Professional Documents
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Conference BD HR Paper
Conference BD HR Paper
research report
E-0015-07-RR
The Conference Board creates and disseminates knowledge about management and the marketplace to help businesses strengthen their performance and better serve society. Working as a global, independent membership organization in the public interest, The Conference Board conducts research, convenes conferences, makes forecasts, assesses trends, publishes information and analysis, and brings executives together to learn from one another. The Conference Board is a not-for-profit organization and holds 501 (c) (3) tax-exempt status in the United States. www.conference-board.org
contents 4 Introduction: Setting the Context Evidence-Based Human Resources: What Makes this Approach Different Part I. The Evolution of Human Resources Management Literature Part II. The Paralell Evolution in Labor Economics Part III. The Emergence of Evidence-Based Human Resources References Appendix 1 About the Authors
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Human resources leaders should not be satisfied with simply demonstrating the efficient use of human capital and begin to work on empirically demonstrating how talent drives the performance of their organization. Human resources professionals need to learn that being at the table is just the beginning. New tools and competencies are necessary for leading the conversation once they get the seat. If business leaders genuinely believe that people are our greatest asset, human resources leaders have the mandate to move the management of human capital beyond simply being aligned with their companies strategies and discover how talent can be powerfully integrated into them. This literature review of Evidence-Based Human Resources marks the beginning of what is anticipated to be a series of reports dedicated to exploring the application of rigorous empirical methods and standards of evidence to assist executives in integrating strategy and talent. The central purpose of this report is to demonstrate that, as a result of the convergence of technological advances, academic research, and economic necessity a new evidence-based approach to measuring and managing talent is emerging.
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All credibility, all good conscience, all evidence of truth come only from the senses.
Friedrich Nietzsche (1886) For generations the field of human resources has been a discipline of faith, embedded in a business/economic system dependant on hard evidence. For human resources practitioners, the two statements above, aligned side by side, resonate with how they work every day. HR professionals know that intangible assets, such as talent, drive the performance of their business. They have faith in things not seen. Yet, they also understand that business cases are built on empirical demonstrations of how strategy gets implemented into action, and how that action subsequently leads to observable (and predictable) outcomes. They know that, in business truth comes from the senses. Fortunately, advances in research, technology, and techniques for measuring intangiblesalong with a timely convergence of academic disciplinesmay have produced a solution that allows Human Resources practitioners to stay true to their faith, yet gives them the means of producing business cases that appeal to the senses. Evidence-Based Human Resources applies scientific standards of causality to demonstrate how intangible human capital can be observed and shown to add tangible business results.
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Lewin (2003).
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employees drive customer value (which ultimately drives business performance), the authors find that in practice firms are only monitoring a small subset of the links. As a result, The Service Profit Chain is filled with examples of each link, but none that demonstrate a complete chain. Ed Gubmans book The Talent Solution (1998), focuses in on the employee relationship to demonstrate that talent is critical to the success of business. Gubman calls for human capital strategies to be aligned with the various components of the companys overall strategies, and included guidance on how to implement HR metrics. Viewed together, The Service Profit Chain and The Talent Solution represent the natural progression toward a conceptual model of the talent-customer-profit relationship. This framework was expanded by John Boudreau and Peter Ramstad (2002), who advocated a new decision science Talentship. They emphasized providing strategic decisions based on the talent within the firm. The responsibilities of Talentship within the firm, as defined by Boudreau and Ramstad, is as a strategic business partner akin to finance and marketing, while the traditional operational functions of HR play supporting roles similar to accounting and sales. Another important perspective on the impact of human capital on organizational performance was contributed by Dave Ulrich and Norm Smallwood in their book Why the Bottom Line Isnt (2003). Ulrich and Smallwood asserted that enterprise-level HR capabilities such as the ability to attract and retain talent, to recognize and adapt to new market conditions, or to innovate quickly and deliver new goods and services in a timely way are, by nature, intangible human capital assets of an organization, yet they obviously have a direct impact on a firms overall value. Their perspective essentially called for the human resources function to move away from simply providing support for executing the organizations strategy, and toward actually driving the strategy itself.
Sichel (1997); investment amount expressed in 2007 constant dollars. Tucker, Zivan, and Camp, 1987.
