Human capital measurement can be tricky

Organisations are compelled to include human resource measurements among financial performance information.Peter White discovers talent-spotting is a tricky process, but can distil good information

Case Studies: CMS Cameron McKenna, West Bromwich Building Society

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There used to be a tape on a constant loop sitting in the corner of the HR department. Every six minutes it would repeat the phrase: ‘Our people are our greatest asset’. But one morning it was found in pieces on the floor, smashed and broken, with a note attached. ‘We’ve had enough, we’re leaving…love, The Machines’.

Until technology goes all Terminator on us, organisations should be safe from this threat. However, simply paying reverence to the needs of employees is no longer acceptable. How employers treat their staff is soon to become a key element of a business’ reporting cycle. Organisations will have to ensure that their people processes are perfect before peering eyes begin to discover the truth.

In May, the Accounting Standards Board (ASB) confirmed that listed companies must include an Operating and Financial Review (OFR), which incorporates a organisation’s people measures, in its annual accounts.

The report states: “Employees may be a particularly key resource – and accordingly a key risk – for many entities. The strengths of a company’s workforce and the ways it is managed can play a major role in both current and future company performance. Directors will need to assess the degree to which the human resources of the entity represent a significant competitive advantage or are critical to a key product, service or process.”

Ladies and gentlemen, please meet ‘human capital management’ also known as ‘collecting useful information about workers to ensure that they are performing’.

Professor Andy Neely, head of operations strategy and performance at Cranfield School of Management, who was on the ASB’s advisory committee, hopes that organisations will use the new rules to link staff satisfaction to performance. “I hope it’s not just pictures of staff smiling and the odd quote saying ‘my employer is the most wonderful in the world’.”

Organisations are expected to collate information on issues such as staff turnover, absence statistics, reward strategies and how performance is measured. Once this process is in place, employers will be able to use the results to prove to investors that their HR policies are critical to the business, as well as to improve their service to staff.

“The data will [already] exist inside the organisation, [but] it may not be collated and one of the difficulties is that the data is owned by different functions, such as HR and marketing, and there’ll be a job to do to bring that data together. Most organisations have vast amounts of data but are drowning in it and you don’t get any insight from it,” says Neely.

Duncan Brown, assistant director-general at the Chartered Institute of Personnel and Development (CIPD), says HR has become better at crunching numbers over the past couple of years. “There’s going to be a very interesting dynamic as we see what information employers give and how extensive that information is. I think it will develop pretty quickly to some pretty standard definitions that the vast majority of organisations use.”

Technology has an important role to play in ensuring this information is as accurate and useful as possible. While strategies need to be in place in the first instance to record such statistics, having a robust and capable HR software system to measure and process the figures is essential. Companies that have good systems to trap data internally will also have the ability to release it externally. “The [organisations] reporting well externally, have good HR information systems, they can produce good performance information and they tend to administer flexible benefits schemes well,” adds Brown.

There is also the challenge that every organisation, across all industry sectors, will treat staff differently, so technology packages will face different demands from each employer. Christine Crowther, boss of HR and pay technology provider Selven Group/Teamspirit, says she hasn’t seen two organisations ask for the same information to be captured. “How do you measure the worth of your people? There is no standard. My current instinct is that everybody is paying lip service to human capital reporting but very few people are actually doing it.”

This reporting could follow the rise in corporate social responsibility (CSR) reporting. “If you look at reporting on CSR, which is totally voluntary but most companies now do it, there’s been much more standardisation now,” says Brown.

Organisations are expected to start benchmarking to see which are the best human capital reporters, which should move things forward pretty quickly.

The RAC has often been mentioned as an interesting case study for its staff reporting. The motoring organisation, which was recently sold to insurance group Aviva, has successfully used a people profit and loss account to measure the cost of its workers. It was able to gauge, for example, that by reducing sickness absence it could use the savings to keep open its defined benefit pension scheme and look to introduce an all-employee share scheme.

West Bromwich Building Society is also looking at how it will report on its 1,000 employees. Paul Turner, general manager (people) at the firm, says: “Over the next few years, everybody’s going to be studying everybody else. It’s going to be a bit like alchemy.”

But he admits that deciding on what to include in a report is a tricky question for most employers. “For example, if companies are going to start reporting their turnover, it’s a big decision. Some companies can make money with 125% turnover, whereas other firms, in regulated industries can’t. And you will [also] get down to an optimum level of absence [so] what happens when it starts to go up and you have to report on that?” he adds.

The OFR rules that will govern what some organisations need to report on have purposely been left ambiguous. The measures are not prescriptive because all employers will need to measure different performance indicators depending on how they operate.

Cranfield’s Neely says: “Saying that everyone should measure staff retention, for example, is not appropriate. For some organisations, staff retention doesn’t matter. If you take a low-skilled, highly-automated environment which you could drop people in and out of very quickly I wouldn’t worry very much about staff. We want [employers] to reflect on what matters to them and release information about that.”

