Human capital's measure for measure

Would your HR metrics rate the seasoned sales professional the same as everyone else in your company? There's a better way to see who's worth the weight.

The employee or human resources box on a company's scorecard is often the least sophisticated and most likely to include meaningless metrics that are not really correlated with important outcomes, such as growth, profitability, or even customer satisfaction. Yet just about any organization you encounter today tells you that its people are the most important asset. The problem is that the metrics these organizations have on the "people part" of the business do little to tell them about the value and performance of this human asset.

As a consultant who reviews the scorecards of many large government and business organizations, I see the same sorts of metrics in the people section:

1) Turnover. Just about every medium-to-large organization tracks attrition or employee turnover. The problem with this as a metric is that it may not tell you much. If you turn over 20 percent of your new employees each year, this could be a good sign, because the ones who leave are the ones whose performances do not meet your standards.

Many of the big accounting and consulting firms lose 80 to 90 percent of their new hires over a five-year period. Some of these firms do not believe that this is a problem. Even though they invest a fortune in training new employees, they know that most of them will be gone in a few years. Many of them get hired away by clients and become good customers of the accounting or consulting firm. To these firms, turnover is not an indication of a problem-it is expected, and often positive, in that it keeps labor costs low by always having a stable of new recruits.

Another problem with turnover as a metric is that whether it is positive or negative depends upon the person leaving. When some people quit, everyone breathes a sigh of relief "Thank God he finally left, he's been retired at his desk for the last five years." And yet when other people leave, you realize that they are almost irreplaceable. It can be devastating to have a competitor steal certain people away. Yet, the turnover graph will show this person as one little dot on the chart, counting this person the same as the kid in the mail room who left after six months because he had not yet been promoted.

Turnover is a crude measure that does not tell you much about how a business is doing in managing its human assets.

2) Education level. A common metric in educational, technical, and research and development (R&D) organizations is the average education level of the staff. Companies count advanced degrees and believe that the value of their intellectual capital increases as does the number of Ph.D.s and graduate degrees. While this is certainly easy to measure, the number of advanced degrees an organization has can also be a misleading metric. I would not trade someone of the caliber of a Bill Gates or Steve Jobs for 50 Ph.D.s. The problem with education or degrees is that they are no guarantee of competence. We've all met some folks with advanced degrees from impressive schools who are still not as impressive as others we've worked with who are less degreed.

3) Training attended. A common HR metric I've seen on many corporate and government scorecards is average number of training hours per employee per year. Companies such as Motorola brag that their employees receive 80 hours of training per year on average. The problem with training attendance or BIC (butts in chairs) as a metric is that it does not tell you whether the employees needed the course, whether they learned anything, or whether it improved their job performances or value to the company.

4) Meeting developmental plan objectives A new HR metric I see cropping up on the scorecards of a number of companies is the percentage of employees who have met developmental objectives that were agreed upon at the beginning of the year.

Most companies have a developmental plan as part of the performance management/ appraisal process, wherein an employee negotiates with her boss skills she will improve or acquire during the following year. At the end of the year, the company measures the extent to which these developmental objectives have been accomplished. The problem with this as a metric is that the developmental objectives are often written as activities-such as the commitment to attend this or that course-as opposed to demonstrating that a particular competency has been acquired. Another problem is that often the skills or knowledge acquired are not the key competencies that the company needs to improve on for its future.

A simple human capital index-a better measure

A simple way of calculating the value or strength of your team is to create a human capital index that is made up of four sub-metrics:

1) Number of years in the business/field.

2) Level in the company (byjob grade or organizational chart level).

3) Performance rating.

4) Number and variety of positions/assignments held.

Each of these four factors needs to be given a weight, based on its relative importance. For example, you could make them each worth 25 percent, or weigh them as follows:

Level in the company: 35 percent Performance rating: 25 percent Variety of positions: 25 percent Years in field/business: 15 percent Each individual would then be given a score once a year based on these four factors. Three of the four metrics are hard objective measures, and performance rating is a subjective rating that comes from a performance review and might be based on peer evaluation, superior evaluation, and measurable performance on key objectives, such as sales and profits.

Using such a system, a marketing vice president that has been with the company for 18 years, has worked in manufacturing and HR, and is consistently rated as superior in performance might receive an overall score of 88/100.

The new worker that takes phone calls in the customer service center, who is two years out of high school and an average performer, might receive a score of 7/100.

Using such an index will tell a company about the strength of its team and give it a way of calculating the true loss of a key person to turnover. When a person quits the company, each one is counted based on his or her human capital score. Similarly, when a new person is hired, that person's score goes into the index. One would have to guess on the performance rating or take the word of previous employers. Another alternative would be to rate performance as a zero until the person has been on the job a year.

