AN INVESTMENT PERSPECTIVE OF

HUMAN RESOURCE MANAGEMENT

The
The Strategic
Strategic View
View of
of Human
Human
Resources
Resources
Employees
Employees are
are human
human assets
assets

Increase
Increaseininvalue
valuetotoorganization
organizationand
andmarketplace
marketplacewhen
when
investments
investmentsofofappropriate
appropriatepolicies
policies&&programs
programsare
areapplied
applied

Effective
Effective organizations
organizations recognize
recognize that
that employees
employees
have
have value
value

Much
Muchas
asorganizations
organizationsphysical
physical&&capital
capitalassets
assetshave
havevalue
value

Employees
Employees are
are valuable
valuable source
source of
of sustainable
sustainable
competitive
competitive advantage
advantage

Exhibit
Exhibit1.1
1.1

Sources
Sources of
of Employee
Employee Value
Value

Sources
Sources of
of Employee
Employee Value
Value
Technical
Technical Knowledge
Knowledge

Markets,
Markets,processes,
processes,customers,
customers,environment
environment

Ability
Ability to
to Learn
Learn and
and Grow
Grow

Openness
Opennesstotonew
newideas
ideas
Acquisition
Acquisitionofofknowledge
knowledge&&skills
skills

Decision
Decision Making
Making Capabilities
Capabilities
Motivation
Motivation
Commitment
Commitment
Teamwork
Teamwork

Interpersonal
Interpersonalskills,
skills,leadership
leadershipability
ability

Adopting
Adopting an
an Investment
Investment Perspective
Perspective
Determines
Determines how
how to
to best
best invest
invest in
in people
people
Costs
Costs
Out-of-pocket
Out-of-pocket
Opportunity
Opportunity

Human
Human assets
assets become
become competitive
competitive advantage
advantage
Required
Required skills
skills become
become less
less manual,
manual, more
more
knowledge-based
knowledge-based
Appropriate,
Appropriate, integrated,
integrated, strategy-consistent
strategy-consistent
approach
approach isis needed
needed

AA Dilemma
Dilemma

Failure
Failure to
to invest
invest in
in employees
employees causes
causes
Inefficiency
Inefficiency
Weakening
Weakening ofof organizations
organizations competitive
competitive
position
position

Human
Human assets
assets are
are risky
risky investment
investment
Require
Require extra
extra effort
effort to
to ensure
ensure that
that they
they
are
are not
not lost
lost

Exhibit
Exhibit1.2
1.2

Types
Types of
of Organizational
Organizational
Assets/Capital
Assets/Capital

Research
Research Findings
Findings
HR
HR practices
practices directly
directly related
related to
to profitability
profitability &
&
market
market value
value
Primary
Primary reason
reason for
for profitability:
profitability:
Effective
Effectivemanagement
managementofofhuman
humancapital
capital

Integrated
Integrated management
management of
of human
human capital
capital can
can
result
result in
in 47%
47% increase
increase in
in market
market value
value
Top
Top 10%
10% of
of organizations
organizations studied
studied experienced
experienced
391%
391% return
return on
on investment
investment in
in management
management of
of
human
human capital
capital

Exhibit
Exhibit1.3
1.3

HR
HR Value
Value Chain
Chain

HUMAN
HUMAN RESOURCE
RESOURCE METRICS
METRICS
Wall
WallStreet
Streetanalysts
analystsstill
stillgenerally
generallyfail
failto
toacknowledge
acknowledge
human
humancapital
capitalin
inassessing
assessingthe
thevalue
valueof
ofan
anorganization
organization
and
andthe
theeffect
effectthat
thathuman
humanresources
resourcescan
canhave
haveon
onstock
stock
price
price
This
Thisisisrooted
rootedin
inthe
thefact
factthat
thatthere
thereare
areno
nostandard
standard
metrics
metricsor
ormeasures
measuresof
ofhuman
humancapital,
capital,much
muchas
asthere
thereare
are
for
forother
otherorganizational
organizationalassets
assets
Exhibit
Exhibit1.4
1.4lists
listssome
someCommon
CommonHR
HRMetrics
Metricswhile
whileExhibit
Exhibit
1.5
1.5displays
displaysthe
themeans
meansof
ofcalculating
calculatingfive
fivecommon
common
metrics.
metrics. However,
However,the
theappropriate
appropriatemetrics
metricsfor
forany
anygiven
given
organization
organizationwill
willbe
bedependant
dependanton
onthat
thatorganizations
organizations
strategy.
strategy.

