FSN: Reporting HR key performance indicators, (KPI’s), under the Companies Act 2006

Reporting HR key performance indicators, (KPI's), under the Companies Act 2006

27th November 2006
Now that the Companies Bill has received the Royal Assent, attention is turning to the measurement and reporting of Human Resource's (HR) Key Performance Indicators, KPIs. Many companies will find themselves reporting these for the first time and various consulting organisations are jumping on the bandwagon to offer benchmarking services and advice. But what sort of indicators should you be thinking about disclosing and how comparable are they between companies? Gary Simon, FSN's managing editor looks at the issues.

Reed Consulting, the HR consultancy is one of the organisations offering services around the new Companies Act 2006 and has launched a new HR benchmarking website specifically to enable Finance Directors to compare their return on investment (ROI) in people. Under the new legislation, quoted companies must, “to the extent necessary for an understanding of the development, performance or position of the company's business”, include information about the company's employees and include “where appropriate” non-financial KPIs about its human capital. Although the rules leave room for manoeuvre most companies will find themselves effectively shamed into disclosure because of the need to state very publicly in the Business Review if they have left out employee metrics.

Talking to FSN, Laura Frith, managing director of Reed Consulting, said that the idea behind the new website is to provide finance and HR directors with a common platform to compare the extent to which improvements in people metrics actually impact upon the bottom line performance of the company as well as helping them to comply with the Act.

Unsurprisingly Frith is a supporter of the public disclosure of HR metrics. She told FSN, “HR performance measures give shareholders an indication of the sustainability of the financial results. For many companies, people are their most valuable asset and if the workforce is stable and retainable then it suggests that financial performance is sustainable. People performance and business performance are directly related.”

But Frith also identifies the inevitable tensions between short and long term performance. “HR investment such as training and development programmes is often about the longer term which sometimes brings it into conflict with the need to satisfy shareholders in the short term.” Acknowledging that there has in the past been a tension between Finance and HR Frith adds, “We're launching this website to provide a forum for Finance to work with HR to demonstrate more clearly how investments in people deliver tangible returns on the bottom line,” Frith concludes.

Not everyone is convinced that it is feasible to link financial performance directly to HR strategies. David Parry, a Deloitte partner specialising in Human Capital Consulting told FSN, “For several years various organisations have been trying to develop Human Capital Indices that measure the value and contribution of people as companies increasingly view people as financial assets. For example, is there a way of measuring the appreciating effect of common ‘inputs' such as training, experience and coaching? With the exception of some very limited studies carried out by the IPD in a manufacturing environment there are not that many indices and benchmarks that do it effectively.”

But with most organisations in the UK paying out over 50% of their overall expenditure on employee costs such as salary, training and benefits and the Companies Act requirements likely to create greater transparency about people management within organisations, Frith believes that this is the time for Finance and HR to work together to ensure the metrics they present in the Business Review send the right messages to the companies employees, investors or stakeholders.

Reed Consulting says that its new website enables organisations to measure and benchmark HR performance in five key areas including workforce composition, retention and motivation, skills and training, reward and fairness and leadership and succession. But Deloitte's Parry says it is difficult to demonstrate a link between HR policy and value created. “Take rewards management – is there a direct link? Can you really break down a rewards and compensation scheme into a percentage increase in profitability?” he says.

Parry believes it is very difficult to create a benchmark when you start to look at the detail. “Comparisons become difficult because some organisations use outsourcing or technology more than others. Also the amount of HR work carried out by line managers differs considerably between organisations which could seriously impact the ration of HR staff to employees. The devil is in the detail,” says Parry.

But Parry is not against the use of benchmarks altogether. He sees a place for them in internal reporting, for example measuring across divisions, but they need to be kept simple. Also, rather than looking at measures such as staff retention and attrition, Parry would rather focus on ‘positive' measures such as employee loyalty and commitment.

Nevertheless, regardless of the merits of human capital benchmarking companies are faced with the practical need to report something sensible in their forthcoming Business Reviews. Frith told FSN that the minimum disclosures should be data such as staff attendance/absence and staff retention which gives insights into the volatility of the workforce. She also maintains that organisations should consider broader measures such as investment in recruitment, skills and management compared to other organisations. “Shareholders need greater transparency about how financial results are being achieved,” adds Frith.

Whilst the disclosure of employee metrics seemed like a good idea to politicians seeking to make company results more transparent and understandable there is a real sense that HR performance measures could become trivialised and meaningless. It's a complex area of endeavour and most finance directors will recognise the limitations of isolated statistics and superficial comparisons even within the same industry. There is a clear danger that employee metrics could become disclosures for their own sake with nobody able to rely on them or develop safe conclusions.

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