What this approach does not measure is the knowledge or competencies of your employees. It also does not measure values, ethics, or managerial expertise. Hence, it does not really provide data on the overall brain power of your employee base. If, however, that brain power is not translated into value for the organization, it is of little use to track it. The advantage of this approach is that it is incredibly simple, easy to understand, and fair because most of the index is based upon hard, objective measures.

A more complicated human capital index

An organization interested in measuring the level of competency or skill mix of its workforce might want to create a human capital index that looks at experience and competencies. The previous example simply looked at experience and job performance ratings. To construct a more complete index, you would first decide how to weigh the two dimensions of skills/competencies versus experience/performance. A good model might be:

60 percent experience/performance,

40 percent competencies/skills.

The weights might be reversed in an organization that needs to work on acquiring many new skills or competencies and is not as concerned with having seasoned employees. Once you've decided on the weights of the two factors, you can compute the experience/ performance side of the metric using the approach previously outlined. In other words, you measure factors such as years of experience, variety of experience, performance ratings, and job level. The competency side of the equation is a little more challenging.

Types of skills and competencies

Within the overall mix of skills needed from employees, they can easily be separated into two types: technical and non-technical.

Technical skills pertain to your industry or field and would include a wide variety of technologies, such as engineering disciplines, hardware platforms, system engineering, marketing background, legal training, human resource development, contracting, or any other fields of knowledge that are important to your organization-- today and in the future.

Start out by listing all of these broad disciplines or fields of knowledge and weighting their importance on a scale of 1 to 10. This will be hard to do because they are all important. The weightings should be done by a cross-functional team that can be objective in looking at the entire organization, rather than their own function/discipline. The competencies that end up with 10 ratings should be the ones that are most correlated with current and future company success. Make sure that there is a relatively even distribution of scores. In other words, they can't all be 7 to 10, or the weighting system will not work.

Non-technical skills. Next, you should do the same thing with non-technical skills/competencies. Many companies already have a list of generic competencies like this. For example, Nortel, located in Toronto, developed a list they call their core values:

Leadership

Customer orientation

Quality

Teamwork

People growth

Risk taking and innovation

Your list might not be as concise as this one, and might include 15 to 20 non-technical skills that you consider important. Some other examples might include:

Project management

Listening

Verbal communication

Written communication

Planning

Coaching/mentoring

Conflict resolution negotiating

Relationship management

Providing feedback

As with the technical skills, each of the non-technical skills needs to be weighted based on its importance. The weightings can be done overall for the entire company, or could be done for each job position. This way you can tailor the skills assessment to what is critical for each position. The same sort of thing could be done for the technical skills. Certainly not all of the technical skills will be appropriate for each employee. The more rigor you try to put into this index the more complicated it will become, however, so I would recommend not making it too complicated to begin with.

Once you've identified all the skills and competencies important to your organization, you need to rate each person's level of proficiency in each area. The rating should also be a scale of 1 to 10, with a 10 indicating a world-class expert, and a 1 indicating a complete beginner or novice in the area. A zero rating would mean that the person has absolutely no knowledge or skill in the area. The ratings of skills and competencies can be done using a variety of methods. Companies that employ 36Q-degree appraisals can use this process to do the competency assessment. A simpler approach is to have employees rated by peers and themselves. The more people who have input to the ratings, the more complicated and bureaucratic the system will become, so select an approach that you will really stick to. When you are finished, each employee will have a competency score that ranges from 0 to 100. A high score indicates a high degree of competency.

To calculate the overall human capital score for each employee, take the competency score multiplied by the weight and the experience score multiplied by the weight to arrive at the final number. (See the table below.)

Final recommendations

Most things that are important to an organization are hard to measure objectively. Competitors can steal your products, services, distribution channels-often just about anything we do, except for fuzzy things such as your culture or people. Traditional HR metrics fail to tell an organization about the level of performance or knowledge of its employee base. Some of the best metrics I've seen are ones that have been custom designed for a particular company, not those taken from a book or another similar company. It is often useful to calculate indices several different ways for a year or two to find the right formula that best depicts overall performance levels.

It is also important that the index has face validity with your employees. Be prepared to do some evaluation and refinement of the index over time. It's definitely worth the effort if this type of data can help you make more balanced management decisions regarding your human resources.

Mark Graham Brown

Mark Graham Brown has been consulting with business and government organizations for the last 20 years. He is the author of five books, including his

most recent, Keeping Score-Using the Right Metrics to Drive World-Class Performance (Amacom, 1996) and an upcoming 1999 release, Balanced Scorecard Design and Implementation Guide (Productivity, Inc.). Brown can be reached at 310-376-2836.

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