Evidence- BasedHuman Resources

research reportE-0015-07-RR A Primer and Summary of Current Literature

Trusted Insights for Business Worldwide

The Conference Board creates and disseminates knowledge about management and the marketplace to help businesses strengthen their performance andbetter 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 inthe United States. www.conference-board.orgEvidence- Based Human ResourcesA Primer and Summar y of Current Literature

by John Gibbons & Christopher Woock

contents

4 Introduction:Setting the Context

5 Evidence-Based Human Resources:What Makes this Approach Different

6 Part I.The Evolution of Human Resources Management Literature

10 Part II.The Paralell Evolution in Labor Economics

13 Part III.The Emergence of Evidence-Based Human Resources

17 References

20 Appendix 1

21 About the Authors

E v idence -Based Human Resources 13

IntroductionSetting the Context

Human capital is possibly the most vital, yet overlooked, means of establishing competitive advantage for companies today. Business periodical have featured the global war for talent, the need for better ways to encourage innovation, the complexities posed by the maturing work- force, or the preparedness of the talent pipeline. Further, rarely can one look through a companys annual report or listen to a CEO presentation withoutbeing reminded that people are our greatest asset. Regardless of howwell executives may genuinely extol the necessity to attract, grow, motivate, and retain talent, the means of measuring the management of talent and, more impor- tantly, empirically demonstrating its impact continues to lag behind.

A 2007 study by The Conference Board (Strategic Human Capital Metrics: Orientation, Accountability, and Communication by Stephen Gates) reveals some encouraging signs. It found that human capital analyticsare being used by many companies to establish perform- ance goals.. However, it is not clear whether these human capital measures are being linked to meaningful company financial or operational performance outcomes, or are simply being used to evaluate how efficiently the human resources function is managing itself. Since more than half of the participants in the study also said that theirHR department plays no role at all in developing their companys strategy, it stands to reason that these advances in the use of human capital analytics are less focused on business strategy and more on department efficiencies.

Advancing the study of human capital analytics and the profession of human resources in general, faces challenges:

Human resources leaders should not be satisfied with simply demonstrating the efficient use of human capital and begin to work on empirically demonstrating how talent drives the performance of their organization.

Human resources professionals need to learn thatbeing 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 HumanResources marks the beginning of what is anticipatedto be a series of reports dedicated to exploring the appli- cation of rigorous empirical methods and standards of evidence to assist executives in integrating strategyand 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 manag- ing talent is emerging.

Evidence-Based Human ResourcesWhat Makes this Approach Different

Faith is the substance of things hoped for, the evidence of things not seen. New Testament, Hebrews 11:1

All credibility, all good conscience, all evidence of truth come only from the senses.Friedrich Nietzsche (1886)

For generations the field of human resources has been a discipline of faith, embedded in a business/economic sys- tem dependant on hard evidence. For human resources practitioners, the two statements above, aligned side by side, resonate with how they work every day. HR profes- sionals 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 strat-egy gets implemented into action, and how that action sub- sequently leads to observable (and predictable) outcomes. They know that, in business truth comes from the senses.

Fortunately, advances in research, technology, and tech- niques for measuring intangiblesalong with a timely convergence of academic disciplinesmay have pro- duced a solution that allows Human Resources practition- ers to stay true to their faith, yet gives them the meansof producing business cases that appeal to the senses. Evidence-Based Human Resources applies scientific standards of causality to demonstrate how intangible human capital can be observed and shown to add tangible business results.

Evidence- Based HRState of the Art

This evidence-based approach to managing talent uses both empirical methods of analysis and standards for evaluating evidence to build the argument that talent drives business performance.

This new movement toward using evidence to guide decision making holds great promise, and does not require HR to discard its scorecards, strategy maps, or other modes of reporting measures. Instead, this evidence-based movement compliments, and indeedenhances existing practices, by providing factual evi- dence as a foundation for decision making. Evidence- Based Human Resources, rests on two key characteristics:

1. Focus on Business Strategy: HR professionals start with the financial and organizational performance measures that are most critical to their business. Then they use quantitative methods to identify the human capital strategies that drive those outcomes.

2. Standards of Evidence: Researchers and practitioners apply a set of criteria to determine the presence and strength of a causal relationship. Such critical evaluation will allow practitioners to design human capital strategies that have predictive heft.

