What are the human capital drivers for improved performance?

David
Baty and Ed Wilson of PricewaterhouseCoopers outline the basic drivers of
improved performance

Human
capital is one of the most important assets of any organisation, although,
sadly, it is often the least managed. Many firms could tell you how many laptops
they own almost immediately, yet would struggle to say how many people they
employ.

Why is the area of
human capital measurement so neglected? Perhaps practitioners have fallen shy
of treating employees with the same financial rigour as any other asset:
understanding the costs, managing the performance and demanding a demonstrable
return on investment. However, high performing organisations are beginning to
recognise the need to link people to profits.

The Human Capital Value Chain

*
FTE – full-time (equivalent) employee

Results of the
PricewaterhouseCoopers’ Global Human Capital Survey 2002

The
Global Human Capital Survey 2002 analysed the effect that HR policies and
practices had on the two measures of employee performance shown in the picture
above. The survey found a number of strong links between traditional and
non-traditional HR metrics and bottom line performance.

Employee performance metric

Higher revenue per
FTE is associated with:

Higher profit per FTE is
associated with:

HR
metric

Existence of a coherent HR strategy,
integrated with business objectives.

Broad ranging reward and performance
management programmes which are successfully implemented across the majority
of the workforce.

Lower rates of absenteeism.

Focused approach to corporate
social responsibility.

Detailed investigation

We
have drawn a peer group of 50 companies from the Global Human Capital Survey
2002. The peer group only contains companies with over 5,000 employees and
excludes any government and not-for profit organisations. Average headcount in
this peer group is 25,000. The organisations are located in 16 major economies.

The
peer group was divided into quartiles based on financial performance. We used
four measures of financial performance: annualised share price growth over the
last 3 years, last year’s profit margin, last year’s revenue per full time
(equivalent) employee (FTE) and last year’s profit per FTE.

We
find in this group the following additional results:

Employee performance metric

Higher revenue per
FTE is

associated with:

Higher profit per FTE is

associated with:

HR
metric

Greater participation in performance-related
pay across the whole organisation.

Higher ability for people in organisation to
admit mistakes and learn from failures.

Corporate social responsibility seen as
vital to organisation’s success.

Higher ability for people in organisation to
admit mistakes and learn from failures.

It
is hard to find a direct link between shareholder value and HR policies and
practices – there is simply too much else affecting share prices for a coherent
picture to emerge from our data.

In fact,
the only significant link we find is the unsurprising result that low
performing companies show much higher rates of compulsory terminations. This
effect is likely to be driven by business performance requiring this HR action
and so does not provide useful information to human capital managers.

The PwC Saratoga-Institute
research

The maxim of ‘you can only manage what you
measure’ holds just as true in human capital as in any other part of a firm’s
operations. If nothing else, HR managers should monitor these 10 leading
indicators:

PwC Saratoga-Institute human
capital Key Performance Indicators

1. Revenue per FTE
2. Profit per FTE
3. Human Capital ROI*
4. Management ratio
5. HR ratio
6. Training costs per FTE
7. Employee cost (compensation per FTE)
8. Benefit costs per FTE
9. Voluntary separation rate
10. Cost per hire

 

*Human capital ROI is defined to be the pre-tax profit an
organisation generates divided by the spend on employee pay and benefits
(after non-human expenses are removed).

This list
has been built by the PwC Saratoga-Institute based on 25 years’ experience in
linking human capital metrics to corporate performance. By using these metrics
as part of a detailed evaluation of their human capital, businesses are forming
the illusive link between people and profits.

For more information go to www.pwc.com/uk/hrs

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