2006 – Campaigning for human capital standards
It is not easy to get some of
the UK’s largest employer organisations,
investor bodies and companies around a single
table, particularly when they represent diverse
interests and memberships.
But one common belief seems
to be uniting members of the recently formed Human
Capital Management Standards Group: there is a
crying need for businesses across the UK to improve
the way they understand and measure the value
of their workforces.
The way that a company creates
value in people, either through recruiting excellence,
employee development or management, coupled with
the way that people deliver value directly in
performance, is of paramount interest to all stakeholders
in a business – be they investors, customers
or employees themselves.
Yet one area of the corporate
balance sheet that receives relatively scant attention
in many companies is the biggest intangible of
all – the knowledge capital invested in
and owned by employees, often the biggest cost
of an enterprise.
One surprising observation that
arose in the group’s latest meeting held
last week at the London headquarters of Investors
In People is that many big companies are unable
to say how many people they have working for them.
Those that do might have differing ways of calculating
their employee numbers.
The observation arose during
a discussion over a proposal to recommend profit
per employee as a significant reporting metric
of human capital that could be included in annual
reports. One possibility might be to adopt a calculation
used by Saratoga, the human capital arm of PriceWaterhouseCoopers.
The measure divides profit before tax by the number
of full-time employees. The head-count used for
the calculation is based on full-time equivalent
employees, so that two people job-sharing would
be counted as a single employee.
The way that Saratoga calculates
head count is to total up the contractual working
hours, including overtime hours for all employees,
and divide by the contractual number of hours
for a full-time employee. Contractors, agency
staff and consultants are excluded from the calculations.
When it is considered that in
its consulting capacity Saratoga recommends the
use of this metric alongside others, such as revenue
per employee, cost per full time employee, resignation
rates and human capital return on investment,
it can be seen how complex the work can become
in this area.
The HCM standards group, however,
is seeking to establish some consensus around
a small number of measures - say five or six -
or groups of measures. The idea is to establish
a base from where companies – including
thousands of small and medium sized employers
– can develop their human capital management
systems. Set some common standards and management
will develop in ways that suit particular organisations
and industries. Some will need more sophisticated
measuring in certain areas that are less relevant
to others but the principal of uniformity underpinning
diversity will have been established.
The group is concentrating its
research and debate therefore on common areas
of employment. On the table currently is a list
drawn partially from work undertaken for Denise
Kingsmill’s Accounting for People Report,
partially from research carried out by the Chartered
Management Institute and a more recent review
by the Institute of Employment Studies, and partially
from the recommendation of members.
One measure suggested from debate,
for example, was the ratio of acceptances to job
offers that gives a clear indication of an organisation’s
ability to attract good recruits. This would be
a particularly interesting statistic for anyone
seeking to compare the success of large-scale
graduate recruitment programmes. A high acceptance-to-offer
ratio would establish an organisation’s
reputation as an employer of choice.
A measure I favour myself is
one I featured here some months ago, suggested
by Fred Reichheld, the former Bain & Co director.
What he calls “The ultimate question [for]
driving good profits and true growth” in
his book of the same name is this: How likely
is it that you would recommend your employing
company to a friend or colleague? Rated from one
to 10, the scoring from this question, says Reichheld,
provides a useful indicator to the overall management
competence of an organisation.
While there are many more sophisticated
groupings of measures of employee engagement,
the scoring from that single question, he believes,
can give an at-a-glance indication of the way
that people feel about their employer and whether
they take pride in their company. What he calls
the “net-promoter score,” he argues
is the single most important indicator of healthy
profits, carrying with them in-built potential
for growth and business improvement.
Other possible areas of measurement
pulled together from various sources include leadership,
training and development, performance improvement
A leadership measure might look
at the percentage of jobs covered by a succession
plan but such a measure might say more about a
process rather than the quality of leadership.
Measures around leadership reputation from attitude
surveys or peer reviews may prove more useful
indicators for outsiders.
I wonder what bosses such as
Sir Alan Sugar, Sir Richard Branson and Arcadia’s
Philip Green - all self-made men who never went
to university - would think to proposals that
companies should list the percentage of their
managers who possess degrees?
A few of the other metrics, in
a list that IES plans to test among a large sample
of companies, includes one that is more of a statement
rather an a measure – that HR plays an active
role in formulating business strategy. This seems
more like HR nest-feathering.
As an investor I would be pleased
to discover that HR people were involved in strategy
if the HR leadership, like that at the Royal Bank
of Scotland, had demonstrated that it can make
a difference. But in some companies this might
be putting the cart before the horse. There are
various areas of human capital management that
might be best performed by people with a financial
or marketing background.
Measures of staff turnover are
useful, particularly when compared within industries.
Absence rates are also useful. The higher average
absence rates in the public sector compared with
those in the private sector say much about the
comparable motivation and performance management
in respective sectors. But such measures should
not be undertaken in isolation.
A bundle of measures around various
HR processes such as appraisals, team briefings,
suggestion schemes and quality circles may also
have some use since research has confirmed that
companies employing such processes often perform
financially better than those that do not. But
the presence of such measures alone would not
satisfy my curiosity as an investor. I would want
to see evidence of improvements or financial benefits
arising from these initiatives to ensure that
they were being managed year-on-year, not simply
subject to an annual tick-box.
This is why good human capital
measures must focus on results that can be compared
historically in individual companies, as well
as across sectors. The HCM Standards Group has
yet to reach a definitive list. Indeed any recommended
list cannot be definitive because this kind of
measurement and management is evolutionary. Measures
must be reviewed over time. But a railway must
run on a track and the track can’t change
its gauge every day, so there is an imperative
to find a tight set of measures that have some
The group is taking soundings from throughout
the public and private sectors. Anyone who would seek to
make an argument for the adoption of any specific human
capital measures should contact the group via Simon Jones,
finance director of IIP, [email protected].
For good measure you might copy them to me: [email protected]