The latest developments in HR management are about changing the way HR managers think and the questions they ask. It also is changing the way they gather, process, and (most importantly) evaluate information. These developments hold the promise of helping the profession move beyond chasing fads and looking for the next great plug-and-play, to getting to the real work of helping their organizations improve business results throughmore effective management of people.

This report documents the evolution of the field of human resources and, in particular, the advances in techniques and technologies for measuring human capital dynamics. It also serves as a review of the current litera- ture from an array of the social sciences, providing an overview of the achievements in measuring the impactof talent on business performance. Finally, it specifically reviews examples in the literature that employ evidence- based approaches to human capital management.

Part I. The Evolution of Human ResourcesManagement Literature

The application of analytics to human resources is not new. For decades statis- tics have been used to track such things as the costs of labor and employee bene- fits, manufacturing downtime, and worker productivity. However, the use of meas- urement in human resources was revolu- tionized in 1984 when pioneer Jac Fitz-enz and his firm, The Saratoga Institute, pro- duced the first national study on HR met- rics. His book How to Measure Human Resources Management, which was released in the same year, quicklybecame the fields standard text for metrics, and is now in its third edition.

Fitz-enzs work was revolutionary, applying basic formu- lae to everyday HR functions to measure their efficiency and effectiveness. His research sought to identify basic formulas for identifying the costs and benefits resulting from employee turnover, recruiting methods, training learning curves, etc. The application of metrics to HRwas a critical step forward, demonstrating that it is possi- ble to measure some of the key aspects of the human side of a company. The research by Fitz-enz and the Saratoga Institute during the 1980s introduced measurementinto how human resources departments are managed. Nonetheless, most firms continued to view HR primarily as an overhead expense.

Since Fitz-enz introduced measurement to the HR func- tion in the 1980s most of the focus has been primarily on measuring the efficiency of HR functions. This focus fails to address the more meaningful issues of o how human capital creates value and how HR interventions serve as catalysts for improving business outcomes. Inhis 1997 book, Human Resource Champions, Dave Ulrich challenged HR professionals to show the value they deliver to a firm. He argued that human resource practices must be viewed as a source of competitive advantage, or else the HR function will be treated as a cost that must be minimized (likely resulting in outsourcing).

The Importance ofTalent to Competitiveness

As the U.S. economy continued to transition toward a greater emphasis on services and innovation in the mid- and late 90s, the business community began to place greater emphasis on the strategic use of human capital. In particular, the high-tech boom and the rise of interna- tional competition from Asia led to a realization that global competitiveness depended upon a companys ability to compete in the marketplace of talent.

David Lewin and Daniel Mitchell (1995) advocate seg- menting the workforce into two groups: a core and a periphery. The core segment is essentially the groupof workers who are considered a valued resource to be invested in (they receive training, promotion, and promo- tion based pay, and often participate in decision-making processes), while the periphery are viewed as a basic input whose costs should be minimized. Under this framework, Lewin and Mitchell (1995) and Lewin(2003, 2005) suggest targeting high-involvement HR management practices (such as employee involvement/ teams, variable pay tied to performance, training, selec- tive hiring, and employee decision making) at the core, while targeting low-involvement HR management practices (characterized by part-time and temporary employment, contract employment, and outsourcing) at the periphery. These high-involvement HRM practices are investments in human capital that will (ultimately) yield net economic return (value added) to the entity making the investments.1

The publication of the book The Service Profit Chain (Heskett, Sasser, and Schlesinger, 1997) was an impor- tant milestone in recognizing the importance of human capital on customer satisfaction and loyalty. While the authors primarily emphasized customers and their central role in growth and profit strategies, they posited that employee productivity and work quality also had a bear- ing on how companies create a lasting relationship with their customers. While The Service Profit Chain pro- motes a conceptual model for understanding how

1 Lewin (2003).

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. Asa 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), focusesin 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 con- ceptual 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 delivernew 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.

Technology Changes HRs Capabilities

The work of Jac Fitz-enz and the Saratoga Institute dur- ing the 1980s introduced measurement to HR, but it was the computer revolution, with its delivery of greater stor- age capacity and speed, that brought these measurements to the broader HR community. From the early 1980s through the mid-1990s, U.S. businesses invested over$1.1 trillion in computers and peripheral equipment.2This investment in computers, along with the exponential increase in computing capabilities, the development of and access to the internet, and the development of HR information systems (PeopleSoft, Lawson, Oracle, SAP, etc.) greatly expanded most large organizations capacity to collect, tabulate, and report a myriad of measures.

