Human Capital Standards Group paper, November 2006

The Human Capital Standards Group was established in 2005 to investigate the kind of employment metrics that could be adopted by all companies as a basis for employee-related information in their annual business review.

The group believes there is a need for the annual review to formalise its employment content around a series of metrics covering the significant intangible of human capital, recognising that this information is as crucial to forward thinking analysis as historic cost accounting is in the presentation of past performance.

Focusing on the annual review was seen as an opportunity to establish some basic principles and guidelines for the use of human capital metrics in external reporting. Additionally it presented itself as the logical next step in the development of human capital management in the wake of the Kingsmill Report from the Accounting for People task force.

That report anticipated an evolutionary process towards the establishment of generic measures in business. The Human Capital Standards Group is attempting to take up the baton from Kingsmill and progress this necessary evolution to a new stage of development.

The terms and reference of the group were established around five guiding aims and principles:

1. To provide a basic set of metrics that we intend to promote as organisational standards for the purpose of external comparison by investors and other stakeholders in publicly quoted private sector corporations.
2. To establish these standards as the underpinning of a wider understanding and use of human capital management in organisations.
3. To review and revise standards periodically in a process of continuous improvement.
4. To embed the practice of human capital management within all organisations around the principle of investing in people as a means of securing stronger individual and organisational performance.
5. To maintain the integrity of generic measurement in which measurements and their formulas are freely available to every organisation that may seek to adopt them

In a series of debates and information gathering exercises seeking expert opinion among various industry sources externally and internally from within the group, a consensus began to emerge around the areas of human capital most useful for information gathering and about the type of measurement that could provide the most significant results.

Seven performance measures or groups of measures have been selected:

· Overall Performance
· Leadership and Management
· Employee Engagement
· Training and development
· Pay and reward structures
· Retention and recruitment
· Health and well being

Under each of these headings some specific measures were considered:

Overall performance (quantitative)

1. Profit per employee
Based on HR records of full time equivalents (FTE) and Profit taken from published accounts

2. Turnover per employee
Based on turnover from published accounts and FTEs from HR records

Leadership and Management (qualitative)

1. Is this organisation well managed?

3. To what extent do I understand the aims of the organisation?

4. I am well managed.

Employee Engagement (qualitative)

1. I would recommend my employer to a friend as an excellent employer.
2. I am proud to work for my employer.
3. I believe in the aims of my employer.
4. I feel comfortable with the values of my employer.
5. I will do more than I’m asked to help this organisation succeed
6. I have a desire to do more.
7. I care about my job.
8. I enjoy my work.
9. I like the people I work with.
10. I want to continue working here.

Training and Development (qualitative)

1. To what extent do I believe I receive the training and development I need to enable me to do my job well (including on the job training)?

Pay and Reward Structures (qualitative)

1. To what extent am I satisfied with my pay and benefits?
2. Are my organisation’s reward and remuneration arrangements fair?

Retention and Recruitment (quantitative)

1. Percentage of Vacancies Unfilled within 3 months
Unfilled vacancies within 3 months / FTEs

2. Offers/ Acceptance ratio for advertised posts
Number of job offers made in last 12 months/number of acceptances in last 12 months.

Health and well being

1. I believe my employer cares about my well being

Information gathering

In gathering feedback from numerous organisations and practitioners of human capital measurement it quickly became clear that work in this field is characterised by a wide variety of practices and opinions. The debate seems most heated around the potential for measures to create a distorting picture of business performance.

There were strong areas of consensus around the need to measure the effectiveness of line management and employee satisfaction, most commonly expressed as employee engagement. Pay, experience, training, leadership/line management quality, job content and staffing levels were all regarded as significant features of employee engagement.

In the detailed comments, most of the criticism of measures seemed to be centred on whether or not they were relevant. Where relevance was questioned I have tried to accommodate these points in a refinement of the measures.

It was clear from the comments that consensus over validity of measures will remain elusive. This should not, however, preclude some broad agreement that embraces the fundamental differences in measuring human rather than fixed capital.

Human capital measures must account for basic human differences. Every single employee in a workplace is an individual. No matter how neatly approximations of human behaviour may be assembled to categorise people, every single one of us thinks, feels and behaves in different ways, sharing some qualities to differing degrees.

This essential difference between accounting for people and accounting for other forms of capital would point to an argument for qualitative measures as the dominant means of collecting rich employee feedback, supported by a number of quantitative measures. The gathering of such qualitative information is particularly useful for year-on-year performance comparisons.

For this reason it is important that consensus within the group is secured with an underpinning of some fundamental assumptions that need to be accepted in establishing workable and universal human capital metrics:

1. If generic measures are to have any meaning they must be usable for external comparison of businesses. They must carry meaning beyond the parameters of the individual companies in which they are used.

2. Measures must be capable of shedding light on the future capabilities and creative potential of the business.

3. Qualitative rather than quantitative measures are more useful in providing a richness of information over time that can best reflect the human side of human capital.

4. Measures can only deliver meaning in business if they are linked to good management. Good management bridges the gap between basic measurement and strategy.

5. Good management establishes a working narrative around the measurement process so that results can be translated in to learning, development and performance management.

The areas of measurement and individual measurements and formulas recommended by the group are intended, therefore, as a foundation and an underpinning of people policies. They are not presented as a definitive group but as “work in progress” that will need refinement and revisions as knowledge of this still maturing discipline expands.

Neither are they focused on strategic differentiation although we should recognise that organisations that commit themselves to these principles may well seek to use them as a basis for strategic distinction and competitive advantage when combined with management interventions and the adoption of other sector and company specific processes.

The comments and feedback are pointing to the development of a two pronged information-gathering exercise, partly based on employee feedback and partly based on quantifiable information.

Once questions are agreed some consideration should be made of weightings and rankings. Should it be marks out of five for individual questions or out of 10?

If a final consensus can be achieved I would recommend that the group moves forward with its proposals in two directions:

1. To campaign through the media and with discussion and promotion among investor bodies for the acceptance of these measures as a broad employer standard.

2. To discuss the measures with the accountancy firms that convened recently to recommend a regular gathering and reporting of metrics covering intangible assets.

©2006 Richard Donkin