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In 2001 Brian Becker, Mark Huselid, and Dave Ulrich published The HR Scorecard. This book was a human resources extension of Robert Kaplan and David Nortons The Balanced Scorecard (1996), which moved beyond benchmarking and advocated individual firms choose the measures appropriate for monitoring their execution against strategy. The HR Scorecard provided a wide array of Human Resources metrics that could be applied and integrated into a Balanced Scorecard methodology. In 2005 Huselid, Becker, and Richard Beatty followed up with The Workforce Scorecard, expanding the metrics to include overall human capital measures in addition to Human Resources functional measures. The scorecard technique4 is valuableit serves as a means by which human capital metrics are viewed in alignment with the execution of the companys overall strategy. It also elevates human capital issues as meaningful to the entire organization, not simply the HR department. However, while the scorecard approach serves as a valuable means of determining how to use human capital metrics, it doesnt provide the more important insight into why metrics are important, which metrics to choose, or what they represent in terms of how human capital generates value. Somewhat paradoxically, these more recent techniques for analyzing data demonstrate how little ground has been covered in the past two decades. Benchmarking is akin to the original human resources measurement work in that, despite its sophistication, it is simply a tool for measuring the efficiencies of particular HR functions. Certainly, scorecards have moved human resources toward the C-suite, providing HR practitioners with measures and means of presenting their function in ways that are more consistent with finance, operations, and marketing. As a result, HR has become a strategic partner in a growing number of firms. However, none of the previously mentioned concepts or practices go beyond using intuition to determine which levers HR can pull to impact the firms overall success that is, providing concrete evidence of the true drivers of the firm, and how can HR influence those drivers.
Russell, Terborg & Powers (1985). Terpstra & Rozell (1993). Borman (1991). Gerhart & Milkovich (1992). The research on Human Resources Management practices has been primarily empirical. For an overview of the theoretical underpinnings of HR management, see Delery and Doty (1996).
The scorecard technique originated at Analog Devices. See Kaplan and Norton (1992 & 1993) for background.
production process, the HR management practices must be adjusted to compliment an environment which provides a larger role for employee influence.
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More recently, Wright et al. (2005) evaluated 66 studies from the HR management and Organizational Psychology disciplines that examine the relationship between a system of HR practices and organization-level performance measures. They apply a rigorous set of criteria to identify the studies that have provided a compelling case for a causal relationship between HR-related measures or actions and performance outcomes.11 As a result, Wright et al. reduce these 66 studies down to 10 that they describe as true predictive designs. The 10 studies identified by Wright et al. as having a truly predictive design all address the same basic question: What is the impact of multiple HR management practices on firm performance? Despite the wide range of HR measures and firm performance measures, nine of these studies present (at least some) evidence that HR strategy has an impact on firm performance. In most cases, the HR measures are indices or scales created by the authors to measure the degree of presence. The downside of creating indices to measure HR management practices is that there is no clear, practical interpretation of the coefficients. As a result, practitioners can find confirmation in what they already believe: HR management systems have a significant positive relationship with firm performance measures. But there are no definitive actions for the practitioner to take away from studies that measure HR management practices using an index number.
Another finding that emerges from these studies is that once past performance is controlled for, many of the relationships between HR management practices and firm performance are reduced and in some cases disappear. Huselid, Susan Jackson, and Randall Schuler (1997) survey senior executives in HR management and line positions to assess HR management effectiveness across a wide range of practices and the capabilities of the HR staff. Their results suggest that HR capabilities are significantly correlated with future performance, while HR effectiveness is not a significant predictor. However, when the contemporaneous performance measure is included as a control variable, the magnitude and significance of HR capabilities are reduced. Like Huselid, Jackson, and Schuler (1997), David Guest et al. (2003) also find a strong positive association between their HR management index and firm performance, but the relationship disappears once previous firm performance was included as a control. Finally, Benjamin Schneider et al. (2003) look at the temporal relationship between employee attitude and firm performance. Using seven different employee attitude scales, the authors find some positive relationships between employee attitudes and future firm performance. However, there were more significant and strong relationships between employee attitudes and past firm performance. These results highlight an important limitation in many studies: including prior firm performance takes into account the possibility that previous firm success could influence both HR management practices and future firm performance.
determine the magnitude of the relationship between High Performance Work Practices and firm performance. Their metaanalysis highlights a strong relationship between HPWP and firm performance, but does not allow them to determine causal order.
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12 See Hamermesh and Rees (1993). 13 Smith also recognized how human capital accumulation
16 See Lazear (1991). 17 See Lazear (1995) and Lazear and McNabb (2004) for reviews. 18 Lazear (2000) finds the piece rate pay system implemented by
published in 1964.
15 In 1992 Becker won the Nobel Prize in Economics for having
Safelite Glass Corporation increased productivity and attracted more productive workers.
19 Knez and Simester (2001) find on-time performance improved at
extended the domain of microeconomic analysis to a wide range of human behaviour and interaction, including nonmarket behaviour. (http://nobelprize.org)
Continental Airlines once the airline introduced monthly bonuses tied to firm-wide performance.