Benchmarking, which began over 25 years ago in the Xerox Corporation,3 has advanced dramatically since the advent of the information age. While comparing an orga- nizations human capital strategies against the best in class companies is not a new concept, the sophistication with which benchmarking now takes place has been rev- olutionized by the advent of massive databases main- tained by leading research and consulting firms such as Gallup, Mercer, SAS, Hewitt, and Price Waterhouse Coopers. Companies can now compare themselves to other companies using any number of financial and human factors with a speed, precision, and richness that was not available ten years ago.

While capacity for computing HR metrics has been dra- matically improved by the creation of these database services, the basic technique of benchmarking continues to have its limitations. First, benchmarking is a method of generating a rich, vivid mirror which, although increasingly accurate, only reflects the practices of ones competitors. It does little to provide insights into how or why financial and human strategies should be aligned. Moreover, if misused, benchmarking can serve as a dis- service to HR departments, since there is typically an underlying assumption that benchmarks serve as the fuel in a continuous process of doing more with less whilefailing to recognize how human capital serves as a means for generating value for the company.

2 Sichel (1997); investment amount expressed in 2007 constant dollars.3 Tucker, Zivan, and Camp, 1987.

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 provideda 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 mean- ingful to the entire organization, not simply the HR department. However, while the scorecard approach serves as a valuable means of determining how to usehuman capital metrics, it doesnt provide the more impor- tant 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, andmarketing. As a result, HR has become a strategic partner in a growing number of firms. However, none of the pre- viously 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.

4 The scorecard technique originated at Analog Devices. SeeKaplan and Norton (1992 & 1993) for background.

Existing Evidence in theAcademic Literature

The late 1980s and 1990s brought the first serious attempts to link HR practices to a companys financial performance. A number of early studies looked at the impact of specific human resources functional areas such as training,5 selection and staffing,6 performance appraisals,7 and compensation8 on various financial performance indicators of individual companies. These studies9 based their (sometimes bold) conclusions on the intuitive appeal that an HR practice (or group of practices) causes the performance outcome. With fewexceptions, however, the empirical rigor of these studies was limited to finding correlations between two variables (e.g. incentive compensation and increased sales). Inother words, they failed to meet more rigorous standards of evidence to show that these practices actually caused the business performance outcome.

As shift in focus within the Human Resources Management literature from the impacts of individual HR management practices to the interrelations and impacts of groups, or bundles, of HR management prac-tices began to take hold in the early 1990s. The research supporting this shift consistently found that the impacts of implementing a group of HR management practices are larger than the combined individual effects of the practices (e.g. MacDuffie, 1995). The focus on groupsof HR management practices also began to (oftentimes implicitly) make the link between HR management prac- tices and firm strategy. As MacDuffie (1995) observed, it is not the bundle of HR management practices alone that creates a competitive advantage for the firm. Innovative HR management practices designed to increase motiva- tion, involvement in the production process, and the accumulation of skills must be matched to a production process for discretionary effort to be appropriately chan- neled toward performance improvement (p. 199).10

5 Russell, Terborg & Powers (1985).

6 Terpstra & Rozell (1993).

7 Borman (1991).

8 Gerhart & Milkovich (1992).

9 The research on Human Resources Management practices has been primarily empirical. For an overview of the theoretical underpinnings of HR management, see Delery and Doty (1996).10 For example: If a manufacturing plant switches to a lean production process, the HR management practices must be adjusted to compliment an environment which provides a larger role for employee influence.

More recently, Wright et al. (2005) evaluated 66 studies from the HR management and Organizational Psychology disciplines that examine the relationship between a sys- tem of HR practices and organization-level perform- ance 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 ques- tion: 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 down- side of creating indices to measure HR management practices is that there is no clear, practical interpretationof the coefficients. As a result, practitioners can find con- firmation 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 meas- ure 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 rela- tionships between HR management practices and firm performance are reduced and in some cases disappear. Huselid, Susan Jackson, and Randall Schuler (1997) sur- vey senior executives in HR management and line posi- tions 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 signif- icantly 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 signifi- cance 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 rela- tionship 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 atti- tude scales, the authors find some positive relationshipsbetween employee attitudes and future firm performance. However, there were more significant and strong rela- tionships between employee attitudes and past firm per- formance. 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 andfuture firm performance.

