HR1

Evidence-Based Human Resources

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Insights for

Business

Worldwide

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

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Evidence-Based Human ResourcesA Primer and Summary of Current Literatureby 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

Human capital is possibly the most vital,yet overlooked, means of establishingcompetitive advantage for companiestoday. Business periodical have featuredthe “global war for talent”, the need forbetter ways to encourage innovation, thecomplexities posed by the maturing work-force, or the preparedness of the talentpipeline. Further, rarely can one lookthrough a company’s annual report orlisten to a CEO presentation withoutbeing reminded that “people are ourgreatest asset.” Regardless of how well executives may genuinely extol thenecessity to attract, grow, motivate, andretain talent, the means of measuring themanagement of talent and, more impor-tantly, empirically demonstrating itsimpact continues to lag behind.

A 2007 study by The Conference Board (StrategicHuman Capital Metrics: Orientation, Accountability, and Communication by Stephen Gates) reveals some

encouraging signs. It found that human capital analytics

are 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 their

HR department plays “no role at all” in developing their

company’s 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 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 appli-

cation 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 manag-

ing talent is emerging.

4 The Conference Board

Introduction

Setting the Context

Ev idence -Based Human Resources 5

“Faith is the substance of things hopedfor, 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 inthings 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 intangibles—along with a timely

convergence of academic disciplines—may have pro-

duced a solution that allows Human Resources practition-

ers 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.

Evidence-Based HR—State of the ArtThis 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 indeed

enhances 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 through

more 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 impact

of talent on business performance. Finally, it specifically

reviews examples in the literature that employ evidence-

based approaches to human capital management.

Evidence-Based Human Resources

What Makes this Approach Different

The application of analytics to humanresources is not new. For decades statis-tics have been used to track such thingsas the costs of labor and employee bene-fits, manufacturing downtime, and workerproductivity. However, the use of meas-urement in human resources was revolu-tionized in 1984 when pioneer Jac Fitz-enzand his firm, The Saratoga Institute, pro-duced the first national study on HR met-rics. His book How to Measure HumanResources Management, which wasreleased in the same year, quicklybecame the field’s standard text formetrics, and is now in its third edition.

Fitz-enz’s 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 HR

was 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 1980’s introduced measurement

into 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 1980’s 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. In

his 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 of Talent to CompetitivenessAs the U.S. economy continued to transition toward a

greater emphasis on services and innovation in the mid-

and late 90’s, 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 company’s

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 group

of 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


Part I. The Evolution of Human Resources

Management Literature

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. As

a result, The Service Profit Chain is filled with examples

of each link, but none that demonstrate a complete chain.

Ed Gubman’s 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 company’s overall strategies, and

included guidance on how to implement HR metrics.

Viewed together, The Service Profit Chain and The TalentSolution 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 theBottom Line Isn’t (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 firm’s overall

value. Their perspective essentially called for the human

resources function to move away from simply providing

support for executing the organization’s strategy, and

toward actually driving the strategy itself.

Technology Changes HR’s Capabilities

The work of Jac Fitz-enz and the Saratoga Institute dur-

ing the 1980’s 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 1980’s

through the mid-1990’s, U.S. businesses invested over

$1.1 trillion in computers and peripheral equipment.2

This 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 organization’s 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-

nization’s 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 one’s

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” while

failing to recognize how human capital serves as a means

for generating value for the company.

2 Sichel (1997); investment amount expressed in 2007 constantdollars.

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

Norton’s 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 valuable—it serves as a

means by which human capital metrics are viewed in

alignment with the execution of the company’s 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 use

human capital metrics, it doesn’t 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, and

marketing. 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 firm’s overall success —that is, providing concrete

evidence of the true drivers of the firm, and how can HR

influence those drivers.

Existing Evidence in the Academic Literature

The late 1980’s and 1990’s brought the first serious

attempts to link HR practices to a company’s 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 few

exceptions, however, the empirical rigor of these studies

was limited to finding correlations between two variables

(e.g. incentive compensation and increased sales). In

other words, they failed to meet more rigorous standardsof evidence to show that these practices actually causedthe 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 1990’s. 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 groups

of 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

8 The Conference Board8 The Conference Board

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

5 Russell, Terborg & Powers (1985).

6 Terpstra & Rozell (1993).

7 Borman (1991).

8 Gerhart & Milkovich (1992).

9 The research on Human Resources Management practices hasbeen primarily empirical. For an overview of the theoreticalunderpinnings 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 beadjusted to compliment an environment which provides a largerrole 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 interpretation

of 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 relationships

between 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 and

future firm performance.