20 Hamilton, Nickerson, and Owen (2003) found that when a
garment manufacturing facility switched from an individual to a team based pay system, productivity increased.
21 See Bassi and McMurrer (2006) for a review. 22 Huang and Cappelli (2006) find that screening results in hiring
workers who are more productive under systems with less monitoring, but firms also gain from implementing the low monitoring systems that complement these independent workers.
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economists have begun to gather insights from other HR researchers, recent work has evolved to consider a system of HR management practices that acknowledges their potential complimentary roles and interactions. Casey Ichniowski and Kathryn Shaw (2003) have introduced an approach they call insider econometrics, where they combine extensive field work with rigorous econometrics to address the effects of HR management on firm performance. The field work is focused on a specific production process, allowing the researcher to produce a detailed model of the production process and collect the appropriate data needed to estimate the model. To date, Ichniowski and Shaw have used this approach to study steel finishing lines23 and valve manufacturing,24 but also recognize several other existing studies that fit their model of insider econometrics.25 Economists can also provide broad macroeconomic (national or global) information, in addition to analyses of firm-specific phenomena. The macroeconomic information helps provide a background and context in which the HR policies and practices take place. For example, global trends, such as increasing demand for high-skill labor, without a countering increase in the supply of high-skill labor, will result in fiercer competition (and thus higher prices) for the high-talent workers. Moreover, because supply of skilled labor has been shown to catch up to demand with a significant lag, firms can expect to pay a large premium for talent for at least the near future. Broad information and insights such as these may not be of great interest to the traditional HR managers, but those who participate in the strategic decisions of their organization should be careful not to ignore them.
23 Ichniowski, Shaw, and Prennushi (1997), Boning, Ichniowski, and
Evidence of the Relationship between HR Management Practices and Firm Performance in the Economic Literature
The growing body of work addressing clusters of HR management practices26 often refers to and focuses on high-performance work practices.27 Economic theory says the transfer of (at least some) decision-making power to employees leads to higher labor costs per employee (with employees benefiting from higher wages and benefits) while employers gain from increased productivity. Thus, the implementation of high-performance work practices increases both labor costs and productivity, resulting in a theoretically ambiguous impact on profitability. Using monthly data collected on 36 steel finishing lines in the United States, Casey Ichniowski, Kathryn Shaw, and Giovanna Prennushi (1997) investigate the productivity effects of innovative employment practices. In their analysis of the impact of HR management on productivity, they find that those plants with the most sophisticated HR systems have the highest uptime, and productivity is sequentially lower as you move toward the traditional HR system. Further, by measuring the prime-yield rates28 for the plants, the authors estimate that the adoption of more innovative HR management practices also resulted in improved quality (as measured by an increase in the prime-yield rate).
Shaw (2001)
24 Bartel, Ichniowski, and Shaw (2005) 25 See Ichniowski and Shaw (2003), p. 169.
economics literature and address the difficulties that arise when trying to measure organizational capital such as work design and employee voice.
27 Cappelli and Neumark (2001) note the confusion introduced
through the use of this phrase. For many studies, what is meant by high performance work systems depends on what is measured. Cappelli and Neumark cite Becker and Gerhart (1996) who count 27 different variables used as high performance work practices across 5 studies, with only 4 of those practices common in 3 or more studies.
28 The percent of total production that met the standards to be
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Ann Bartel (2004) observes that prior studies on the impact of HR management on productivity and performance focus on the goods-producing sector. Yet the service-providing sector continues to increase in significance and employment (in 2006 over 80 percent of employees were in the service-providing sector of the U.S. economy).29 She addresses this gap in the existing literature by collecting data on bank branches, and finds variation in the applications of HR policies across branches, in spite of a company-wide formal mandate for these policies. Once prior performance is controlled for; performance and reward is a significant factor in the percentage change in loans balances, but not a significant factor in the percentage change in deposits. Bartel (2004) concludes that the incentives dimension of a high-performance work system in the most important predictor of performance in the banking industry. Peter Cappelli and David Neumark (2001) attempt to solve the difficulty in the existing literature in establishing whether observed links between work practices and organizational performance are causal or merely reflect pre-existing differences among firms. Using data from the National Employer Surveys and the Census Bureaus Longitudinal Research Database, Cappelli and Neumark find evidence that suggests high-performance work practices increase sales per worker (productivity) and labor costs, but no evidence that synergies between practices reduce costs.30 Because these HR management practices appear to increase both productivity and costs, the authors also estimate their impact on sales per labor costs, or labor efficiency. The majority of the effects point to offsetting relationships. As a result, implement-
ing high-performance work practices results in higher labor costs and higher productivity, resulting in no net effect on labor efficiency. Finally, macro-level research by Laurie Bassi and Daniel McMurrer (2004) shows that firms investing in employee education and training (employee development) experience extraordinary shareholder return. They constructed both hypothetical and actual investment portfolios comprised of firms that invested heavily in employee development in a given year, tracked them for several following years, and found these indices to outperform the S&P 500 over the same time horizon. More recently, Bassi and McMurrer (2007) use information from several dozen firms to look for human capital measures that predict organizational performance. Using the literature as their guide, Bassi and McMurrer were able to discover which metrics consistently predict organizational performance (leadership, employee engagement, knowledge accessibility, workforce optimization, organizational learning capacity) and which metrics do not (turnover rate, time to fill, total hours training). They conclude, however, that while it is possible to use a single framework to identify the most important human capital drivers of organizations performance, it is not possible to identify a single set of human capital metrics that are equally important drivers of performance across organizations (or even within a single organization at various points in its evolution).
