Human Capital Metrics and Analytics: On the Way Toward Standardized Reporting Mark C. Ubelhart Hewitt Associates

Recently, Hewitt released the results of research showing the actual data by industry of gains and losses of pivotal employees (defined as Talent Quotient™) and also the impact gains and losses of such employees have on business results, specifically Cash Flow Return on Investment (CFROI®). The research and other initiatives in the domain of measuring human capital illustrates several themes:

• clamor by management and investors for evidence-based insights pertaining to human capital
• the possibility of standardized reporting, for cross-company comparison
• the link of such measures to business results, enabling companies to prioritize their investments
• the use of predictive analytics to gauge the impact of policies and practices on Talent Quotient (TQ™), and through that to Shareholder Value

Very simply, TQ is a ratio that any company can compute on its own, and report internally. Hewitt and Credit-Suisse will be hosting a joint conference soon to advocate public disclosure as well, but admittedly this will be voluntary and not occur until it is in the company's best interests to do so -- or until it becomes too embarrassing not to do so.

Intuitively it is obvious that TQ should have an impact on subsequent financial performance and that financial performance should have an impact on TQ. In our recent research, we have isolated the former, based on data for over 20 million employees. We found that 10 points in TQ converts to an estimated 0.7% and 1.6% increase in CFROI for industrial and financial services, respectively. When multiplied by gross financial investment, averaging $20 billion per company in the data base, these are very large impacts.

To standardize the calculation for cross-company analysis, pivotal employees are those who are in the top quartile of a company's percentage pay progression (who after adjustments for where they are likely to be within their salary ranges based on age, pay and tenure). In other words, the people in whom the company is investing incrementally more are deemed pivotal. Here it is possible for a company to substitute its own more tailored definition of pivotal employees, yet revert to the standardized definition for comparison purposes.

Just the TQ reporting alone, with the connections to business results and the standardization can have a behavioral impact, whether or not accountability or incentive compensation is tied to it. We've already witnessed its power as a diagnostic tool when TQs are segmented by function, business unit, geographical region, pay (executive, management, and broad), diversity, etc.

That's just part of the story. Finding out what affects TQ and the degree of sensitivity it has on TQ through the use of predictive analytics provides management with an ability to compare the costs of various investments in human capital to their benefits, as the improved TQ can provide the cash flow estimate of the benefits. The analyses we've conducted to date yield industry adjusted optimums for a range of metrics -- including the degree of differentiation in pay increases and actual/target bonuses. executive tenure, pay at risk, and the investment in star performers ("Shooting Stars"). Not surprising are the results that it is possible to have too much of a good thing, and thereby suppress TQ. That this goes beyond benchmarking is evident, as the optimum points, or "Sweet Spots" are seldom the same as conventional practice.

Of course, this is just the "tip of the iceberg" but such movement towards internal and eventually external reporting is important. Hopefully critics will not hold the development and use of human capital metrics and analytics hostage to limitations no greater than those that exist for traditional financial performance measurements.

CFROI® is a registered trademark in the United States and other countries (excluding the United Kingdom) of Credit Suisse or its affiliates. Credit Suisse HOLT is a division of Credit Suisse
 

Chart 1

Chart 2

Posted on January 23, 2007

Comments on this column?  You are welcome to create a post on the EBM Blog.