11 Combs et al. (2006) use a meta-analysis of 92 studies to determine the magnitude of the relationship between High Performance Work Practices and firm performance. Their meta- analysis highlights a strong relationship between HPWP and firm performance, but does not allow them to determine causal order.

Part II.The Parallel Evolution in Labor Economics

In his book, The Wealth of Nations (1776), Adam Smith espoused the general con- cepts behind what economists refer to as human capital the acquired skills and innate abilities of an individual that make them productive.12 Smith identified the influence of human capital, and more specifically investments in it, on produc- tivity and economic progress.13 Howeverit was Gary Becker14 in the 1960s who laid out the fundamental conceptual framework for the modern economic treatment of human capital, which included the distinction between general (or transferable) human capital and firm- specific human capital. Becker was also one of the first economists to apply eco- nomic methods to topic areas that had previously been the domain of sociolo- gists and psychologists.15

The Development ofPersonnel Economics

In the years following the publication of Human Capital (1964), many labor economists set out to test and expand the theories laid out by Becker. By the early 1990s the area of personnel economics had begun to take shape. Personnel economics, which is the application of eco- nomic theory and principles to the human resources prob- lems of the firm, provides a solid theoretical foundationto the rules and strategies of human resources manage- ment with much of this theoretical foundation backed by rigorous empirical analyses. Much of this early work was done by Edward Lazear,16 who is recognized as the founder of personnel economics.

The role of economists in studying human resource man- agement practices is becoming increasingly important, since researchers and practitioners are sensing an urgency to move away from casual observation and towardcausal evidence. The statistical tools used by economists offer ways to control for individual worker ability, firm (or plant) specific characteristics, simultaneity of events, and prior conditions to establish a causal relationship. Much of the work by economists has focused on individ- ual components of HR management,17 such as piece rates18 and other pay-for-performance measures,19 pensions and mandatory retirement, teams,20 promotion schemes, training,21 turnover, and screening.22 But as

12 See Hamermesh and Rees (1993).

13 Smith also recognized how human capital accumulation impacted the individuals earnings capability.14 The seminar work by Becker is his book Human Capital, originally published in 1964.15 In 1992 Becker won the Nobel Prize in Economics for having extended the domain of microeconomic analysis to a wide range of human behaviour and interaction, including nonmarket behaviour. (http://nobelprize.org)

16 See Lazear (1991).

17 See Lazear (1995) and Lazear and McNabb (2004) for reviews.

18 Lazear (2000) finds the piece rate pay system implemented by Safelite Glass Corporation increased productivity and attracted more productive workers.19 Knez and Simester (2001) find on-time performance improved at Continental Airlines once the airline introduced monthly bonuses tied to firm-wide performance.20 Hamilton, Nickerson, and Owen (2003) found that when a garment manufacturing facility switched from an individual to a team based pay system, productivity increased.21 See Bassi and McMurrer (2006) for a review.

22 Huang and Cappelli (2006) find that screening results in hiring workers who are more productive under systems with less monitoring, but firms also gain from implementing the low monitoring systems that complement these independent workers.

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 intro- duced 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 andcollect 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 infor- mation 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 ofhigh-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 tradi- tional HR managers, but those who participate in thestrategic decisions of their organization should be careful not to ignore them.

Evidence of the Relationship between HR Management Practices and Firm Performance in the Economic LiteratureThe 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 higherwages and benefits) while employers gain from increased productivity. Thus, the implementation of high-perform- ance work practices increases both labor costs and productivity, resulting in a theoretically ambiguousimpact 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 produc- tivity effects of innovative employment practices. In their analysis of the impact of HR management on pro- ductivity, 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).

23 Ichniowski, Shaw, and Prennushi (1997), Boning, Ichniowski, andShaw (2001)

24 Bartel, Ichniowski, and Shaw (2005)

25 See Ichniowski and Shaw (2003), p. 169.

26 Black and Lynch (2005) highlight some of the findings in the economics literature and address the difficulties that arise when trying to measure organizational capital such as work design and employee voice.27 Cappelli and Neumark (2001) note the confusion introduced through the use of this phrase. For many studies, what is meant by high performance work systems depends on what is measured. Cappelli and Neumark cite Becker and Gerhart (1996) who count 27 different variables used as high performance work practices across 5 studies, with only 4 of those practices common in 3 or more studies.

