Welcome to the fourth blog in our “Humanizing Human Capital” series. The focus of the series is to define human capital measurements associated with different aspects of the worker journey and provide Human Capital practitioners with necessary facts and approaches to determine the most impactful interventions and investments in people, supported by data-driven evidence, that will prove the economic value contribution to the company’s bottom-line performance.
Internal and External Talent Mobility Measurements
This category of measurements examines the stability of the workforce (either in the aggregate or based on key critical roles), the rate at which employees leave the organization (and potentially why), and how quickly talent is deployed through the organization (by function, level, or division). Three potentially useful metrics indicators are Employee Attrition, Employee Tenure, and Mobility. These can be reported to the board of directors on a regular basis. Below are the definitions, algorithms, appropriate application, and relevance, as well as potential “signals” of human capital health for each measurement in the “Internal and External Talent Mobility” category:
Internal Mobility is the movement along the career trajectory, the path that an employee takes within an organization that allows them to have different work experiences. Mobility includes: promotions and demotions, lateral moves, role or department changes, rotational assignments, status changes (part-time to full-time or vice versa). It does not, however, reflect title changes (inflation) for the same position/work.
How to calculate: Number of employees who had a “mobility” event ÷ Total number of employees
How to use it: Mobility achieves three objectives: 1) It is a vehicle to transfer skills and technical “know-how” to different parts of the organization; 2) It can also help satiate the need for progress of employees who are focused on mobility as a career objective; and 3) Mobility can also be used as an organizational tool by providing opportunities for employees to grow, learn new skills sets/competencies and expand the internal capabilities of the workforce. New assignments can be used to enhance skills/abilities of workers without having to recruit new talent from outside the organization. Wild swings in mobility can indicate an inefficient human resources strategy or operations, and can signal to employees that a professional approach to mobility isn’t being followed in the organization.
Why does it matter? Research supports that mobility has a generally positive impact on morale, especially in organizations with Millennial employees who value mobility and the opportunity to work in different parts of the organization. Companies that use mobility as a talent management strategy signal to employees that they are keeping an eye on them for career development and that there is concrete evidence of career progression opportunities. Mobility also helps build organizational networks within the company, which research shows is beneficial to sustained enterprise performance. Companies can test the relationship between mobility and financial performance. Often, companies select tenure as a way to test the effectiveness of their mobility strategy and execution as longer tenure is a goal for organizations.
Employee Tenure is the average tenure of the workers at your organization and it is another indicator of the stability of your workforce. Tenure could signal the general level of employee satisfaction. You can understand the competitiveness of your workforce stability by comparing your average tenure to that of your competitors.
How to calculate: Sum of the total years of employment of all current employees since joining the organization ÷ Number of employees.
How to use it: Swings in average tenure can help explain the demographic composition of the workforce. If average tenure is declining, this can be compared to overall headcount to understand who is leaving and why. Declines in average tenure may be an indicator of acceleration in new hires, so caution should be used in coming to conclusions about longer-tenured employees leaving the organization.
Why does it matter? Research shows that a more stable workforce is associated with higher levels of corporate performance. This metric allows decision-makers to understand who is leaving the organization and at what point in their career. Interventions can be developed to help extend employee tenure, including “just-in-time” programs.
Employee Attrition (external mobility) is the number of employees leaving (for any reason) during the measurement period as a percentage of the total headcount (which can be defined as all employees, or full time equivalents).
How to calculate: Number of employees who left during the period ÷ Average headcount for period. Please note that there are many ways to calculate attrition. This is perhaps the least complicated of the measurements. However, you should be consistent in the measurement approach over time – don’t mix apples and oranges.
How to use it: This metric tells you how stable your workforce is. It can be compared to the rate at which you have added new employees during the period to see how quickly employee populations can be stabilized. In addition, this metric can be compared to the average tenure of the workforce to understand if long- or short-tenured employees are leaving the organization. If your average tenure is increasing over time with a high attrition rate, then your longer-tenured employees are staying. If average tenure is decreasing over time, then your long-tenured employees are leaving. You need to determine which is more detrimental to the organization and respond accordingly. Further insight might be gained by an analysis of the cause of turnover (voluntary or involuntary, retirement, etc.) and the nature of the turnover (gender, ethnicity, race, function, level, etc.) as well as based on performance level (HIPOs, key critical roles, etc.).
