Welcome to the sixth 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.
Humanizing Human Capital: Workforce Diversity Measurements
Measurements in this category involve the diversity (however that is defined by the organization, not necessarily reflective of the EEO-1 report, and can include segmenting the workforce by other diversity indicators, such as LGBTQ+, ability/disability, gender identification, etc.) of an organization’s workforce. The fundamental premise underlying DE&I (BA…) is that a broad spectrum of perspectives can improve organizational performance and decision-making (especially when that spectrum parallels the customer base), and an abundance of research suggests that greater workforce diversity has a direct relationship with competitive effectiveness and sustainable profitability performance. There is an abundance of academic research/evidence that supports this relationship. The question is how to measure diversity and correlate diversity performance to human capital metrics and enterprise financial performance.
The metrics listed below are the most basic of organizational diversity – gender, generation, and ethnicity. The list of metrics can be expanded to take into account diversity within, for example, particular levels of management (women or minorities in Sr. leadership or on the Board) or particular divisions or functions (sales, administrative, technology, etc.), or particular segments of the workforce (disabled/abled, LGBTQ+, etc.) The level of diversity, however defined by the organization, or reflecting the EEO's definition of diversity can be monitored regularly. Additionally, you may want to produce analyses of DE&I or what some institutional investors are referring to as a “Racial Equity Audit” that provides information over a specific period of time (two or more years) and includes the Simpson Diversity Index, a Gender Index calculation, and provides benchmark information (EEO database for your industry sector, or Bureau of Labor Statistics information) to understand geographic trends by workplace location. This essentially provides information about how well your organization “mirrors” the labor supply/demographic. Below are the definitions, algorithms, appropriate applications, and relevance, as well as potential “signals” of human capital health for each measurement in the “Workforce Diversity” category:
Gender Diversity is the ratio of male and female workers. A category has been recently added for employees not identifying with either gender.
How to calculate-Some metrics can include: Female headcount ÷ Total headcount; Male headcount ÷ Total headcount; Other or not identified gender headcount ÷ Total headcount
How to use it- Once you calculate the metrics, you will want to see if any trends emerge. These trends can reveal if you have any biases based on gender diversity in specific divisions or functional areas (e.g., IT, engineering, etc.) or by geography (minority representation is 30% of your organization where the local labor supply is represented by 60% minority) or even by function or manager .
Why it matters - Diversity metrics combined with employee attrition may offer insight into who is leaving the firm and why. Understanding if you are more or less diverse than you consumers or your competitors may explain financial performance as well as market share. Based on our research, there is a strong relationship between the diversity trend and HCROI improvements. And, we know that for organizations that spend more than 50% of total expense on people, that HCROI and enterprise profitability are highly correlated. So improvements in the diversity index drives better profitability through HCROI. (See below.)
Generational Diversity is the ratio of each of the five generations in the workplace:
Silent (born between 1930 and 1948)
Baby Boomers (born between 1949 and 1965)
GenXers (born between 1965 and 1985)
Millennials (born between 1986 and 1998)
GenZs (born after 1999), and
Gen Alpha (born after 2010). Even though they're not in the workforce now, they will be before the end of the decade!
How to calculate: Number of employees in selected Generation ÷ Total headcount
How to use it: The observation of trends may help in understanding workforce attitudes and enhance responsiveness to workforce needs or desires. By segmenting the population (above by gender, here by generation, below by ethnicity/race) you may be better able to anticipate the needs of employees, address those needs and enhance engagement and retention.
Why it matters - An organization with a majority of Baby Boomers may face issues of retirement, succession and talent replacement. An organization heavily populated by Millennials may face employee desire for social impact, training and development, mobility, and work-life balance. Benchmark diversity data by geographic location by accessing BLS data.
Racial and Ethnic Diversity is the ratio regarding each of the five identified racial categories: American Indian or Alaska Native; Asian; Black or African American; Native Hawaiian or Other Pacific Islander; White; and ethnic identifier of Hispanic/Non-hispanic.
How to calculate: Number of employees in ethnic category ÷ Total headcount.
How to use it: The additional perspective of a broad spectrum may help decision-making particularly if it better reflects the customer base.
Why does it matter? Research supports a direct relationship between HR diversity and improved financial performance. Benchmark diversity against competitors in the same industry by accessing the EEOC database. Benchmark diversity data by geographic location by accessing BLS data.
Simpson Diversity Index is a way to measure the diversity in a community. Denoted as D, this index is calculated as: D = Σni(ni-1) / N (N-1) where: ni: The number of people that belong to category i. N: The total number of people. The value for Simpson’s Diversity Index ranges between 0 and 1.
Financial Impact
Based on analyses of DE&I performance over a two-year period for organizations disclosing EEO-1 reports, a compelling pattern emerges. Organizations engaged in continual improvement in diversity initiatives resulting in higher Simpson Diversity Index scores generate higher levels of human capital return on investment (HCROI). HCROI is directly linked to better profitability performance.
The illustrative charts below provide important evidence of the relationship between diversity performance and HCROI performance for a representative set of organizations -- with improvements in diversity and status quo in diversity levels.
If diversity performance is correlated to profitability performance, wouldn't you want to focus on this for your organization?
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.
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