000 2.66 % $ 2,857 Average 1.7 3.15 $ 270,367 4.79 % $ 2,454 *While individual organizational information is presented, due to the confidentiality of the data, the name of the organization is not provided. HR: Leading People, Leading Organizations SM 7

*** Fictitious Data Sample *** CUSTOMIZED HUMAN CAPITAL BENCHMARKING REPORT FOR [YOUR ORGANIZATION S NAME] COMPENSATION AND TURNOVER DATA Organization 2005 Annual Salary Increase 2004 Salaries as a Percentage of Operating Expense 2004 Annual Turnover Rate Organization * 1.4 % 2.3 % 48.0 % Organization * 3.0 % 32.0 % 21.0 % Organization * 3.0 % 20.0 % 0.0 % Organization * 5.0 % 70.0 % 0.1 % Organization * 2.5 % 45.0 % 50.2 % All Peer Organizations n 47 23 26 25 th Percentile 2.5 % 14.3 % 6.5 % Median 3.0 % 25.0 % 12.1 % 75 th Percentile 3.5 % 37.0 % 20.0 % Average 3.2 % 26.9 % 16.5 % *While individual organizational information is presented, due to the confidentiality of the data, the name of the organization is not provided. HR: Leading People, Leading Organizations SM 8

*** Fictitious Data Sample *** CUSTOMIZED HUMAN CAPITAL BENCHMARKING REPORT FOR [YOUR ORGANIZATION S NAME] HEALTH CARE DATA 2004 Health Care Expense per All Employees 2004 Health Care Expense per Covered Employees 2004 Percentage of Premiums Organization Pays for Employee-Only Coverage 2004 Percentage of Premiums Organization Pays for Employee and Dependent Coverage 2005 Projected Increase in Health Care Expenses Organization Organization * $ 6,006 $ 6,156 80.0 % 70.0 % 12.0 % Organization * $ 4,974 $ 5,062 75.0 % 58.0 % 10.0 % Organization * $ 3,375 $ 3,971 80.0 % 80.0 % 12.0 % Organization * $ 4,171 $ 5,840 76.0 % 76.0 % 14.0 % Organization * $ 6,283 $ 6,180 100.0 % 100.0 % 10.0 % All Peer Organizations n 30 26 47 48 36 25 th Percentile $ 3,954 $ 4,882 75.0 % 67.5 % 9.5 % Median $ 4,679 $ 5,571 80.0 % 77.2 % 11.0 % 75 th Percentile $ 5,918 $ 6,471 92.0 % 80.0 % 14.5 % Average $ 4,203 $ 5,673 80.5 % 73.1 % 11.5 % *While individual organizational information is presented, due to the confidentiality of the data, the name of the organization is not provided. HR: Leading People, Leading Organizations SM 9

*** Fictitious Data Sample *** CUSTOMIZED HUMAN CAPITAL BENCHMARKING REPORT FOR [YOUR ORGANIZATION S NAME] EMPLOYMENT DATA Organization 2004 Number of Positions Filled 2004 Time-to-Fill 2004 Cost-Per-Hire Organization * 2.0 21 Days $ 500 Organization * 45.0 7 Days $ 256 Organization * 25.0 60 Days $ 2,000 Organization * 20.0 21 Days $ 500 Organization * 207.0 7.5 Days $ 510 All Peer Organizations n 50 26 17 25 th Percentile 5.0 7.5 Days $ 500 Median 13.5 23.0 Days $ 1,000 75 th Percentile 34.0 35.0 Days $ 3,000 Average 24.8 31.9 Days $ 5,081 *While individual organizational information is presented, due to the confidentiality of the data, the name of the organization is not provided. HR: Leading People, Leading Organizations SM 10

*** Fictitious Data Sample *** CUSTOMIZED HUMAN CAPITAL BENCHMARKING REPORT SUMMARY DATA FOR ALL MANUFACTURING (DURABLE GOODS) INDUSTRY Total Revenue for All Organizations in the Human Capital Benchmarking Database from the Manufacturing (Durable Goods) Industry in 2004 Average $ 571,491,304 Median $ 42,000,000 Staff Size for All Organizations in the Human Capital Benchmarking Database from the Manufacturing (Durable Goods) Industry in 2004 Under 100 FTEs 19% 100 to 249 FTEs 31% 250 to 499 FTEs 20% 500 to 999 FTEs 9% 1,000 to 2,499 FTEs 12% 2,500 to 7,499 FTEs 4% 7,500 or More FTEs 4% Geographic Region for All Organizations in the Human Capital Benchmarking Database from the Manufacturing (Durable Goods) Industry in 2004 Pacific West 9% Southwest Central 15% North Central 41% Southeast 20% Northeast 16% Profit Status for All Organizations in the Human Capital Benchmarking Database from the Manufacturing (Durable Goods) Industry in 2004 Nonprofit 0% For Profit 100% Industry Sector for All Organizations in the Human Capital Benchmarking Database from the Manufacturing (Durable Goods) Industry in 2004 Private 92% Public/Government 8% Note: Percentages may not total 100% because of rounding. HR: Leading People, Leading Organizations SM 11

