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The term Human Capital represents an asset with a flow of
benefits that are greater than the cost of the asset. To most
the term capital means assets that yield income so that when using
the term Human Capital, it means the value
added by the workforce.
The approach to workforce management in most organisations
focuses on cost i.e. cost per hire, or in other words Financial
Capital, which is expressed in hard dollars. However, recent research strongly suggests that non-financial- management and intangibles can have immediate and dramatic effects on executing organisation strategy with much higher outcomes. Balanced Scorecard approaches offer an
alternative to the traditional indicators by describing what has to be measured in order to assess the effectiveness
of workforce performance to meet company strategies.
Financial Capital Management Mostly Cuts Costs
The concentration on financial metrics mainly
focuses on cost cutting and short-term gains at the expense
of longer-term goals and objectives. We have seen an evolution in HR Metrics through the use of the Balanced Scorecard, human capital
metrics and return on investment. Developing strategic performance
measures can be difficult, slow and might not provide the
same sense of clarity as cost per hire, however in the case of performance metrics it
is always better to be approximately right than precisely wrong.
Human Capital Research
Lake’s (1999) research illustrates that 60% of HR departments
have no official measurement system, and those that do merely
focus on ‘performance against budget’. Sanchez
(2006, p.16) further broadens the issue conveying that there
is too much attention to the financial dimensions of performance,
and not enough attention to the performance drivers that determine
those results achieved. He also claims that “intangibles
such as human capital are the primary source of profits”.
Dr. Mark Huselid, co-author of “The HR Scorecard” and “The Workforce Scorecard”, performs
research and consulting activities which focus on the linkages
between human resource management systems, corporate strategy
and firm performance. Dr. Huselid conducted a study of over
3,000 organisations over a 10 year period. His research focused
on comparing the best and worst HR systems, his findings may
surprise some.
|
Bottom 10% |
Top 10% |
Hours training per new employees |
5 |
39 |
Hours training per exp employees |
4 |
23 |
% Received Performance Appraisals |
60% |
96% |
% Performance Appraisal Based on Objective Measures |
13% |
63% |
Employee Turnover |
34.09% |
20.87% |
Sales per employees |
$158,101 |
$617,576 |
1.1 “Five bi-annual national surveys with over 3,000
firms (Huselid & Becker, 1991-2003)”
Watson Wyatt has been globally acknowledged
for having created the Human Capital Index or HCI. The HCI was developed by rating 750
leading European and United States organisations on their
Human Capital management practices.
In 1999 and 2001 Watson Wyatt surveyed 51 organisations and rated them according to how they scored in the HCI against the five year total return to shareholders. They found that:
- Low HCI organisations averaged a 21% total Return To Shareholders
- Medium HCI organisations averaged 39% total Return To Shareholders
- High HCI organisations averaged 64% total Return To Shareholders
The reverse correlation was not true. That is, strong financial
performance did not lead to better Human Capital Management practice or necessarily
to sustained strong financial performance.
SEEK Limited is Australia's leading employment
website advertising positions in Australia, New Zealand and
the UK. SEEK have also conducted some interesting research.
The SEEK Survey of Employee Satisfaction and Motivation
In Australia asked the question, “Is there
anything you hate about your current job”? The research
discovered, as per the results in Figure 1.2 that over 55%
of employees surveyed were unhappy with the quality of management
and 50% where dissatisfied with the lack of feedback and appreciation
they received.
(click on image to enlarge)
Figure 1.2 - “A manager can be a great
person but a lousy manager.” – Source www.seek.com.au
Figure 1.3 describes how employees rate their immediate manager versus management qualities they respect. It is astonishing that the results indicate that the 2005 actually qualities are 55-60% less than the respected qualities.
(click on image to enlarge)
Figure 1.3 – “Management –
What jobseekers want vs. what they get” – Source
www.seek.com.au
Capital invested in human resources is recognised as having
a much greater influence on organisational performance than
capital invested in other types of resources.
How does Human Capital Performance Management Work ?
Research conducted by the University of Chicago reviewed the
business results of 437 publicly listed companies to determine
if there was a link between the use of Performance Management systems and business
performance. The sample group was divided into organisations
with Performance Management systems and those without.
On every
Financial or productivity measure used in the study, the organisations
with Performance Management systems outperformed
those without Performance Management systems (Allan Preiss and Maria Galati. “Do you measure up?”, HR Monthly, May 2001: 46-47).
In a survey conducted by Dave Ulrich of 240 organisation’s
in 1999 it was found that organisation’s with higher
strategic capabilities perform significantly better than lower
capability organisations. When a manager and employee set
clear and concise expectations about the results that need
to be achieved and the methods needed to achieve them, a clear path for success is established. The statistics and research
covered clearly relay the same message.
A plethora of recent research strengthens these results as well as the conclusions.
"If you can’t
measure it, you can’t manage it, therefore you can’t
improve it."
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