Source: theHRDIRECTOR
Date: April 2006

“IN ALL AFFAIRS IT’S A HEALTHY THING NOW AND THEN TO HANG A QUESTION MARK ON THE THINGS YOU HAVE LONG TAKEN FOR GRANTED.” (BERTRAND RUSSELL, 1872-1970)

‘People are this organisation’s greatest asset’ is a phrase that is repeated mantra-like in many organisations. People also constitute the greatest overhead cost for most  organisations. Despite this, many do not pay sufficient attention to measuring their people assets when compared to sales, production or financial performance. Charles fair, principle consultant, right management consultants, looks into this common oversight.

Whilst effective measurement of financial performance is essential in any operation, running an organisation on these measures alone is like driving whilst only looking in the rear view mirror. Financial measures are, by definition, lagging indicators of business performance.

In contrast, people measures are leading indicators of performance. An organisation that is seeing a decline in employee morale and motivation will inevitably see a rise in sickness and absence, as well as an increase in staff turnover. People costs will rise, and eventually there may be a decline in productivity, quality, customer satisfaction and retention. The challenge for HR is to demonstrate ways in which the value (or return on investment) of employees can be measured and maximised.

The pressure on businesses to report measures of human capital is steadily increasing. Denise Kingsmill’s ‘Accounting for People Task Force’ in 2003 recommended that human capital management (HCM) reporting should highlight the links between an organisation’s HR policies and practices and its strategy and performance. Whilst HCM reporting is not yet mandatory for all organisations, those that produce a business review must nevertheless “disclose information that is material to understanding the development, performance and position of the company, and the principal risks and uncertainties facing it”. This should include information on employees, the main employee-related policies, and key performance indicators relating to employee issues.

“it is up to companies to report what they like”

As there is no commonly agreed HCM reporting framework – not even a defined list of measures deemed to be essential – it is up to companies to report what they like. As a result, HC measures used in annual reports tend to be very top level and descriptive, with average headcount being the one measure common to all. Organisations listed in the Sunday Times ‘100 Best Companies to Work for’ know the benefits of being an ‘employer of choice’ – one that people would rather work for, do business with, receive a service from or deliver a service to, and where employees are motivated, developed, rewarded and stimulated. Such things
need to be measured.

In fact, many of the current HR measures reported by organisations are of limited use. For example, ‘training days per employee’ is a commonly stated measure. However what does this statistic really tell you? Merely the ‘fact’ of the number of days training spent by each employee! It doesn’t tell you whether the training was considered to be relevant by the attendees, or whether they merely considered it to be a nice excuse to get out of the office. Moreover, it typically only accounts for days spent in formal training programmes rather than on-the-job development. It doesn’t account for the time that an employee might have spent being developed by being stretched in a new role, and the mentoring time invested by their manager.

"Organisations should question what people measures they report and why"

Such a measure is quoted simply because it is easy to measure, often requiring no more than a report from an HR information system (HRIS), rather than because it is meaningful. Another easily measured statistic that can be meaningless without the context is the ratio of employees to HR staff. Does a high ratio mean that the HR function is woefully undermanned and struggling to keep up? Or does it represent a business where much of the transactional aspects of HR have been outsourced or given over to employee self-service?

Organisations should question what people measures they report and why. The measures quoted above help to evaluate the effectiveness and efficiency of the HR function, but they don’t help to tell us about the value of an organisation’s people. The HR measures needed are those that will help HR functions answer questions such as:

• Are we attracting and retaining the kind of people who will make us more competitive?
• Is our investment in training money well spent?
• What are the key drivers of staff turnover?
• Are our leaders performing better at managing human capital?
• Do we have a clear vision?
• Do we have an environment where successes are celebrated and rewarded?