Exhibit
Exhibit1.4
1.4

Common
Common HR
HR Metrics
Metrics

Absence
AbsenceRate
Rate
Cost
Costper
perHire
Hire
Health
HealthCare
CareCosts
Costsper
perEmployee
Employee
HR
HRExpense
ExpenseFactor
Factor
Human
HumanCapital
CapitalReturn
Returnon
on
Investment
Investment(ROI)
(ROI)
Human
HumanCapital
CapitalValue
ValueAdded
Added
Labor
LaborCosts
CostsasasaaPercentage
Percentageof
of
Sales
SalesororRevenues
Revenues
Profit
Profitper
perEmployee
Employee
Revenue
Revenueper
perEmployee
Employee
Time
Timetotofill
fill

Training
TrainingInvestment
InvestmentFactor
Factor
Training
TrainingReturn
Returnon
onInvestment
Investment
(ROI)
(ROI)
Turnover
TurnoverCosts
Costs
Turnover
TurnoverRate
Rate(Monthly/Annually)
(Monthly/Annually)
Vacancy
VacancyCosts
Costs
Vacancy
VacancyRate
Rate
Workers
WorkersCompensation
CompensationCost
Costper
per
Employee
Employee
Workers
WorkersCompensation
CompensationIncident
Incident
rate
rate
Workers
WorkersCompensation
CompensationSeverity
Severity
rate
rate
Yield
YieldRatio
Ratio

Exhibit
Exhibit 1.5
1.5
Calculation
Calculation of
of Human
Human Capital
Capital Metrics
Metrics
Measure
Measure

Formula
Formula

Value/Use
Value/Use

Human Capital ROI

Human Capital ROI

Revenue - (Operating Expenses

Revenue - (Operating Expenses
-Compensation + Benefits Costs)) /
-Compensation + Benefits Costs)) /
Compensation + Benefits Costs
Compensation + Benefits Costs

Allows determination of return

Allows determination of return
on human investments relative
on human investments relative
to productivity and profitability;
to productivity and profitability;
represents pre-tax profit for
represents pre-tax profit for
amounts invested in employee
amounts invested in employee
pay and benefits after removal of
pay and benefits after removal of
capital expenses
capital expenses

Profit per employee

Profit per employee

Revenue - Operating Expenses/

Revenue - Operating Expenses/
Number of Full-time equivalent (FTE)
Number of Full-time equivalent (FTE)
employees
employees

Illustrates the value created by

Illustrates the value created by
employees; provides a means of
employees; provides a means of
productivity and expense
productivity and expense
analysis
analysis

HR expense factor
HR expense factor

Total HR expense/total operating

Total HR expense/total operating
expenses
expenses

Illustrates the degree of

Illustrates the degree of
leverage of human capital;
leverage of human capital;
provides a benchmark for
provides a benchmark for
overall expense analysis
overall expense analysis
relative to targets or budgets
relative to targets or budgets

Exhibit
Exhibit 1.5
1.5 (cont.)
(cont.)
Calculation
Calculation of
of Human
Human Capital
Capital Metrics
Metrics
Measure
Measure

Formula
Formula

Value/Use
Value/Use

Human Capital Value Added

Human Capital Value Added

Revenue - (Operating Expenses

Revenue - (Operating Expenses
-Compensation + Benefits Costs)) /
-Compensation + Benefits Costs)) /
Total number of FTE employees
Total number of FTE employees

Shows the value of employee

Shows the value of employee
knowledge, skills and
knowledge, skills and
performance and how human
performance and how human
capital adds value to an
capital adds value to an
organization
organization

Turnover Rate
Turnover Rate

number of employee separations

number of employee separations
(during a given time period)/
(during a given time period)/
number of employees
number of employees

Provides a measure of
Provides a measure of
workplace retention efforts
workplace retention efforts
which can impact direct costs,
which can impact direct costs,
stability, profitability morale,
stability, profitability morale,
and productivity; can be used
and productivity; can be used
as a measure of success for
as a measure of success for
retention and reward programs
retention and reward programs

HR
HR Metrics
Metrics Are
Are Complex
Complex
90%
90% of
of Fortune
Fortune 500
500 organizations
organizations evaluate
evaluate
HR
HR operations
operations on
on basis
basis of
of three
three metrics:
metrics:
Employee
Employeeretention
retentionand
andturnover
turnover
Corporate
Corporatemorale
morale
Employee
Employeesatisfaction
satisfaction

These
These metrics
metrics do
do not
not necessarily
necessarily illustrate
illustrate
how
how HR
HR impacts
impacts
Profits
Profits
Shareholder
Shareholdervalue
value