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

In his book, The Wealth of Nations (1776),Adam Smith espoused the general con-cepts behind what economists refer to ashuman capital— the acquired skills andinnate abilities of an individual that makethem productive.12 Smith identified theinfluence of human capital, and morespecifically investments in it, on produc-tivity and economic progress.13 Howeverit was Gary Becker14 in the 1960’s wholaid out the fundamental conceptualframework for the modern economictreatment of human capital, whichincluded the distinction between general(or transferable) human capital and firm-specific human capital. Becker was alsoone of the first economists to apply eco-nomic methods to topic areas that hadpreviously been the domain of sociolo-gists and psychologists.15

The Development of Personnel EconomicsIn 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 1990’s 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 foundation

to 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 toward

causal 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


Part II.

The Parallel Evolution in Labor Economics


12 See Hamermesh and Rees (1993).

13 Smith also recognized how human capital accumulationimpacted the individual’s earnings capability.

14 The seminar work by Becker is his book Human Capital, originallypublished in 1964.

15 In 1992 Becker won the Nobel Prize in Economics “for havingextended the domain of microeconomic analysis to a wide rangeof human behaviour and interaction, including nonmarketbehaviour.” (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 bySafelite Glass Corporation increased productivity and attractedmore productive workers.

19 Knez and Simester (2001) find on-time performance improved atContinental Airlines once the airline introduced monthly bonusestied to firm-wide performance.

20 Hamilton, Nickerson, and Owen (2003) found that when agarment manufacturing facility switched from an individual to ateam based pay system, productivity increased.

21 See Bassi and McMurrer (2006) for a review.

22 Huang and Cappelli (2006) find that screening results in hiringworkers who are more productive under systems with lessmonitoring, but firms also gain from implementing the lowmonitoring systems that complement these independentworkers.


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 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 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 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 tradi-

tional HR managers, but those who participate in the

strategic decisions of their organization should be careful

not to ignore them.

Evidence of the Relationship betweenHR Management Practices and FirmPerformance 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 higher

wages 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 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 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 rates”28 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 theeconomics literature and address the difficulties that arise whentrying to measure organizational capital such as work design andemployee voice.

27 Cappelli and Neumark (2001) note the confusion introducedthrough the use of this phrase. For many studies, what is meantby “high performance work systems” depends on what ismeasured. Cappelli and Neumark cite Becker and Gerhart (1996)who count 27 different variables used as “high performance workpractices” across 5 studies, with only 4 of those practicescommon in 3 or more studies.

28 The percent of total production that met the standards to bedesignated “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 Bureau’s

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 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) 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 outperform

the 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 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 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) alsofind high performance work practices significantly increaseproductivity, and find no evidence that more productive firmsimplement high performance work practices.


The advances in the sophistication ofanalytics in the field of Human ResourcesManagement, along with a convergenceof work coming from PersonnelEconomics, has led to a new approach to the practice of HR. This new approach,EEvviiddeennccee--BBaasseedd HHuummaann RReessoouurrcceess,, capi-talizes on these new analytic capabilitiesand 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 been

focused on improving efficiency or proving the value

of the HR function. Evidence-Based Human Resources

extends beyond this focus. In particular, practitioners ofEvidence-Based Human Resources are motivated by thedesire to find the critical human levers for improvingbusiness 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 Sutton’s book, Hard Facts,Dangerous Half-Truths, and Total Nonsense: Profitingfrom Evidence-Based Management (2006).

The future is indeed promising. Boudreau and Ramstad’s

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 HR’s success in developing a set

of 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 StrategyMaps, 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 firm’s strategy.31 A key component

of intangible assets is the firm’s people— the existing

employees, knowledge base, customer relationships,

and organizational relationships —thus creating a critical

strategic role for human capital management.

Part III.

The Emergence of Evidence-Based Human Resources

31 Bassi and McMurrer (2007)


Inherent in the firm’s strategy— its plan for developing

and sustaining competitive advantages—is 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 firm’s strategic success.

Standards of EvidenceThe 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 highlight

Cook and Campbell’s (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 people’s 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 HaloEffect (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 tool—but only if

we’re 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 Sutton—that

it is crucial to measure what is important, not what is

easy (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 the

existing evidence fits their problem.

32 For greater detail, see the discussion and references in Wright etal. (2005), pages 410-415.

33 Rosenzweig (2007b)

34 Kennedy, 2003


Observations Concerning the Current 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 are

having an impact.

Second, nearly all of the studies that have met Cook and

Campbell’s 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 to

focus on the impact of particular practices (or combina-

tions of practices) across organizations while also meet-

ing the standards of causation.