28 The percent of total production that met the standards to be designated prime finished steel.

Ann Bartel (2004) observes that prior studies on the impact of HR management on productivity and perform- ance focus on the goods-producing sector. Yet the serv- ice-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. econ- omy).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 poli- cies. Once prior performance is controlled for; perform- ance 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) con-cludes that the incentives dimension of a high-perform- ance 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 establish- ing 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 prac- tices reduce costs.30 Because these HR managementpractices 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) experi- ence 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 outperformthe S&P 500 over the same time horizon.

More recently, Bassi and McMurrer (2007) use informa- tion 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 orga- nizational performance (leadership, employee engage- ment, 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 usea 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 var- ious points in its evolution).

29 Authors computation based on Bureau of Labor Statistics, Current Employment Statistics program, Historical Table B-1.30 Using firm level panel data, Black and Lynch (2001, 2004) also find high performance work practices significantly increase productivity, and find no evidence that more productive firms implement high performance work practices.

Part III.The Emergence of Evidence-Based Human Resources

The advances in the sophistication of analytics in the field of Human Resources Management, along with a convergenceof work coming from PersonnelEconomics, has led to a new approachto the practice of HR. This new approach, Evidence-Based Human Resources, capi- talizes on these new analytic capabilities and the causal empiricism of economics.

Evidence-Based Human Resources is a philosophical and pragmatic approach to the management of human capital. Practitioners of Evidence-Based Human Resources focus squarely on the impact of management practices on observable financial and organizational outcomes; and their decisions are guided by the best available evidence. Much of the work in HR metrics to date has beenfocused on improving efficiency or proving the valueof the HR function. Evidence-Based Human Resources extends beyond this focus. In particular, practitioners of Evidence-Based Human Resources are motivated by the desire to find the critical human levers for improving business results.

This approach has been advanced in the academic litera- ture beginning with the work of Brian Becker and Mark Huselid (1998), and more thoroughly expounded by Patrick Wright and colleagues (2005). Meanwhile, the need for the use of empirical evidence in decision mak- ing is being promoted in the popular press by Jeffrey Pfeffer and Robert Suttons book, Hard Facts, Dangerous Half-Truths, and Total Nonsense: Profiting from Evidence-Based Management (2006).

The future is indeed promising. Boudreau and Ramstads most recent book, Beyond HR (2007), advocates for the emergence of a talent decision science. They assert that, for HR to truly be a strategic partner, it must evolve into a bimodal structure similar to the relationship between accounting and finance, or sales and marketing. According to Boudreau and Ramstad, human resources practitioners currently have measures that are similar to the tactical functions of accounting and sales. But the strategic future lies in HRs success in developing a setof decision science standards comparable to those that serve as the foundation for the fields of finance and mar- keting. In particular, Finance and marketing use measures that focus on delivering firm-level strategic outcomes, rather than focusing on how well the (finance and mar- keting) departments operate.

As mentioned earlier in this report, this approach rests on two key characteristics:

1. Focus on Business Strategy; and

2. Standards of Evidence

Focus on StrategyFirst 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 valuefor its stakeholders. The increasing reliance on intangible assets to create and sustain firm value magnifies the importance of a firms strategy.31 A key componentof 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.

31 Bassi and McMurrer (2007)

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 suc- cess of the strategy. Key Performance Indicators (KPIs) are quantifiable measures that provide the firm with a way of measuring progress toward their strategic goals. KPIs are also useful because they are accepted across the enterprise as indicators of success. The usefulness and impact of KPIs will typically be greatest when they are:

aligned with overall strategy;

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 mecha- nism 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 evalu- ated. 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 rela- tionship. Patrick Wright and colleagues (2005) have drawn attention to the inability of past research to con- vincingly show a causal relationship. They highlightCook and Campbells (1979) three criteria for showing a causal relationship:

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.

Wright and colleagues add a fourth requirement for establishing causation:

data must be collected in a timely manner.

This fourth requirement is especially important when measuring opinions and other subjective information. Research has shown that peoples responses to subjective questions about past events or practices are skewed based on recent firm success or failure.32

How the Evolution of HR ManagementImpacts HR ProfessionalsA recent publication by Phil Rosenzweig, The Halo Effect (2007a), underscores the need for Human Resources (and other business managers) to acquire the basic skills necessary to analyze and interpret statistical analyses. As Professor Rosenzweig states, evidence- based management can be a powerful toolbut only if were clear about what constitutes valid evidence. Unless we can distinguish hard facts from questionable data,we may not get very far, no matter how good our inten- tions may be.33 He also echoes the sentiments of Boudreau and Ramstad, and Pfeffer and Suttonthatit is crucial to measure what is important, not what iseasy (to measure).

