Linking Human Capital Measurements to ROI – Part 2

Sixth Entry in the Metrics and Analytics Series

Last week, I published Part 1 of Linking Human Capital Measurements to ROI, setting the stage for the four human capital metrics that track the return on investment in human capital. My source is Kirk Hallowell’s essay in The New HR Analytics book by Jac Fitz-Enz.

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As a brief summary,  Hallowell’s four metrics are designed to be event driven (how and when the measurement takes place), clear and easy to understand, and focus on the highest points of leverage for gain or loss of ROI (fewer strategic measures).

So, with that, let’s dig in!

Performance metric 1 – Time to Full Productivity (TFP)

An employee’s time to full productivity (TFP) is simply a learning-value curve that will increase over time as that employee improves their knowledge, skills, and productivity. TFP is a very important metric because it can focus and direct the organization’s investment strategies. In order for this metric to be effective, however, full productivity needs to be clearly defined and quantified in order to properly measure it.

An employee’s competencies and professional relationships will predict the employee’s future performance and contribution to the organizations overall performance.

The primary goal here is for the organization to shorten the employee’s TFP as much as they possibly can. Some of the ways they can do this are listed here:

  • Use an integrated talent development system
  • Hire employees for their competencies and adaptive learning skills
  • Provide competency-based training
  • Deliver a robust and effective onboarding process
  • Identify and address development needs early
  • Deliver timely and effective feedback
  • Provide incentive-based pay
  • Optimize environmental issues (work flow, equipment, support resources, etc.)

Performance Metric 2 – Quality of Hire

The quality of hire is how the employee fits within the organization’s culture and their ability to accomplish their job responsibilities. Different employees will reach full productivity at different rates depending on their skills and experience.  Each employee will have a different starting point, shape, and trajectory on the learning-value curve.

Several variables that can determine the quality of hire are listed here:

  • The employee’s key experiences as they relate to the job responsibilities
  • Their past work and performance
  • A competency assessment
  • Their adaptive learning skills
  • Personality variables as measured by an assessment

Of course, the actual quality of a hire will vary greatly depending on how the candidates are sourced and recruited. Employees with stronger and more developed competencies will achieve their TFP much quicker.

We can also use the quality of hire to justify pay differences between new hires by paying more to those who can show that they are capable of reaching TFP sooner than their peers.  An organization’s decision to invest more in a higher quality of hire will be justified when that new hire reaches their TFP quicker than her peers.

Performance Metric 3 – Quality of Promotion

The quality of a promotion depends on how well the newly promoted manager adjusts and learns their new position. There will be a dip in their learning-value curve after their promotion but if the employee was properly vetted for the promotion and the proper training is administered, the learning-value curve will recover and the employee’s performance will start to provide a solid return on investment.

Most of us can agree that one of the most difficult transitions an employee makes is when they are promoted from a line employee to a supervisor. The employee must shift from being a technical/administrative/functional expert to a management expert.

In addition, when the newly promoted employee becomes the supervisor of people with whom they were peers, they will often fail or struggle for a long period of time. This is where the organization must invest in management training, coaching and effective feedback in order to realize a good ROI.

And this is where the learning-value curve takes a dip.

If the employee’s promotion is successful, their learning-value curve will recover from the dip and begin an upward increase positively impacting their direct reports, systems, and processes.

Performance Metric 4 – Quality of Separation

The loss of good employees can have a tremendous negative impact on an organization’s economic return. Typically, an organization does not measure this impact leaving it a costly and unknown mystery to how serious the impact actually is.

When a good employee leaves an organization, the ROI in human capital is potentially reduced in the following ways:

  • The potential for the employee to add economic value from their performance immediately stops.
  • The organization’s investment in training, experience, and internal networking of the employee is immediately lost.
  • New investments to replace the employee must be made in order to maintain and grow productivity.
  • Loss of potential revenue streams and broken customer relationships may hurt the organization’s profitability.
  • The employee may move to a competitor and take their intellectual capital and customer relationships with them.
  • The remaining employee’s morale and productivity is typically negatively impacted.

The separation costs of a top-performing employee has been estimated to be 75 to 125% of that employee’s annual salary when including lost opportunity costs and adding the direct and indirect costs of hiring, training, onboarding a new employee.

 

The four metrics I just briefly discussed here give organizations the opportunity to apply a dollar amount on the cost or return on investment as they relate to human capital investment as was done above in the Quality of Separation metric above.

I highly recommend you read Hallowell’s essay in Fitz-Enz’s book where he does a great job of explaining the four metrics as they apply to his case study.

Please take this week’s survey, located at the top of the sidebar, about this week’s subject of linking human capital measurements to ROI!

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