An Innovative Approach To Managing and Measuring Human Capital
by William A. Schiemann, CEO, Metrus Group
Corporations have struggled for years to try to quantify human capital. While there has been a great deal of debate, one fact has remained constant: For most firms, human capital represents one of their largest investments and presents one of the most—if not the most—difficult resource management challenges. How can a company maximize its return on human capital investments and know that the return is sufficient to outpace the competition? This article introduces the concept of People Equity as a powerful framework for examining investments in human capital and for determining their impact on customer and shareholder value.
The value the market places on an organization – and affords to its shareholders -- is based on a number of different factors. The consistency of past earnings, revenue growth and earnings are all important. But, there are also intangible factors related to the future earning potential of an organization that investors consider in fixing its value, such as new patents, brand equity and the firms existing customer base – to name just few. The marketplace also evaluates the human capital of an organization. For example, the 50% premium price/earnings multiple that the market gives Southwest Airlines compared to its competitors is based to a large degree on the company’s quality of its leadership, commitment of its employees and the long history of positive labor relationships the company has experienced. It any of these human factors were threatened (e.g., a strike occurred), the value the marketplace gives the company would quickly decline.
People equity, then, is the value shareholders gain from the human capital invested in their business. This includes the premium (or penalty) a company receives in the marketplace as a result of such things as intellectual capital, culture, and leadership quality as well as customer and labor relationships.
Like any type of capital investment, investments in People Equity need to be measured, understood and managed. Years of consulting and research have convinced us that the premium value – or People Equity – that a company experiences as a result of its workforce performance is dependent on three primary factors: (1) motivation or “level of engagement”, (2) the collective competencies of the workforce (knowledge, skills, and abilities), and (3) alignment of the workforce with the business strategy, customer requirements and unit. (See Exhibit 1)
Exhibit 1 Title: What Factors Underlie People Equity?
Let’s look at the three components of People Equity more closely:
- Alignment refers to the extent to which employees (or other labor sources) are connected to the business strategy. It includes employees’ alignment with the business strategy, with customers and with the brand identification, in addition to simply focusing on their department or personal goals.
- Capabilities is comprised of three sub-components: (1) the necessary employee talents, as derived from the strategy, (2) the resources required to execute the strategy and (3) the information necessary for action to take place – right information, to the right people, at the right time.
- Engagement is a more recent evolution of the earlier employee satisfaction and commitment movements. Over the past several decades there has been a transition in the literature from job satisfaction and high morale to employee commitment to workforce engagement, with the latter implying an even higher level of connectedness to the successful operation of the organization. High levels of People Equity require more than happiness and satisfaction—they require employees to be fully committed to – and engaged in – executing the ultimate strategies and goals of the organization.
To achieve high levels of people equity, a company must achieve high levels of performance on all three of these components. Low performance in any area can severely impact performance. For example, if a company has skilled employees that are highly engaged, but the employees are not knowledgeable and aligned with the strategy, the result is misdirected effort:
Alignment Capabilities Engagement Outcome High High High Superior Performance High Low High Under-equipped or unequipped Low High High Strategic Disconnect or Misdirected Effort Low Low High Pollyanna High High Low Underachiever High Low Low Frustrated/Cynical Low High Low Talent Waste Low Low Low Retired in Place or Passenger
How can a company maximize the three factors that create People Equity? It can do so by managing the drivers of these factors -- and by attending to the interaction across the factors. Decades of working with different kinds of organizations has lead us to conclude that the drivers of People Equity consist of five broad types: Human resource management systems, Innovation, Technology, Structure, and Unique Strategy Elements.
Human Resource Management Systems. Here, we refer to a Performance Management System in the broadest sense. Such systems begin with recruitment and selection and extend to training, rewards and recognition, performance feedback and professional development.
Technology Systems. Included in this set of drivers are the various tools and their associated work processes that enable employees to understand customers, make decisions, build knowledge and deliver value to the customer.
Innovation includes a workforce’s ability to develop and implement new and creative ideas that lead to better products, services and work processes -- as well as the ability to adapt to changing environments (e.g., new industry regulation) or evolving competitive landscapes.
Structure refers to the way the company, functions, and units are organized and how this organization helps (or hinders) execution of the strategy. .
Unique Strategic Elements. Finally, there are unique strategic factors for an industry, a company or function that can contribute to Engagement, Alignment, and Capabilities. An example is a company like Merck that has as its core mission “Developing Life-Saving Drugs.” The mission – and its effective communication throughout the organization – contributes to many employees’ motivation and engagement in the business.
EnablersThe five drivers we have identified are directly linked to building (or destroying) an organization’s People Equity. In our work we have also identified four enabling factors that permeate an organization and provide the foundation on which the drivers operate and generate People Equity:
Supervision. The immediate supervisor or manager/coach of an employee or work team has a dramatic impact on performance. Supervisors can very quickly either create superior performance or drain the People Equity of a business.