As practitioners move forward, it is important not to let the management of human capital be paralyzed by a lack of consensus; an approximate answer to the right ques- tion is worth a great deal more than a precise answer to the wrong question.34 There is likely no single, univer- sal answer. Our evidence-based approach provides a framework that practitioners can use to find the right answer for their unique organization. Businesses that adopt the evidence-based framework must place the existing literature within the context of their unique situations, and evaluate the degree to which theexisting evidence fits their problem.

32 For greater detail, see the discussion and references in Wright et al. (2005), pages 410-415.33 Rosenzweig (2007b)

34 Kennedy, 2003

Observations Concerning theCurrent Literature/Future Research

There are a number of ways that the body of research on evidence-based approaches to management needs to con- tinue to advance. First, while there has been a great deal of research that identifies and reports the various metrics that are employed by HR departments, there is very little research or popular literature that has been designed to identify the KPIs across organizations within the same industry or (perhaps more importantly) publish these KPIs in a format that makes them easy for the average human resources practitioner to apply them to their own organization, design human capital strategies that are targeted toward them, and establish evidence-based standards to determine whether these strategies arehaving an impact.

Second, nearly all of the studies that have met Cook and Campbells standards for showing causality have been conducted within the context of a single enterprise. While these studies may have demonstrated the impact of HR management practices within a particular organization, there is little evidence to show that the results could be generalized to other organizations, let alone other indus- tries. Therefore, there is a need for future research tofocus on the impact of particular practices (or combina- tions of practices) across organizations while also meet- ing the standards of causation.

Third, since there isnt a large body of literature that demonstrates the causal impact of human capital strate- gies on organizational performance across organizations, there is very little in terms of a paved road to identify a universal set of concepts, standards, practices, or princi- ples that are necessary for creating a genuine decision science for human resources. Until this body of research is created, the field is limited to simply describing what the characteristics of the decision science are, without actually creating it.

Finally, the impact of human capital extends beyond the collection of contributions by individuals. Ulrich and Smallwood (2003) make the important point that,collectively, human capital creates organizational capabil- ities that also create value. For example, organizational cultures that foster innovation, structures that encourage collaboration, or leadership teams that instill a feelingof trust among employees are all enterprise-level intangi- bles, yet their impact on a firms performance (in theform of new ideas and products, higher quality goodsand services, or a more dedicated workforce) are strategi- cally important, and tangible. Future research shouldnot overlook the impact of these enterprise-level human capital capabilities.

The Need for Cross- DisciplineCooperationSo how can economists, sociologists, and industrial psychologists gain from each others work? Lazear believes there is a mutually beneficial relationship between economists and sociologists and industrial psychologists that arises from the skills and approaches within each group.35 The strength of economics is its rigorous and analytic approach. However, such an approach often requires the use of simplifying assump- tions which, in turn, produce concrete, but narrow, solu- tions. Sociologists and industrial psychologists, on the other hand, have paid more attention to a deeper behav- ioral approach to the relevant questions. Traditionally this has resulted in findings that are less empirically rigorous, but offer much more detail in the way of identifying the problems, offering insights into individuals behaviorat work, and providing courses of action for managers to follow. Lazear suggests that integrating economics into the discussion can result in research that provides practitioners with findings that combine the richness of sociology and industrial psychology literature with the empirical rigor of economics.36

35 See Lazear (1991) for more discussion on the role of economists in addressing the practices within an organization.36 Researchers in these fields have already begun to display benefits of integrated work, as sociologists and industrial psychologists are stressing empirical rigor, and economists are becoming more aware of underlying organizational behaviors. See Ichniowski and Shaw (2003) for a detailed discussion.

