People Equity: Measuring Return on Human Capital

Measuring Return on Human Capital

If you question the strategic importance of people to the bottom line, consider this: 85 percent of corporate value is tied to intangible assets today, and of these assets people represent the greatest component.

If you’re still a doubter, think about the cost of employee churn. The average cost of replacing an employee is roughly $15,000; loaded costs, including lost productivity, quality, and team disruption often double that number. In a firm with 5,000 employees and a 10 percent turnover rate, shareholders may be swallowing over $15 million a year in unnecessary costs.

Given the strategic impact of employees, you would expect that most executives move to maximize their investment in human capital. Think again. The vast majority report having a lot of underutilized human potential.

Those few organizations that adeptly tap human potential and build the value of people equity focus on three critical factors: alignment, capabilities, and engagement. In such “ACE” organizations, the rewards in terms of retention, customer satisfaction, and financial success are well worth the investment.

  • Alignment. When you encounter a gap between what your boss expects of you and what you think the boss wants, you can become cynical and demotivated. Every CEO wants to have everyone rowing in the same direction, but they seldom do. The result: misalignment, which leaves telltale signs, such as a proliferation of low-value activities, wasted time, overstaffing, firefighting, and quick fixes. The gap between the strategy and day-to-day behavior is caused by fuzzy strategy, poor communication, a weak performance-measurement system, ineffective goal setting, or poor feedback and coaching.
  • Capabilities. Capabilities include the talent, information, and resources needed to meet the expectations of internal and external customers. For example, suppose that you step up to the service counter of your car rental, hotel, or airline and are greeted by incompetent people. You walk away frustrated. If it happens often enough, you’ll avoid that location or organization.
  • Engagement. Engagement means that the hands, hearts, and minds of employees are deployed at full tilt to meet the objectives of the business, serve customers, create a caring culture, and produce quality products and services. Engaged employees dramatically outperform their peers on many measures, including their attention to quality and service.

The Power of Three

Here’s a sure-fire way to calculate total work-force value: the contribution that people make to your competitive advantage. Assess the factors of alignment, capabilities, and engagement—ACE. Organizations with high ACE have better market performance, lower turnover, and higher quality.

Those organizations among the top of people equity are also in the top of their industry in financial performance. So, the best way to ensure maximum return on your investment in people is to manage the ACE factors. And, high ACE cultures are more fulfilling.

Rising People Equity

Five Actions for Leaders

Leaders can raise the people equity in five ways:

  1. Know your people equity profile. To do so, you need to create an objective, empirically reliable mechanism than can be tracked over time. We recommend surveys because they are quick, relatively inexpensive, and pinpoint the profiles quite accurately. Listen to employees. They’re uncanny in their ability to pinpoint strengths and weaknesses in the ACE factors.
  2. Identify the drivers of people equity. Assess the gaps by asking: “What are the causes of the gaps in alignment, capabilities, and engagement?” Surveys or structured conversations can help you identify leadership actions, HR systems, and other factors—for example, clarity of strategy and technology gaps—that can lead to low A, C, or E.
  3. Develop situational solutions. One-size-fits-all solutions tend to demotivate high performers, and fail to correct poor performance. An effective people equity diagnostic works better than a magic wand! It helps to target scarce resources in areas such as supervisory skills, recognition, training, or communications, which may inhibit high ACE in a particular unit.
  4. Use ACE as a developmental tool. ACE is not a “gotcha” tool for zapping managers who don’t get perfect people equity scores. Instead, it provides a baseline to grow leadership talent, help managers think deeply about their strengths and their development needs, and construct a framework for management to target investments in its people.
  5. Track and measure the impact of initiatives on ACE—and business results. While most CFOs want to see justification of planned initiatives against ROI goals, there is no easy way to do so in the HR arena. The people equity model provides a business focus for such initiatives. For example, using people equity, initiatives can be: 1) targeted to improve the ACE dimensions that are underperforming, 2) measured for their impact on those dimensions, and 3) adjusted as needed to bring up their value. This creates a direct line of sight between initiatives and business results.

People equity goes beyond “engagement.” You improve performance by building the equity of your people.

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