find high performance work practices significantly increase productivity, and find no evidence that more productive firms implement high performance work practices.
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Focus on Strategy
First and foremost, Evidence-Based Human Resources places strategy at the forefront. In their book Strategy Maps, Kaplan and Norton (2004) define strategy as describing how the company intends to create value for its stakeholders. The increasing reliance on intangible assets to create and sustain firm value magnifies the importance of a firms strategy.31 A key component of intangible assets is the firms people the existing employees, knowledge base, customer relationships, and organizational relationships thus creating a critical strategic role for human capital management.
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Inherent in the firms strategy its plan for developing and sustaining competitive advantagesis a set of goals, the achievement of which is synonymous with the success of the strategy. Key Performance Indicators (KPIs) are quantifiable measures that provide the firm with a way of measuring progress toward their strategic goals. KPIs are also useful because they are accepted across the enterprise as indicators of success. The usefulness and impact of KPIs will typically be greatest when they are:
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data must be collected in a timely manner. This fourth requirement is especially important when measuring opinions and other subjective information. Research has shown that peoples responses to subjective questions about past events or practices are skewed based on recent firm success or failure.32
aligned with overall strategy; quantifiable and measurable; and recognized throughout the organization as indicators of success. Further, by establishing target values for each KPI, organizations create a transparent and ongoing mechanism for determining whether their strategic goals are being (or have been) reached. KPIs help facilitate the process by which each functional unit within the firm can prioritize its efforts and focus resources on those levers within its domain that impact the observable measures that indicate the firms strategic success.
Standards of Evidence
The second characteristic of Evidence-Based Human Resources requires that information be rigorously evaluated. Only recently has the academic research on HR management practices paid explicit attention to the rigors and methodologies required to lay claim to a causal relationship. Patrick Wright and colleagues (2005) have drawn attention to the inability of past research to convincingly show a causal relationship. They highlight Cook and Campbells (1979) three criteria for showing a causal relationship:
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a strong relationship exists between the two factors; the cause factor occurs before the effect factor; and the analysis must account for other possible influences.
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Finally, the impact of human capital extends beyond the collection of contributions by individuals. Ulrich and Smallwood (2003) make the important point that, collectively, human capital creates organizational capabilities that also create value. For example, organizational cultures that foster innovation, structures that encourage collaboration, or leadership teams that instill a feeling of trust among employees are all enterprise-level intangibles, yet their impact on a firms performance (in the form of new ideas and products, higher quality goods and services, or a more dedicated workforce) are strategically important, and tangible. Future research should not overlook the impact of these enterprise-level human capital capabilities.
benefits of integrated work, as sociologists and industrial psychologists are stressing empirical rigor, and economists are becoming more aware of underlying organizational behaviors. See Ichniowski and Shaw (2003) for a detailed discussion.
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Conclusion
Evidence-Based Human Resources is the natural outcome of the ongoing evolution of the field of HR management. However, this evolution would not be possible without simultaneous evolution of Organizational Psychology, Labor Economics, and other academic disciplines that provide direction and insight for the management of people in business. Additionally, advances in database technology, the emergence of the service-driven economy, and the globalization of the labor market have all served as catalysts for this transformation. While many of the evolutionary forces are relatively new, Evidence-Based Human Resources also applies longestablished standards for demonstrating causation using the scientific method. These are not new standards, but they are very new in their application to the field of human resources.