*** Fictitious Data Sample *** CUSTOMIZED HUMAN CAPITAL BENCHMARKING REPORT FOR THE MANUFACTURING (DURABLE GOODS) INDUSTRY ORGANIZATIONAL DATA 100% 98% Nonprofit/For-Profit Status for Industries in 2004 90% 80% 74% % of Organizations 70% 60% 50% 40% 30% 26% 20% 10% 0% For-Profit 2% Nonprofit Manufacturing (Durable Goods) All Industries Note Manufacturing (Durable Goods) Industry n = 85 All Industries n = 1,562 HR: Leading People, Leading Organizations SM 12

*** Fictitious Data Sample *** CUSTOMIZED HUMAN CAPITAL BENCHMARKING REPORT FOR THE MANUFACTURING (DURABLE GOODS) INDUSTRY ORGANIZATIONAL DATA Expectations for Revenue Change in 2005 100% 90% 80% 80% 74% % of Organizations 70% 60% 50% 40% 30% 20% 10% 7% 6% 13% 20% 0% Increase Decrease Stay the same Manufacturing (Durable Goods) All Industries Note Manufacturing (Durable Goods) Industry n = 85 All Industries n = 1,562 HR: Leading People, Leading Organizations SM 13

*** Fictitious Data Sample *** CUSTOMIZED HUMAN CAPITAL BENCHMARKING REPORT FOR THE MANUFACTURING (DURABLE GOODS) INDUSTRY HR DEPARTMENT AND EXPENSE DATA 100% Where the Head of HR Reports in 2004 90% 80% % of Organizations 70% 60% 50% 40% 30% 61% 54% 20% 10% 13% 8% 8% 7% 4% 9% 3% 8% 11% 14% 0% CEO* Head of Operating Unit CHRO** Head of Administration Other CFO*** Manufacturing (Durable Goods) All Industries Note Manufacturing (Durable Goods) Industry n = 84 All Industries n = 1,573 *CEO = Chief Executive Officer or Chief Operating Officer, or President or Owner **CHRO = Chief Human Resources Officer ***CFO = Chief Financial Officer HR: Leading People, Leading Organizations SM 14

*** Fictitious Data Sample *** % of Organizations 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% CUSTOMIZED HUMAN CAPITAL BENCHMARKING REPORT FOR THE MANUFACTURING (DURABLE GOODS) INDUSTRY 36% HR DEPARTMENT AND EXPENSE DATA 31% HR FTEs by Level in 2004 54% Administrative support Professional and technical staff Supervisors, managers and above Manufacturing (Durable Goods) 51% All Industries 10% 18% Note Manufacturing (Durable Goods) Industry n = 74 All Industries n = 1,448 HR: Leading People, Leading Organizations SM 15

*** Fictitious Data Sample *** CUSTOMIZED HUMAN CAPITAL BENCHMARKING REPORT FOR THE MANUFACTURING (DURABLE GOODS) INDUSTRY HR DEPARTMENT AND EXPENSE DATA 15% Expectations for HR Hiring in 2005 13% % of Organizations 11% 9% 7% 5% 3% 1% 8% 7% 9% 9% 6% 5% 5% 6% 4% 3% 2% 8% 3% 1% -1% Generalist Recruiting Compensation Training Benefits Other areas Organizational development Manufacturing (Durable Goods) All Industries Note Manufacturing (Durable Goods) Industry n = 85 All Industries n = 1,629 HR: Leading People, Leading Organizations SM 16

*** Fictitious Data Sample *** % of Organizations 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% CUSTOMIZED HUMAN CAPITAL BENCHMARKING REPORT FOR THE MANUFACTURING (DURABLE GOODS) INDUSTRY HR DEPARTMENT AND EXPENSE DATA Expectations for Changes in Human Resource Costs in 2005 46% 52% 5% 9% 49% Increase Decrease Stay the same Manufacturing (Durable Goods) All Industries 40% Note Manufacturing (Durable Goods) Industry n = 83 All Industries n = 1,543 HR: Leading People, Leading Organizations SM 17