Executive Leadership. One of the primary roles of the leadership team is to ensure that managers and supervisors--the conduits of the business strategy--are themselves highly aligned with the business strategy, capable of aligning and motivating others, and motivated to do so. Typically, leaders accomplish this through setting clear goals, communicating purpose and demonstrating how the organization will achieve its objectives.
Strategy/Direction. Leaders create an overall direction to an organization through strategy which needs to be cascaded to different units that each play a unique role in executing the strategy. The strategy – and its effective communication -- provides the blueprint for how the workforce will increase the equity of the organization.
Values/Operating Style. Every organization has a culture--a unique set of shared values and beliefs about how business is conducted. These values and beliefs develop over time and strongly influences employee behaviors. Each leadership team adds its imprimatur to the prior culture, adding unique biases, preferences, and ways of doing business that may or may not contribute to increasing effectiveness.
Based on our experience, almost all organizations have at least a 20% People Equity improvement opportunity. A majority have a 50% improvement opportunity or more! We have found that surveys—despite some limitations—are one of the most practical and economic tools for obtaining an accurate assessment of People Equity improvement opportunities. Surveys work well for several reasons. First, people are the key contributors to People Equity, so their perceptions – and resulting behaviors – are crucial. Second, not only do surveys allow one to measure general levels of People Equity, they also make it possible to examine the drivers and enablers of People Equity in a cost-effective manner to determine what is contributing to declines or depressed levels. Finally, and perhaps most importantly, survey information differentiates high and low performance groups within the organization. Through variance analyses across an organization it becomes possible to determine which problems are generic to the entire enterprise, as opposed to problems created at the unit level. Knowing the genesis of a problem makes it possible to invest effectively to make corrections.
In the past, surveys have not always lived up to the promise identified here. One reason is that often surveys are designed to address only a subset of the components and drivers that determine People Equity. An incomplete picture can result in actions or investments that are less than optimal and don’t provide the integrated improvement across factors that is needed for real improvement.
At Metrus, we have experimented with various approaches to measuring and improving levels of People Equity. Based on years of practice and research we have developed a short, powerful diagnostic tool (20 questions) that captures information about the three crucial components of People Equity. By expanding the questionnaire to only 50 questions, we are able to gather information on the drivers and enablers of People Equity as well.
In most organizations People Equity can be built at three levels: the enterprise, the unit (division, function, department), and the individual level. Organizations typically vary in terms of their relative strength at the different levels.
Finally, it is important to be aware of potential interactions among factors that can accelerate declines in People Equity. A bank that we surveyed for several years had strong overall “Capability” scores among its employees, but perennially low “alignment” scores in many individual departments.” This appeared to be driven by the absence of any concerted effort by senior leaders to communicate a brand profile and connect people with the business strategy. In time, the failure to connect employees with the strategy via concrete executive actions began to degrade Engagement scores as employees perceived a lack of customer commitment by senior management. Thus, problems in one area can waterfall into other areas, accelerating declines in People Equity.
Once the People Equity dimensions -- and their supporting drivers -- have been measured, they can be linked to operating performance (e.g., speed of response to customers, cycle time, quality metrics), supplier metrics (e.g., partnering, quality), customer drivers/outcomes (e.g., reputation, loyalty, service quality, price), and financial outcomes (productivity, SG&A, revenue growth, margins). This type of causal analysis can provide an organization with an interconnected profile of drivers and results, highlighting gaps in the value chain towards which resources can best be directed for maximum return in terms of enhancing overall equity.
In summary, organizations that want to maximize their shareholder or stakeholder equity must focus on their employees and other sources of labor. Investments in People Equity are maximized when they focus on aligning employees with the business strategy and its targeted markets, motivating or engaging them to excel, and providing them with the requisite capabilities and skills to flourish. Human resources systems, technology, innovation, and structure need to be designed and deployed in a manner that maximizes these three components of People Equity. Companies that are doing a thorough job of measuring and managing People Equity have a distinct—and sustainable -- advantage over their competitors. Effective measurement is the first step towards effective management of People Equity.
The best way to start increasing People Equity is to understand your current organizational profile and begin directing resources to high-leverage areas most likely to improve it. Here are a few questions to ask and steps to take:
- 1. If you are using an employee survey, ask whether it captures the strategic elements of People Equity? If not, you need to re-evaluate the purpose of the your survey.
- 2. Ask whether your senior executives are eager to see their next survey results? If not, why not? Is the problem that the survey content is not viewed as strategic to the core success of the business?
- 3. If you want to capture and begin measuring People Equity, compare your survey with the People Equity components, drivers and enablers, outlined above, and determine any gaps.
- 4. Once the gaps have been identified, either enhance your existing survey to include missing measurement areas, or introduce a separate People Equity survey to focus leaders on more strategic elements of business performance.
- 5. Initially, consider supplementing the survey with interviews and focus groups to provide a more in-depth picture of strengths and weaknesses.
- Christine B Hutchinson
Metrus Group, Inc.
(908) 231-1900x108
E-mail us by clicking here
- Metrus Group People Equity Survey - A Do-It-Yourself Survey Tool
- Metrus Group Custom People Equity Measurement Solutions