ConclusionEvidence-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 peo- ple in business. Additionally, advances in database tech- nology, 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 long- established 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 practi-tioners, it sets the groundwork for making better business cases. And finally, for everyone in the business commu- nity, 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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Appendix 1

Evidence- Based Human Resources Advisory Panel

John W. BoudreauJeffrey PfefferDavid O. Ulrich

Professor and Research DirectorThomas D. Dee II Professor ofProfessor of Business Administration

Center for Effective OrganizationsOrganizational BehaviorDirector, Human Resource Executive

Marshall School of BusinessGraduate School of BusinessProgram

University of Southern CaliforniaStanford UniversityRoss School of Business

University of Michigan

Jac Fitz-enzJack Phillips

Chief Executive OfficerChairmanPatrick M. Wright

Human Capital SourceThe ROI InstituteProfessor of Human Resources Studies

Director, Center for Advanced Human

Edward L. GubmanPeter M. RamstadResources Studies

PartnerVice President of Business andSchool of Industrial and Labor Relations

Strategic Talent SolutionsStrategic DevelopmentCornell University

The Toro Company

David Lewin

Neil H. Jacoby Chair in ManagementKathryn Shaw, Stanford University

Anderson School of ManagementErnest C. Arbuckle Professor of

University of California, Los AngelesEconomics

Graduate School of BusinessStanford University

Evidence- Based Human ResourcesResearch Working Groups Participating Companies

ABN AMRO/LaSalle Bank CorporationFedEx Corporation/FedEx GroundThe Royal Bank of Scotland Group

Aetna, Inc./Schaller Anderson, Inc.Fidelity Investments/FidelitySAP America, Inc

Alliant Energy CorporationManagement & Research CompanySaudi Aramco/Aramco Services

Allied Irish BanksGMAC ResCapCompany

AMR Corporation/American AirlinesHumana Inc.Science Applications International

A.P. Moller-Maersk A/SIBM CorporationCorporation (SAIC)

Avaya Inc.Lockheed Martin CorporationState Farm Insurance Companies

Bank of America CorporationMcDonalds CorporationTarget Corporation

Bank of IrelandNational Aeronautics and SpaceThrivant Financial for Lutherans

Best Buy Company, Inc.Administration (NASA)/JohnsonUBS

BMO Bank of MontrealSpace CenterThe Walt Disney Company

Capital One Financial CorporationNationwide Financial Services, Inc.Wells Fargo & Company

The Clorox CompanyNavy Federal Credit UnionThe World Bank

Deere & CompanyPetSmart, Inc.

Deutsche Post World Net/Exel Inc.Pharmaceutical Research and

Manufacturers of America (PhRMA)

About the Authors

John Gibbons is a Senior Research Advisor in the Management Excellence Program at The Conference Board. In addition to leading The Conference Boards research in Evidence-Based Human Resources, he is also responsible for the organizations employee engagement research practice. Gibbons joined The Conference Board with more than 15 years as a Human Resources practitioner, serving in HR management roles as well as in specialist capacities in organizational development, com- pensation design, and sourcing and staffing. He has a Mastersof Science in Organizational Psychology from Purdue University.

Christopher Woock is a Research Associate in the Management Excellence Program of The Conference Board. In addition to exploring the empirical links between human capital and busi- ness performance, his research addresses the human capital components of a number of topic areas, including creativity and innovation, the relationship between age and productivity, and business role in improving the economic opportunities andwell-being of disadvantaged groups. Woock received his PhD inEconomics from the University of Kentucky.

related publications and resources

Finding a Definition of Employee EngagementExecutive Action Report Number A-0236-07-EA, 2007

Employee Engagement: A Review of Current Research and Its ImplicationsResearch Report E-0010-06-RR, 2006

Strategic Workforce Planning: Forecasting Human Capital Needs toExecute Business Strategy,Research Report R-1391-06-WG

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 ResourcesCouncil for Division Leaders Human Resources IICouncil for Mid-Market Human Resources Executives Eastern Division Council for Mid-Market Human Resources Executives Western Division Council of Human Resources ExecutivesCouncil of Talent Management Executives Council of Talent Management Executives II Council on Executive CoachingCouncil on Learning, Development and Organizational PerformanceCouncil on Staffing and Talent AcquisitionEuropean Council of Human Resources ExecutivesEuropean Council on Learning, Leadership, and Organisational DevelopmentGlobal Human Resources Council Global Human Resources Council II Human Resources Council India Human Resources Council Mexico Leadership Development CouncilPolish Council of Human Resources Executives

Publishing Director Chuck MitchellAuthors John Gibbons & Christopher WoockDesign Peter DrubinProduction Pam Seenaraine

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