Many of these questions can be answered by use of a number of ‘tools’ that may already exist in an organisation. These ‘tools’ must be thought of as part of an integrated suite, ensuring consistency in objectives, methodologies and analysis, rather than as standalone items owned by different sponsors. There are three tools which should be integrated, but which in practice rarely are:

First is an employee survey, which is now an established tool in many companies. However, many organisations do not make the most of their employee survey processes. Too often they are insufficiently well aligned with the business strategy and may even be measuring the wrong things. For example, some still measure employee satisfaction. This is despite the fact that there is plenty of evidence to show that satisfaction by itself is a poor predictor of business performance – it is possible for a person to be satisfied for the wrong reasons.

"An HRA is a crucial element of a wellbeing programme, as it will identify those areas of the organisation with the highest employee risks"

Instead, it is more accurate to combine satisfaction with other measures that are more strongly linked to organisational performance, such as motivation, commitment, pride in the job and organisation, as well as advocacy for the employer and its products and services. Collectively, these factors will give a far clearer picture of the level of employee engagement within a business.

Employee engagement is strongly linked to business outcomes such as profitability and productivity. This is especially evident in companies with a large number of discrete profit & loss units (such as retailers). We find that the most profitable units are usually those that have the most engaged staff. Their personnel costs are inclined to be lower because staff turnover and sickness and absence levels also tend to be lower.
Second is the 360° review, which is another familiar assessment tool. A 360° tool will measure a number of ‘inputs’ i.e. specific leadership behaviours. It should, ideally, be designed in parallel with the employee survey, as this will measure the perceptions of those leadership behaviours by the wider workforce and the ‘output’ i.e. the engagement of the workforce. Where appropriate there would be similarities in questions designed to measure different perspectives on the same themes.

For example, in one current customer engagement survey, we have been carrying out an online 360° review of all the business unit management teams of a major public sector employer. The 360° measures 16 dimensions of leadership performance. We intend to analyse this data alongside that from the organisation’s employee survey and performance measures. A 360° measure such as communication effectiveness is also measured in the employee survey.

A third tool that is growing in importance is the online Health Risk Assessment (HRA), which is a key part of the growing area of Health and Productivity Management (HPM). The need to control staff health costs, as well as the desire to be seen as an ‘employer of choice’, is forcing employers to take the issue of employee wellbeing seriously. Organisations are investing in a wide variety of wellbeing initiatives such as Employee Assistance Programmes (EAP) and work/life balance schemes. Evidence shows that companies who embark on integrated wellbeing programmes typically achieve an ROI of at least £3 for every £1 spent, with cost savings including lower absence, lower staff turnover, lower temporary staff costs and lower health insurance/income protection premiums.

An HRA is a crucial element of a wellbeing programme, as it will identify those areas of the organisation with the highest employee risks. An HRA tool will include measures of occupational health such as stress (it could include the Health & Safety Executive’s ‘Indicator Tool for Work Related Stress’) as well as measures of physical and mental wellbeing. Again the HRA tool needs to be integrated with the other tools; for example, a common stressor is the management and communication of organisational change, which is an issue that would typically be covered in an organisational survey and 360° process.

Other measurement tools that could be used include data from exit surveys and interviews, data from new joiner surveys, as well as measures of the strength of the employer brand amongst potential recruits.
Data collected by these tools should be analysed alongside other ‘hard’ metrics that could be drawn from an HRIS; for  example, measures of staff turnover, sickness and absence. It might also be possible to include business unit level statistics from an EAP. Advanced statistical techniques such as regression and key driver analysis would be used to understand the relationships between the different sets of data.

“greater pressure to report meaningful measures”

Competition and globalisation mean that organisations will come under greater pressure to report meaningful measures of human capital performance. Institutional shareholders are more likely to invest in businesses that are transparent in reporting their intangible assets and talented workers (essential now in ‘the war for talent’) are more likely to gravitate towards companies more able to demonstrate effective human capital management. All organisations in every sector should be thinking in terms of ‘joined up human capital measurement’.

This process of using an integrated suite of human capital measurement tools followed by rigorous analysis of the data will allow organisations to report useful and actionable measures of human capital performance. By asking the right questions, we will obtain those meaningful answers.