*** Fictitious Data Sample *** % of Organizations 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% CUSTOMIZED HUMAN CAPITAL BENCHMARKING REPORT FOR THE MANUFACTURING (DURABLE GOODS) INDUSTRY TURNOVER DATA Expectations for Turnover in 2005 25% 26% 23% 13% 62% Increase Decrease Stay the same Manufacturing (Durable Goods) All Industries 51% Note Manufacturing (Durable Goods) Industry n = 85 All Industries n = 673 HR: Leading People, Leading Organizations SM 18

*** Fictitious Data Sample *** % of Organizations 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 76% CUSTOMIZED HUMAN CAPITAL BENCHMARKING REPORT FOR THE MANUFACTURING (DURABLE GOODS) INDUSTRY 78% 46% HEALTH CARE DATA Health Care Plans Offered in 2004 42% 32% 24% PPO HMO POS None Other Employer Provided Manufacturing (Durable Goods) 5% 3% All Industries 1% 4% 3% 4% Note Manufacturing (Durable Goods) Industry n = 85 All Industries n = 1,629 HR: Leading People, Leading Organizations SM 19

*** Fictitious Data Sample *** % of Organizations 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% CUSTOMIZED HUMAN CAPITAL BENCHMARKING REPORT FOR THE MANUFACTURING (DURABLE GOODS) INDUSTRY 74% HEALTH CARE DATA Expectations for Changes in Health Care Costs in 2005 77% 3% 4% 23% 19% Increase Decrease Stay the same Manufacturing (Durable Goods) All Industries Note Manufacturing (Durable Goods) Industry n = 84 All Industries n = 1,262 HR: Leading People, Leading Organizations SM 20

*** Fictitious Data Sample *** CUSTOMIZED HUMAN CAPITAL BENCHMARKING REPORT FOR THE MANUFACTURING (DURABLE GOODS) INDUSTRY EMPLOYMENT DATA Expectations for Changes in Hiring in 2005 100% 90% 80% % of Organizations 70% 60% 50% 40% 30% 20% 44% 40% 40% 39% 16% 21% 10% 0% Increase Decrease Stay the same Manufacturing (Durable Goods) All Industries Note Manufacturing (Durable Goods) Industry n = 85 All Industries n = 1,571 HR: Leading People, Leading Organizations SM 21

*** Fictitious Data Sample *** Statistical Definitions Glossary of Metric Terms, Definitions and Calculations Median (50 th percentile) The median is the midpoint of the set of numbers or values arranged in ascending order. It is recommended that the median is used as a basis for all interpretations of the data when the average and median are discrepant. Average The average is the sum of the responses divided by the total number of responses. It is also known as the mean. This measure is affected more than the median by the occurrence of outliers (extreme values). Percentile The percentage of responses in a group that have values less than or equal to that particular value. For example, when data are arranged from lowest to highest, the 25 th percentile is the point at which 75% of the data are above and 25% are below it. Conversely, the 75 th percentile is the point at which 25% of the data are above and 75% are below it. n Letter n in tables and figures indicates the number of respondents to each question. Therefore, when it is noted that n = 25, it indicates that the number of respondents was 25. HR: Leading People, Leading Organizations SM 22

*** Fictitious Data Sample *** Organizational Data FTE FTE is an abbreviation for full-time equivalent. Full-time equivalents represent the total labor hours invested. To convert part-time staff into FTEs, divide the total number of hours worked by part-time employees during the work year by the total number of hours in the work year (e.g., if the average work week is 37.5 hours, total number of hours in a work year would be 37.5 hours/week x 52 weeks = 1,950). Converting the number of employees to FTEs provides a more accurate understanding of the level of effort being applied in an organization. For example, if two employees are job-sharing, the FTE number is only one. Revenue In business, revenue is the amount of money that a company actually receives from its activities, mostly from sales of products and/or services to customers. To investors, revenue is less important than profit, or income, which is the amount of money the company has earned after deducting all of its expenses. Revenue per FTE Revenue per FTE is the total amount of revenue received during an organization s fiscal year divided by the number of FTEs. This ratio conceptually links the time and effort associated with the firm s human capital to its revenue output. If the revenue-per-fte ratio increases, it indicates that there is greater efficiency and productivity because more output is being produced per FTE. If the ratio decreases, it indicates there is less efficiency and productivity. Net Income Before Taxes Net income before taxes is the amount of revenue received during the fiscal year minus the operating expenses during the fiscal year. HR: Leading People, Leading Organizations SM 23

