Return on Talent: Measuring the Relationship Between People and Profitability
This term is likely to become as pervasive in the business lexicon as Return on Investment in the coming years
Businesses regularly measure cash flow, revenue, market capitalization, growth and profitability. Now, human capital can be added to the list of regularly measured variables. Consequently, the term “Return on Talent” is likely to be as pervasive in the business lexicon as Return on Investment in the coming years.
This white paper is based on a comprehensive study conducted by the Forum for People Performance Management and Measurement entitled Linking Employees to Organizational Performance: A Framework for Driving Success. The authors examined numerous books, academic papers, journal articles and industry and private reports on many aspects of employee engagement, organizational performance, customer satisfaction, customer loyalty and human resources management. They discovered that while organizations measure and evaluate an abundance of employee-related constructs such as output, efficiency, satisfaction and engagement, few companies have systemic ways to assemble these constructs into formal processes that calibrate the long-term relationship between people and organizational performance.
In addition to providing an overview of several approaches that have been created to manage and measure performance, the authors developed a Workforce Measurement Model that organizations can use to make a full linkage between their investment in human capital and organizational performance. Before we get to that, let’s look at three of the existing people performance and human capital metrics.
The Balanced Scorecard
The Balanced Scorecard measures a company’s activities in terms of its vision and strategies to give managers a comprehensive view of the performance of a business. By focusing on human issues as well as financial outcomes, the Balanced Scorecard helps provide a comprehensive view of a business, which in turn helps organizations act in their best long-term interests.
While the Balanced Scorecard approach addresses the link between people and organizational performance, its central premise is not people-based; it is metric- and outcome-based. This allows for the flexibility of having metrics of all types fit into the framework. For organizations where the performance of people is of primary importance, however, the Balanced Scorecard is likely to under-represent the impact of people-related inputs on overall performance. Even when organizations try to include people-based metrics in performance analysis, the lack of clear and widely accepted standards results in a variety of measures that vary in specificity, relevance and objectivity.
Most traditional HR performance metrics – employee turnover rates, average time to fill open positions, total hours of training provided – don’t predict organizational performance. The HCM (Human Capital Metric) framework addresses this issue with five major categories: leadership practice, employee engagement, knowledge accessibility, workforce optimization and organizational learning capacity. By employing rigorously designed surveys to score a company on the range of HCM practices across these five categories, it’s possible to benchmark organizational HCM capabilities, identify HCM strengths and weaknesses and link improvements or backsliding in specific HCM practices with improvements or shortcomings in organizational performance.
Profit Per Employee
Most measurements of business performance are geared to the needs of 20th-century manufacturing companies. Today, companies need to redesign their financial performance metrics by placing greater weight on “intangible” capital. One such measure is Profit per Employee. The difference between Profit per Employee and traditional financial measures is that viewing Profit per Employee as the primary metric puts the emphasis on Return on Talent. This approach focuses the minds of managers on increasing profit relative to the number of people a company employs. Another advantage of Profit per Employee is that it requires no adjustment for accounting conventions. Since companies expense their spending on intangibles but not on capital investments (which are usually depreciated over time), Profit per Employee is a conservative, output-based measure. And since it is based on accounting conventions, companies can easily benchmark it against the comparable results of competitors and other companies.
A New Workforce Measurement Model
As noted, the authors of this study have developed a new model that illustrates how employee performance can be connected to corporate performance in a systematic way. The Workforce Measurement Model incorporates a set of human capital drivers, gleaned from academic and industry literature, that relates to organizational performance. Those drivers are: leadership; communications; learning capacity; corporate values; company reputation; HR practice; and technology.
When managed properly, these seven drivers generate employee engagement and positive behaviors that directly affect performance. The Workforce Measurement Model diagram shows how human capital drivers affect corporate financial performance through employee engagement, employee performance and attitudes, as well as customer satisfaction and loyalty. The main emphasis on the model is how employee feelings and behavior relate to customer feelings and behavior, and how the behaviors of both link to financial measures of performance. The general flow of the model is from left to right – in other words, people drive performance. This framework presents a way to evaluate organizational performance from the perspective of the people-related inputs that drive it.
To view a copy of the FORUM white paper, “The Workforce Model Every Organization Should Use,” click here.
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