Using Measurements to Improve Workplace Environment While Generating Economic Value
Welcome to the first post in our “Humanizing Human Capital” series. The focus of this series is to define the human capital measurements associated with different parts of the worker journey and provide HR practitioners with approaches to reveal the necessary facts and evidence to understand the enterprise-level impact of Human Capital (HC) initiatives. By doing so, practitioners will be able to determine the investment priority of these interventions to optimize the return on investment in programs and drive the highest level of economic value to the company.
The adoption of Human Capital Analytics (HCA) practice has been gaining momentum and both business leaders and senior HC practitioners are increasingly making decisions based on available information that is objective, reliable, and easily validated through statistical approaches. This data-driven, evidence-based approach translates human capital data (both quantitative and qualitative) into business insights that give leaders early indicators of potential issues, or the need for changed or additional interventions, and can then be monitored over time as closely as other financial indicators like ROI, ROA, ROE, etc. Such measurements and financial ratios enable organizations to understand, measure, and benchmark the human capital drivers of economic value creation. And the process doesn’t have to be complex! It can start with relevant data that may already exist in the organization. When you consider that most organizations allocate between 60%-80% of total expenses to HC programs/people costs, it makes sense to understand the level of effectiveness and efficiency in this “spend”. Some metrics you may want to calculate include:
Financial performance metrics that quantify the contribution of human capital to financial outcomes. There are direct correlations between these human capital trends and financial performance. A human capital materiality audit that is performed regularly can create a feedback loop where improvements in critical metrics like HCROI, HCVA, HEVA, HCMV, etc. can be monitored, correlated to financial indicator performance over the same period of time and benchmarked to the core group of peer organizations identified in the organization’s proxy report.
Talent acquisition metrics provide information about the talent pipeline and the effectiveness of investments in talent acquisition. This may be the least financially-rationalized HC process, as corporate resources are spent on candidates that never generate any benefit to offset the cost of recruitment with productivity as they either aren’t given offers or they don’t accept extended offers.
Internal mobility metrics show the stability of the workforce. Research shows a direct relationship between a stable workforce (especially management) and organizational performance. Extending tenure and reducing regrettable or voluntary attrition is shown to be a positive factor in firm performance. Furthermore, enhanced employee mobility and advancement correlate to firm performance through enhanced knowledge transfer. Here is an excellent attrition calculator that can be used to understand the costs to the organization, including real dollar costs as well as the opportunity costs (lost productivity, etc.) associated with attrition.
Training metrics show the amount of investment in workforce training and development the organization has made, compared to the enterprise-level benefit generated from these initiatives. Research shows that there is a direct relationship between a company’s investment in training and developing its workforce and sustainable financial outcomes.
Workforce diversity metrics based on tracking demographic characteristics of the workforce such as gender, generation, sexual preferences, ethnicity, learning style, working preferences etc. A DE&I Audit can shed light on the progress against company policies and goals, which are critical to investors, employees, candidates and customers alike, quantify the relationship between diversity progress and financial outcomes, and benchmark to organizations in the same industry. These efforts transform DE&I into an active driver of economic value creation rather than a performative program.
The above are examples of how these areas can be quantified as human capital metrics and ratios and then monitored against firm performance to optimize return on human capital investment.
Now that we discussed the areas, which metrics are of greatest use to a particular business? Over the next five posts, we will define the measurements aligned to the area above! In the first post, we will focus on defining the financial performance 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.”
1. Melo, T. (2012). Determinants of Corporate Social Performance: The Influence of Organizational Culture, Management Tenure and Financial Performance. Social Responsibility Journal, 8(1), 33-47.
2. Mawdsley, J. K., & Somaya, D. (2016). Employee Mobility and Organizational Outcomes: An Integrative Conceptual Framework and Research Agenda. Journal of Management, 42(1), 85-113.
4. Bernstein, A., & Beeferman, L. (2015). The Materiality of Human Capital to Corporate Financial Performance. Available at SSRN 2605640.