Human capital's measure for measure

Journal for Quality and Participation, The, Sep/Oct 1999 by Brown, Mark Graham

Would your HR metrics rate the seasoned sales professional the same as everyone else in your company? There's a better way to see who's worth the weight.

The employee or human resources box on a company's scorecard is often the least sophisticated and most likely to include meaningless metrics that are not really correlated with important outcomes, such as growth, profitability, or even customer satisfaction. Yet just about any organization you encounter today tells you that its people are the most important asset. The problem is that the metrics these organizations have on the "people part" of the business do little to tell them about the value and performance of this human asset.

As a consultant who reviews the scorecards of many large government and business organizations, I see the same sorts of metrics in the people section:

1) Turnover. Just about every medium-to-large organization tracks attrition or employee turnover. The problem with this as a metric is that it may not tell you much. If you turn over 20 percent of your new employees each year, this could be a good sign, because the ones who leave are the ones whose performances do not meet your standards.

Many of the big accounting and consulting firms lose 80 to 90 percent of their new hires over a five-year period. Some of these firms do not believe that this is a problem. Even though they invest a fortune in training new employees, they know that most of them will be gone in a few years. Many of them get hired away by clients and become good customers of the accounting or consulting firm. To these firms, turnover is not an indication of a problem-it is expected, and often positive, in that it keeps labor costs low by always having a stable of new recruits.

Another problem with turnover as a metric is that whether it is positive or negative depends upon the person leaving. When some people quit, everyone breathes a sigh of relief "Thank God he finally left, he's been retired at his desk for the last five years." And yet when other people leave, you realize that they are almost irreplaceable. It can be devastating to have a competitor steal certain people away. Yet, the turnover graph will show this person as one little dot on the chart, counting this person the same as the kid in the mail room who left after six months because he had not yet been promoted.

Turnover is a crude measure that does not tell you much about how a business is doing in managing its human assets.

2) Education level. A common metric in educational, technical, and research and development (R&D) organizations is the average education level of the staff. Companies count advanced degrees and believe that the value of their intellectual capital increases as does the number of Ph.D.s and graduate degrees. While this is certainly easy to measure, the number of advanced degrees an organization has can also be a misleading metric. I would not trade someone of the caliber of a Bill Gates or Steve Jobs for 50 Ph.D.s. The problem with education or degrees is that they are no guarantee of competence. We've all met some folks with advanced degrees from impressive schools who are still not as impressive as others we've worked with who are less degreed.

3) Training attended. A common HR metric I've seen on many corporate and government scorecards is average number of training hours per employee per year. Companies such as Motorola brag that their employees receive 80 hours of training per year on average. The problem with training attendance or BIC (butts in chairs) as a metric is that it does not tell you whether the employees needed the course, whether they learned anything, or whether it improved their job performances or value to the company.

4) Meeting developmental plan objectives A new HR metric I see cropping up on the scorecards of a number of companies is the percentage of employees who have met developmental objectives that were agreed upon at the beginning of the year.

Most companies have a developmental plan as part of the performance management/ appraisal process, wherein an employee negotiates with her boss skills she will improve or acquire during the following year. At the end of the year, the company measures the extent to which these developmental objectives have been accomplished. The problem with this as a metric is that the developmental objectives are often written as activities-such as the commitment to attend this or that course-as opposed to demonstrating that a particular competency has been acquired. Another problem is that often the skills or knowledge acquired are not the key competencies that the company needs to improve on for its future.

A simple human capital index-a better measure

A simple way of calculating the value or strength of your team is to create a human capital index that is made up of four sub-metrics:

1) Number of years in the business/field.

2) Level in the company (byjob grade or organizational chart level).

3) Performance rating.

4) Number and variety of positions/assignments held.