Some firms are worried that by divulging information about how they treat staff, competitors will be able to see how they work and steal their best ideas. “Some companies aren’t saying very much [at the moment] because they are worried about what they might give away,” says Brown at the CIPD.

But, Keith Pearse, director of people and development at CMS Cameron McKenna, which recently launched its own people reports (see box), says this wasn’t an issue for the law firm. “There was a deliberate transparency, both with competitors and within the firm because those sorts of figures, even though they were available, I don’t think they were widely published [even] within the firm.”

It is also very difficult to put into words why certain people policies are successful. Sometimes the culture of an organisation just means certain things work. “It’s a jigsaw. Your annualised hours system [might] happen to fit well with your incentive scheme, which happens to fit well with the industry you’re in. You can’t just take one bit of the jigsaw and stick in some other organisation,” adds Neely.

Undoubtedly, there will also be bland generic people reports that will be steeped in PR fluff more than HR depth. But even this might tell its own story. Some investors will be as interested in what information is omitted from such reports as in what is included.

Other investment analysts, especially those concentrating on shorter term factors influencing the markets, will not even yet see the value of this people reporting. However, there are many investment groups that take an interest in how an organisation is expected to perform in the long term, and they are beginning to understand that treating staff well can help make a company more valuable. Take Google, for instance. The fact that Google’s media empire is now standing at more than $80bn is not just down to its people policies, but the fact that its reputation is as well known as its free breakfasts, won’t hurt the company’s valuable empire.

Brown believes it will be interesting to see how investors will react to reports that show an organisation is treating staff well. “Will they say that the company is wasting money on assets that can be stripped?” he asks.

Trade unions have been encouraging employers that the only time when there is no reason to report on employee issues is if there are no staff in the business to report on. Both the TUC and Unifi were hoping that organisations would be forced to include such measures as their maternity and paternity policies, childcare and eldercare arrangements and flexible working options.

But West Bromwich Building Society’s Turner suggests that this is where it gets more difficult. “Some companies might not have a flexible working policy and whether that would really be of interest to the shareholders is another debate.”

According to US researchers Sirota Consulting, there is a link between happy employees and an increasing share price. It has found that there is a morale factor associated with a company’s share price, which can account for between 20% and 30% of share price changes. By studying firms such as BP, American Express and Ebay, it was able to prove that happy staff helped cheer up share prices.

However, not everyone is convinced that employees are an asset worth rewarding so heavily. Dr El Kersten, who has just published The Art of Demotivation (Despair Inc., 2005), argues that executives realise the picture of employees as a company’s most valuable asset does not always square with their experience. “They realise that their employees create just as many problems as they solve. They bring their personal problems to work, they immerse themselves in petty politics, they actively search for reasons to resist the company’s initiatives, they complain about every minor difficulty and yet they continue to demand more and more from the company.

“We have been hoodwinked into believing that it is somehow noble to overpay for labour. Despite the fact that such wanton disregard for shareholder value should be a source of shame, many executives actually take pride in making their companies employee friendly or ‘a good place to work’,” says Kersten.

But this thinking is unlikely to prosper, especially in an environment where HR is being treated more as a respected board partner, rather than a distant cousin. As the CIPD’s Brown adds: “It can’t just be an HR ghetto thing, the agenda has to be broader than that.”

Case Study: CMS Cameron McKenna

CMS Cameron McKenna has produced a report highlighting how it treats its staff to boost graduate recruitment and satisfy clients.

The law firm, which has over 1,000 employees in the UK, collated information regarding absence figures, reward strategies and recruitment statistics.

Head of HR, David Leech, says: “Even though we’re not a publicly-listed company, it is valuable to communicate the way we manage our people, especially to our clients.”

The report shows, for example, that the firm was able to reduce sickness absence among its legal secretaries from 14 days in 1999 to 6 days in 2004 as a result of a number of healthcare benefits that were introduced. “We’d never collated this information in one document so the more open we are, the more likely we are to manage [absence],” says Leech.

And CMS Cameron McKenna has been able to show that this has a direct impact on its ability to recruit top talent too. “We’ve found that over the years that potential recruits are very interested in this sort of stuff; they’re increasingly interested in how they’re going to be treated as human beings.”

The report highlights that staff particularly value the firm’s on-site physiotherapist.

Case Study: West Bromwich Building Society

West Bromwich Building Society is happy to publicise the way it treats its people.

Paul Turner, general manager (people), says that it is often smaller measures that staff appreciate the most. “Our people measures are something that we would shout about because we want to build our brand and we want great people to come and work for us. It’s these little things that help such as the home computing initiative, where if somebody’s buying a computer they can make a tax-efficient saving.”

He believes human capital management will take off as a result of the recent legislative changes. “We have a set of guidelines that have put human capital management or people measures on the corporate agenda in what is a traditionally financial arena.

“This will put more credence and heavyweight research around this employee engagement and customer satisfaction link. People are going to start picking their companies by employee engagement issues, just like picking a horse.”

The building society, which employs around 1,000 staff, currently offers employees benefits such as discounted mortgages and insurance deals, free financial and legal advice, and a discounted travel scheme.