Third, since there isn’t 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 feeling

of trust among employees are all enterprise-level intangi-bles, yet their impact on a firm’s performance (in the

form of new ideas and products, higher quality goods

and services, or a more dedicated workforce) are strategi-

cally important, and tangible. Future research should

not 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’ behavior

at 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 economistsin addressing the practices within an organization.

36 Researchers in these fields have already begun to displaybenefits of integrated work, as sociologists and industrialpsychologists are stressing empirical rigor, and economists arebecoming 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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John W. BoudreauProfessor and Research Director

Center for Effective Organizations

Marshall School of Business

University of Southern California

Jac Fitz-enzChief Executive Officer

Human Capital Source

Edward L. GubmanPartner

Strategic Talent Solutions

David LewinNeil H. Jacoby Chair in Management

Anderson School of Management

University of California, Los Angeles

Jeffrey PfefferThomas D. Dee II Professor of

Organizational Behavior

Graduate School of Business

Stanford University

Jack PhillipsChairman

The ROI Institute

Peter M. RamstadVice President of Business and

Strategic Development

The Toro Company

Kathryn Shaw, Stanford UniversityErnest C. Arbuckle Professor of

Economics

Graduate School of Business

Stanford University

David O. UlrichProfessor of Business Administration

Director, Human Resource Executive

Program

Ross School of Business

University of Michigan

Patrick M. WrightProfessor of Human Resources Studies

Director, Center for Advanced Human

Resources Studies

School of Industrial and Labor Relations

Cornell University

Appendix 1

Evidence-Based Human Resources Advisory Panel

Evidence-Based Human Resources Research Working Groups Participating Companies

ABN AMRO/LaSalle Bank Corporation

Aetna, Inc./Schaller Anderson, Inc.

Alliant Energy Corporation

Allied Irish Banks

AMR Corporation/American Airlines

A.P. Moller-Maersk A/S

Avaya Inc.

Bank of America Corporation

Bank of Ireland

Best Buy Company, Inc.

BMO Bank of Montreal

Capital One Financial Corporation

The Clorox Company

Deere & Company

Deutsche Post World Net/Exel Inc.

FedEx Corporation/FedEx Ground

Fidelity Investments/Fidelity

Management & Research Company

GMAC ResCap

Humana Inc.

IBM Corporation

Lockheed Martin Corporation

McDonald’s Corporation

National Aeronautics and Space

Administration (NASA)/Johnson

Space Center

Nationwide Financial Services, Inc.

Navy Federal Credit Union

PetSmart, Inc.

Pharmaceutical Research and

Manufacturers of America (PhRMA)

The Royal Bank of Scotland Group

SAP America, Inc

Saudi Aramco/Aramco Services

Company

Science Applications International

Corporation (SAIC)

State Farm Insurance Companies

Target Corporation

Thrivant Financial for Lutherans

UBS

The Walt Disney Company

Wells Fargo & Company

The World Bank


John Gibbons is a Senior Research Advisor in the Management

Excellence Program at The Conference Board. In addition to

leading The Conference Board’s research in Evidence-Based

Human Resources, he is also responsible for the organization’s

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 Masters

of 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 and

well-being of disadvantaged groups. Woock received his PhD in

Economics from the University of Kentucky.

About the Authors

The Conference Board, Inc.845 Third AvenueNew York, NY 10022-6600United StatesTel +1 212 759 0900Fax +1 212 980 7014www.conference-board.org

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related publications and resources

Publishing Director Chuck Mitchell

Authors John Gibbons & Christopher Woock

Design Peter Drubin

Production Pam Seenaraine

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 to Execute Business Strategy,Research Report R-1391-06-WG

CouncilsCouncils are peer membership groups that provide intimate forums for executives with common responsibilities and interests to share solutions to business challengeswith colleagues in other companies, industries, and countries. They are designed tokeep executives abreast of the latest developments in their fields and fully informedabout new management strategies and tactics. Each council has its own specificmembership requirements.

Council for Division Leaders – Human ResourcesCouncil for Division Leaders – Human Resources IICouncil for Mid-Market Human Resources Executives – Eastern DivisionCouncil for Mid-Market Human Resources Executives – Western DivisionCouncil of Human Resources ExecutivesCouncil of Talent Management ExecutivesCouncil of Talent Management Executives IICouncil 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 CouncilGlobal Human Resources Council IIHuman Resources Council – IndiaHuman Resources Council – MexicoLeadership Development CouncilPolish Council of Human Resources Executives

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