But are shareholders more important than others who have an interest in the success of the organisation the stakeholders? In order to create and protect value, we need to know how value is added, both financial and non-financial, to all stakeholders.
Jack Welch, the famous, former head of GE, made the memorable statement: There are three key measures in business customer satisfaction, employee satisfaction and cashflow, in that order. More recently, he said that he had the first two the wrong way round employees should come first. What he recognised was that everything depended on people: their capability, motivation, creativity, organisational skills and leadership.
Resourcing decisions should be based on value rather than cost. It will always be necessary to adjust manpower levels, but knowing the relative value of teams and individuals helps in the decision about whom to retain.
Such knowledge also helps in understanding the relative value of investing in people, compared to other assets. It also allows businesses to keep stock of talent and expertise in a much more meaningful way than counting heads, for example.
When we make a decision to cut costs from an organisation, we have clear numbers to work with. Everyone understands the systems and measures for costs. However, when we talk about their corresponding value, if indeed we do, we have only words and numbers always speak louder than words.
We lack a commonly accepted framework for assessing the value and contribution of people. It is only when people leave the organisation that we miss the value they contributed, often so much so that we hire them again as consultants.
The main difficulties then in HR measurement are:
- people do not fit the financial definition of an asset
- we cannot predict the lifetime of an individuals contribution
- we do not own our human capital; it has its own freedom
- we cannot be totally objective in quantifying we must often rely on judgments and perceptions
- performance measurement is over-dominated by an outdated system of management accounting that absorbs managerial time; other measures are given lower priority
- we tend to equate value with money alone we need to understand other forms of value too
The Human Capital Monitor model attempts to address these problems. It is a method of measuring and tracking three fundamental areas: the intrinsic worth of people as individuals, their contribution to both financial and non-financial added value, and the environment in which they make that value.
The intrinsic worth of individuals
It is possible to measure a relative value for individuals by using the human asset worth equation: human asset worth equals employment cost (EC) times individual asset multiplier (IAM) divided by 1,000 (HAW = EC x IAM/1,000). I divide by 1,000 so that the end result will not look like a monetary amount that can be directly compared with cost, as this would be misleading.
A persons EC is the sum of their base salary, their benefits and the employer taxes. The IAM is the level of present and potential value they bring to the organisation. The key components of the IAM are: capability; contribution; potential; and alignment.
Inevitably, we are going to need to make judgments about the relative value of these factors. What is important is to use a consistent set of scales within an organisation or a function. Each person is scored on a scale of 0.1 to 2.0 and the factors are weighted according to their perceived relative value for each organisation.
The definition of capability goes far beyond personal competencies and includes all the value an individual is able to offer an organisation.
Contribution is what the individual brings to the sum total of the businesss value.
Potential is, broadly, the ability to make a greater contribution in the future, and is not just about rising to higher levels of responsibility.
Values alignment influences commitment, and people who are well aligned with what the organisation is are more likely to stay.
I believe that the human asset worth of every individual should be evaluated and monitored regularly. The next area that the Human Capital Monitor tackles is the process of getting the most from employees maximising human capital arguably, the most critical activity.
The first step is to categorise and record the human capital at your companys disposal. It would be possible to categorise people according to their IAM scores, for example, who is most flexible, who has most potential, and so on. Another category could be those people who would be most difficult to replace. Categorising in this way allows us to create a human asset register that enables us to keep track of our stock of human capital.
There are three basic processes in getting the most from our human assets. These are: the acquisition of new people, either as fully contracted employees; buying specific skills for a period of time to supplement our stock; and retention and growth of key assets.
We need to devise output measures to assess our success in these areas. These might include attrition statistics and changes in the IAM factors for teams and units. We also need measures to assess factors that might influence our success, such as investment in development, employee satisfaction and the strength of our employer brand in attracting people.
Financial and non-financial value
We also want to be able to measure how much people are adding current and future value to everyone with some interest in the business. This goes beyond the merely financial. People work in teams and as individuals to provide specific financial and non-financial value in various ways, such as investor confidence achieved through effective communication. We need organisation-wide indicators of this contribution. We should also measure every individual against the specific aims of his or her role.
But however good the people we recruit may be, their contribution is strongly influenced by their working environment. It affects the level of their motivation, commitment and loyalty, and encourages or restrains the full use of their abilities. Motivated people give of their best.
Environmental factors
It is vital therefore to identify the factors that make a difference in the environment and to measure their influence. People in organisations operate in an environment, which we may think of as a soil the basic underlying culture and in a climate, which is more transient and local. Together, they affect, as with plants, the output and growth of people.
But how do you measure culture? It cannot be done in any absolute way, Culture refers to the systems, processes and behavioural expectations, built up over time, that affect all parts of an organisation. Examples include the structure of rewards and corporate values. Climate includes the local influences: people, geography and local leadership.
Aspects of culture that make the greatest degree of difference to motivation and commitment are: leadership effectiveness; practical support in the workplace; the nature of the work group; the culture of learning and development; and the systems for rewards and recognition.
The Human Capital Monitor model suggests ways to measure and track these factors.
A fundamental goal of the model is to create a system of consistent and credible measurements. Given the number of factors that affect business performance, it is important to know what to measure. If we try to measure everything, we will be swamped.
There are two levels at which measurement should be focused: the critical organisational goals and strategies; and the areas of value that matter most to each stakeholder.
At the first level the enterprise level the measures might include financial value added, investments in employee development, community involvement and innovation. This level also encompasses areas where comparison with other companies is required, such as attrition rates, overall satisfaction, and reward levels.
At the second level, the factors may be growth levels, profitability, market share and so on. We can ascertain such factors by applying cause-and-effect chains to identify the key people in the paths to our goals, and also the factors about them, their environment and their contribution that will make the difference.
Every day we see the outcomes of a lack of balance between thinking of people as costs and viewing them as assets. The Human Capital Monitor starts from the principle that everything can be quantified in a way that allows us to measure it. Whether we are talking about the capability or potential of people, the culture in which they work or their motivation to cite just a few examples we can measure it and track it.
How the Human Asset Worth formula works
Gerry McDougall is customer service representative for West Scotland at an engineering firm. He has high customer loyalty but no potential to grow further in the organisation. His knowledge and skills are aligned to the role he has had for many years. He could take on another region but much of his value is in his natural empathy with his own compatriots.
McDougalls employment cost (EC) is calculated as follows:
Total remuneration package: 35,000 a year (made up of 28,000 plus benefits of 7,000); national insurance costs are 9% (3,150)
EC: 28,000 + 7,000 + 3,150 = 38,150
His individual asset multiplier (IAM) is calculated as follows:
Component: Capability
Factor Value* x Weighting** = Weighted value
1.0 x 0.15 = 0.15
Component: Contribution
Factor Value* x Weighting** = Weighted value
1.9 x 0.40 = 0.76
Component: Potential
Factor Value* x Weighting** = Weighted value
1.0 x 0.15 = 0.15
Component: Values Alignment
Factor Value* x Weighting** = Weighted value
2.0 x 0.30 = 0.60
Total: Individual asset multiplier (IAM): 1.66
HAW = EC x IAM/1,000 38,150 x 1.66/1,000 = 63.33
*factor value: assigned to the individual on a scale of 0.1 to 2.0
**weighting: assigned by the company to each component in terms of importance and adding up to a total of 1
Further reading