*** Fictitious Data Sample *** Net Income Before Taxes per FTE Net income before taxes per FTE is the net income before taxes divided by the number of FTEs. It calculates efficiency by taking net income before taxes, which is the difference between gross revenue and expenses, and divides the outcome by the number of FTEs. Unlike revenue per FTE, which has only one factor--revenue, net income per FTE comprises two factors, and it is best looked at over time. HR Departments and Expenses Total HR Staff Total HR staff is the actual number of employees supporting the HR function for an organizational level. HR-to-Employee Ratio The HR-to-employee ratio provides a more manageable way to compare HR staffing levels between organizations. It represents the number of HR staff per 100 employees supported by HR in the organization. The number is calculated by dividing the number of HR FTEs by the total number of FTEs in the organization and multiplying the outcome by 100: HR-to-Employee = Total number of HR FTEs X 100 Ratio Total number of Employee FTEs in the organization HR Expenses Human resource expenses represent HR s total costs for a given fiscal year. HR Expense to Operating Expense Ratio HR expense to operating expense ratio is calculated by dividing the organization s total HR expenses by the operating expenses for a given fiscal year. This ratio depicts the amount of HR expenses as a percentage of total operating expenses, which is an indication of the amount of dollars an organization invests in its HR function. HR: Leading People, Leading Organizations SM 24

*** Fictitious Data Sample *** HR Expense to FTE Ratio HR expense by FTE ratio represents the amount of human resource dollars spent per FTE in the organization. It is calculated by taking the HR expenses for a given fiscal year and dividing that by the number of FTEs in the organization. Compensation and Turnover Data Annual Salary Increase Annual salary increase is the percentage of increase in salaries that an organization expects to provide to its employees for a given fiscal year. Salaries as a Percentage of Operating Expense Salaries as a percentage of operating expense is calculated by taking the total amount of employee salaries divided by the operating expense for a given fiscal year. Annual Turnover Rate Annual turnover rate is the rate at which employees enter and leave a company in a given fiscal year. Typically, the more loyal employees are to a firm, the lower the turnover rate. A 100% turnover rate from year to year means that as many employees left the company as were hired. To calculate annual turnover, first calculate turnover for each month by dividing the number of separations during the month by the average number of employees during the month and multiplying by 100: # of separations during month average # of employees during the month x 100. 1 The annual turnover rate is then calculated by adding the 12 months worth of turnover percentages together. HR: Leading People, Leading Organizations SM 25

*** Fictitious Data Sample *** Health Care Data Health Care Expense per All Employees Health care expense per all employees is calculated by taking the total health care expenses paid by the organization in a given fiscal year and dividing that by the number of employees in that organizational unit. Total health care expenses include both employee- and company-paid premiums, stop-loss insurance and administrative fees. These expenses do not include dental costs. Health Care Expense per Covered Employees Health care expense per covered employees is calculated by taking the total health care expenses paid by the organization in a given fiscal year and dividing that by the number of employees who are enrolled in a health care plan in that organizational unit. Total health care expenses include both employee- and company-paid premiums, stop-loss insurance and administrative fees. These costs do not include dental costs. Percentage of Premiums Organization Pays for Employee-Only Coverage Percentage of premiums organization pays for employee-only coverage is calculated by dividing the amount the organization pays for employee-only coverage premiums by the total premium amount. Percentage of Premiums Organization Pays for Employee and Dependent Coverage Percentage of premiums organization pays for employee and dependent coverage is calculated by dividing the amount the organization pays for employee and dependent coverage premiums by the total premium amount. Projected Increase in Health Care Expenses This percentage represents the expected increase in an organization s health care expenses for a given fiscal year. HR: Leading People, Leading Organizations SM 26

*** Fictitious Data Sample *** Employment Data Number of Positions Filled Number of positions filled reflects the number of open positions for which individuals were hired during the fiscal year. Open positions could be filled either by internal or external candidates. Hired means the individual accepted the position during the fiscal year, but may not have started until the following year. This would occur mostly with those candidates who accepted positions during the last month of the organization s fiscal year. Time-to-Fill Time-to-fill represents the number of days from when the job requisition was opened until the offer was accepted by the candidate. 2 This number is calculated using calendar days, including weekends and holidays. Cost-Per-Hire Cost-per-hire represents the costs involved with a new hire. These costs include the sum of advertising, agency fees, employee referrals, travel cost of applicants and staff, relocation costs, and recruiter pay and benefits 3 divided by the number of hires. 1 Society for Human Resource Management. HR metrics toolkit. Retrieved from www.shrm.org/metrics/library_published/nonic/cms_005910.asp. 2 Kluttz, L. (2003). SHRM/EMA 2002 staffing metrics survey: Time to fill/time to start. Alexandria, VA: Society for Human Resource Management. 3 Society for Human Resource Management. HR metrics toolkit. Retrieved from www.shrm.org/metrics/library_published/nonic/cms_005910.asp. HR: Leading People, Leading Organizations SM 27

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