Most importantly, Evidence-Based Human Resources uses business performance measures as its outcome units of analysis. By doing so, Evidence-Based Human Resources serves as a means of providing genuine insight into how talent drives the business. Evidence-Based Human Resources serves to inform the next generation of human capital analytics research and development. Specifically, for non-HR business leaders, it gives a better understanding of the human component of the equation of business performance. For HR practitioners, it sets the groundwork for making better business cases. And finally, for everyone in the business community, it provides greater appreciation for the traditionally intangible contributions of talent. Indeed, it appeals to the senses while keeping the faith.
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References
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Fitz-enz, Jac, and Barbara Davidson, 2002. How to Measure Human Resources Management, 3rd Ed., New York, NY: McGraw-Hill. Gerhart, Barry, and George T. Milkovich, 1990. Organizational Differences in Managerial Compensation and Financial Performance, The Academy of Management Journal, Vol. 33(4) (December), p. 663-691. Gubman, Edward L., 1998. The Talent Solution: Aligning Strategy and People to Achieve Extraordinary Results, New York: McGrawHill. Guest, David E., Jonathan Michie, Neil Conway, and Maura Sheehan, 2003. Human Resource Management and Corporate Performance in the UK, British Journal of Industrial Relations, Vol. 41(2) (June), p. 291-314.
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Lewin, David, 2005. The Dual Theory of Human Resource Management and Business Performance: Lessons from HR Executives, in The Future of Human Resource Management: 64 Thought Leaders Explore the Critical HR Issues of Today and Tomorrow, Mike Losey, Sue Meisinger, and Dave Ulrich, eds., Hoboken, NJ: John Wiley & Sons. Lewin, David, and Daniel J. B. Mitchell, 1995. Human Resource Management: An Economic Approach, 2nd ed., Cincinnati, OH: South-Western. MacDuffie, John Paul, 1995. Human Resource Bundles and Manufacturing Performance: Organizational Logic and Flexible Production Systems in the World Auto Industry, Industrial and Labor Relations Review, Vol. 48(2) (January), p. 197-221. Pfeffer, Jeffrey, and Robert I. Sutton, 2006. Hard Facts, Dangerous Half-Truths, & Total Nonsense: Profiting From Evidence-Based Management, Boston, MA: Harvard Business School Press. Rosenzweig, Phil, 2007a. The Halo Effect and Eight Other Business Delusions that Deceive Managers, New York: Free Press. Rosenzweig, Phil, 2007b. An Obstacle to Evidence-Based Management: The Halo Effect, posted to the Evidence-Based Management Website, February 5, 2007, http://www.evidencebasedmanagement.com/guests/rosenzweig_feb07.html Russell, James S., James R. Terborg, and Mary L. Powers, 1985. Organizational Performance and Organizational Level Training and Support, Personnel Psychology, Vol. 38(4) (December), p. 849-863.
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Appendix 1
Evidence-Based Human Resources Advisory Panel
John W. Boudreau Professor and Research Director Center for Effective Organizations Marshall School of Business University of Southern California Jac Fitz-enz Chief Executive Officer Human Capital Source Edward L. Gubman Partner Strategic Talent Solutions David Lewin Neil H. Jacoby Chair in Management Anderson School of Management University of California, Los Angeles Kathryn Shaw, Stanford University Ernest C. Arbuckle Professor of Economics Graduate School of Business Stanford University Jeffrey Pfeffer Thomas D. Dee II Professor of Organizational Behavior Graduate School of Business Stanford University Jack Phillips Chairman The ROI Institute Peter M. Ramstad Vice President of Business and Strategic Development The Toro Company Patrick M. Wright Professor of Human Resources Studies Director, Center for Advanced Human Resources Studies School of Industrial and Labor Relations Cornell University David O. Ulrich Professor of Business Administration Director, Human Resource Executive Program Ross School of Business University of Michigan
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Councils
Councils are peer membership groups that provide intimate forums for executives with common responsibilities and interests to share solutions to business challenges with colleagues in other companies, industries, and countries. They are designed to keep executives abreast of the latest developments in their fields and fully informed about new management strategies and tactics. Each council has its own specific membership requirements. Council for Division Leaders Human Resources Council for Division Leaders Human Resources II Council for Mid-Market Human Resources Executives Eastern Division Council for Mid-Market Human Resources Executives Western Division Council of Human Resources Executives Council of Talent Management Executives Council of Talent Management Executives II Council on Executive Coaching Council on Learning, Development and Organizational Performance Council on Staffing and Talent Acquisition European Council of Human Resources Executives European Council on Learning, Leadership, and Organisational Development Global Human Resources Council Global Human Resources Council II Human Resources Council India Human Resources Council Mexico Leadership Development Council Polish Council of Human Resources Executives
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