Why does it matter? Turnover is costly – full stop! There are two categories of costs that must be considered here. One category of costs are associated with filling the open positions and specifically - the hard dollar costs of placing ads, paying headhunters, doing background screening, etc. as well as the soft dollar costs which include the cost of talent acquisition staff, hiring manager, and anyone else interviewing the candidate. These are considered as costs because these are resources that are expended to fill positions. There’s another, and perhaps more important cost of open positions—and that’s the opportunity loss of that position. One can understand what drives value erosion in terms of both—hard dollar and soft dollar (productivity loss)—by calculating average productivity per employee (revenue ÷ headcount) to quantify how attrition impacts revenue attributable to each employee. When what you spend on the position is equivalent to the benefit they generate for the organization, then you don’t really care as the expense savings is equal to the productivity loss. For example, if you pay someone $120,000 in salary, and your average employee productivity is $120,000, then what you save in paying that salary is off-set by the revenue you attribute to that position. However, as in the example below, if each employee generates more than their salary, then there’s an economic loss for the organization—you pay someone $120,000 to generate their “proportion” of $637,000 in revenue—and that’s a nice return on investment because the value that employee generates is 5.3 times (productivity ratio) what you pay them! You may be saving $120,000 in salary (or a portion of that based on how long the position is open) but you’re losing the equivalent of $637,000 (or a portion of that) in supporting revenue generation. By the way, if you’re paying employees the same as their productivity contribution, you have a bigger issue with your business model. Attrition cost is also impacted by the number of days the position is open and the average salary per employee. A recent attrition analysis for an organization where average salary was $120,000, revealed that the average time to fill positions was 120 days and the average productivity was $637,000 per employee! Their 32% attrition rate was costing the company more than $20,000,000 in productivity/revenue loss! Attrition impact goes beyond the cost of replacing an employee. It also encompasses the diminished productivity of the organization when there are open positions especially in roles that have a high pay/productivity ratio. That productivity impact is experienced not just in the year that attrition happens, as research shows that today’s turnover can increase overall HC costs by 30% in the subsequent year. If you’re planning for the future, you should take this cost into consideration and realize how critical talent retention is for organizations.
Cost of Attrition is the hard and soft dollar costs associated with losing talent/employees.
How to calculate: Cost calculators can be found through a Google search, as many exist. HCMoneyball’s Attrition Cost Calculator is provided here. You only need 6 pieces of information to use this calculator: Total number of employees (FTE), average FTE annual salary, estimated turnover rate, total revenues, average out-of-pocket expenses associated with recruiting per position, and average number of days to fill open positions.
How to use it: Consider using the following indicators: attrition rate, employee productivity (see above), time to fill position, and hard dollar costs associated with recruiting, if you use any calculator other than the HCMoneyball calculator as you won’t capture the real cost of attrition if you’re not calculating productivity losses. Make sure you equate the cost of attrition to your salary cost so you can communicate this cost as a percent of payroll cost. This helps you create a context for the savings associated with lower attrition.
Why does it matter? Attrition is perhaps the most costly event for the organization. Not only does it have a real cost (in replacing employees), but also an opportunity cost associated with lost productivity and disruptions in work processes and organization network impact. Many times CHROs will ask for a small increase in their payroll budget which is often denied or negotiated down. If you can show that attrition is a higher cost than the budget increase, and show the opportunity gains in higher salaries (which need to correspond to lower attrition), it’s much easier to get approvals—when you can show the economic benefit of the budget allocation request.
In the next post, we will focus on Training Measurements.
To learn more about ways to bring evidence-based practices to your organization read Humanizing Human Capital: Invest in Your People for Optimal Business Returns.