FSN: What KPI's would you use to measure employee performance in the OFR?

What KPI's would you use to measure employee performance in the OFR?

13th June 2005
Human capital and its management is material to the future capability and performance in every company, whatever the size and sector. But CIPD (Chartered Institute of Personnel and Development) research demonstrates conclusively that there are no generically successful programmes for managing people, and so no universal ratios or statistics that in all circumstance will show to readers of the accounts how effective the organisation is at managing its human capital. So what are you going to disclose in the OFR?

The Operating and Financial Review imposes the obligation on publicly quoted companies to report KPI's used by the directors to assess progress in achieving their strategic objectives. The standard, RS1, requires both financial and non-financial KPI's to be disclosed. Human resource measures, or perhaps more fashionably, human capital measures feature high up the list of non-financial KPI's that it may be appropriate to disclose.

Richard Phelps, of PwC the accounting firm takes a different stance from the CIPD. He told FSN that PwC considers it perfectly possible to derive, say, ten to twenty generic measures that are relevant to almost any organisation. "Although the OFR does not make the disclosure of human capital KPIs mandatory, people form a significant part of the cost base of most organisations so disclosure is going to be difficult to avoid. There is a lot of mystique around performance measures but we have been collecting metrics globally for 25 years, so it can be done," he said.

Whilst most business will alight on fairly obvious measures such as staff turnover, and the number of training days others will struggle to define KPI's that truly reflect their strategic objectives. The implementation guidance of RS(1) suggests a couple of industry related KPI's by way of illustration. For example, in an industry such as mining, where the "licence to operate" is based on effectively managing a myriad of issues including health and safety, the directors may monitor, "lost time injury frequency rate" calculated as the number of lost time injuries per million hours worked.

However, KPI disclosure should not be taken lightly. For each KPI it is necessary to disclose its definition and calculation, its purpose, the source of underlying data, strategic targets for the KPI and comparatives in prior periods. In addition, any changes to the method of calculation or the source of data have to be revealed as well. This means that it will be difficult for management to flatter the data and could expose difficult issues around comparatives when they are published for the first time.

The importance of different KPI's can vary markedly between organisations. Angela Barron, an advisor at the CIPD told FSN , "The biggest issue is not with measurement but with the interpretation of what the measures mean. For example, you could decide that it is important to disclose how much is spent on training since this contributes to people development and hence the prospects for the company. But a figure such as this is meaningless unless the context is explained. One company may spend on high tech training whereas another might spend more on induction training. Both may be very important in their own setting but it's important to explain the background to assess the contribution that the measure makes to the delivery of the strategy."

Care also needs to be exercised in interpreting the information disclosed. "What's healthy in one company could be a problem in another. For example, high staff turnover could be seen as a significant problem in one company but part of a deliberate agenda in another that is seeking to refresh its staff more frequently.", says Baron.

Phelps agrees, "One of the big issues is the challenge of interpretation. Understanding performance measures in context is key," He told FSN.

Whilst generic measures are regarded as inappropriate by the CIPD, Baron says that they are carrying out research into industry based measures. "We will be reviewing OFRs to see if any measures emerge on an industry basis."

According to Baron, most companies have the systems and data they need to furnish the information required for the OFR but they do not always recognise its value. "Many companies will have information on performance related pay, competency management and even attitudinal surveys. The challenge is recognising the value of what they have got and pulling it together in a meaningful way."

If disclosure of human capital measures is not a systems issue then it is certainly a process issue. In the past, the preparation of financial statements has largely been confined to the finance function but the OFR requires input from a range of other functional areas, including human resources. Constant monitoring of KPIs and timely disclosure in the OFR is going to require sleek processes that transcend functional silos and allow the appropriate information and commentaries to be gathered, analysed and disclosed.

Phelps agrees, "there needs to be a sort of Chief Workforce Officer whose role is to understand the key human capital measures that drive performance."

Whether it is the information to be disclosed, the underlying systems or the processes used to deliver the explanations and commentary it is clear that the management of human capital is going to be one of the thorniest areas of OFR disclosure. Early preparation will be key to ensuring that you can meet the deadlines.

"Businesses will need to clarify their strategy, the HR actions required to maximise success and the KPIs used to monitor them," says Phelps. "They will then need to make sure that they can get hold of the data necessary to support those KPIs." All of this will take preparation and planning.

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