Mercer
Mercer Model
Model of
of Measuring
Measuring HR
HR
Impact
Impact
Identify
Identify problem
problemHR
HRcan
can impact
impact
Calculate
Calculate actual
actual cost
cost of
of problem
problem
Choose
Choose HR
HR solution
solution that
that addresses
addresses problem
problem
Calculate
Calculate cost
cost of
of solution
solution
Calculate
Calculate value
value of
of improvement
improvement 66 to
to 24
24 months
months
after
after implementation
implementation
Calculate
Calculate specific
specific return
return on
on investment
investment
ROI
ROI in
in human
human assets
assets often
often not
not realized
realized until
until some
some
time
time in
in future
future

Exhibit
Exhibit1.6
1.6

Factors
Factors Influencing
Influencing Investment
Investment
Orientation
Orientation

Investment-Oriented
Investment-Oriented Organization
Organization
Sees
Sees people
people as
as central
central to
to mission
mission &
& strategy
strategy
Mission
Mission statement
statement &
& strategic
strategic objectives
objectives
espouse
espouse value
value of
of human
human assets
assets in
in achieving
achieving
goals
goals
Management
Management philosophy
philosophy encouraging
encouraging
development
development &
& retention
retention of
of human
human assets
assets
Does
Does not
not treat
treat human
human assets
assets in
in same
same ways
ways
as
as physical
physical assets
assets

Investment
Investment Orientation
Orientation Factors
Factors
Senior
Senior Management
Management Values
Values &
& Actions
Actions
Managers
Managersneed
needinvestment
investmentorientation
orientationtoward
toward
people
people

Attitude
Attitude Toward
Toward Risk
Risk
Investment
Investmentininhuman
humanresources
resourcesinherently
inherentlyriskier
riskier
Human
Humanassets
assetsnever
neverabsolutely
absolutelyowned
owned

Nature
Nature of
of Skills
Skills Needed
Needed by
by Employees
Employees
The
Themore
moremarketable
marketableemployee
employeeskills,
skills,the
theriskier
riskierthe
the
firms
firmsinvestment
investmentininskill
skilldevelopment
development

Investment
Investment Orientation
Orientation Factors
Factors
Utilitarian
Utilitarian (Bottom
(Bottom Line)
Line) Mentality
Mentality
Attempt
Attemptmade
madetotoquantify
quantifyemployee
employeeworth
worththrough
through
cost-benefit
cost-benefitanalysis
analysis
Soft
Softbenefits
benefitsofofHR
HRprograms
programsdifficult
difficulttotoobjectively
objectively
quantify
quantify

Availability
Availability of
of Outsourcing
Outsourcing
Given
Givenavailability
availabilityofofcost-effective
cost-effectiveoutsourcing,
outsourcing,
investments
investmentsininHR
HRshould
shouldproduce
producehighest
highestreturns
returns&&
sustainable
sustainablecompetitive
competitiveadvantages
advantages..

Reading
Reading1.1:
1.1:The
TheHidden
HiddenLeverage
Leverageof
ofHuman
HumanCapital
Capital

Model
Model for
for Management
Management Success
Success

Strengthen
Strengthen key
key
relationships
relationships
Customers
Customers
Employees
Employees
Shareholders
Shareholders

Leverage
Leverage
downtime
downtime
Use
Usevariable-pay
variable-pay
Address
Addressneglected
neglected
areas:
areas:
Infrastructure
Infrastructure
Marketing
Marketing
Operations
Operations

Reading
Reading1.1
1.1

Model
Model for
for Management
Management Success
Success
Refocusing
Refocusing staff
staff on
on
whats
whats important
important
Performance
Performance
management
managementas
as
disciplined,
disciplined,strategic,
strategic,
value-added
value-addedprocess
process
Clearly
Clearlydefine,
define,
differentiate
differentiate&&balance
balance
between
betweencore
core
competencies
competencies&&results
results

Building
Building return
return on
on
compensation
compensation
Link
Linkbase-pay
base-pay
progression
progressiontoto
competency
competency
achievement
achievement
Link
Linkincentive
incentivepay
paytoto
annual,
annual,semiannual,
semiannual,oror
quarterly
quarterlyresults
results

Reading
Reading1.2
1.2

Seven
Seven Common
Common Misconceptions
Misconceptions
1.
1. Conscientiousness
Conscientiousness isis aa better
better predictor
predictor of
of
performance
performance than
than intelligence.
intelligence.
2.
2. Companies
Companies that
that screen
screen job
job applicants
applicants for
for values
values
have
have higher
higher performance
performance than
than those
those that
that screen
screen
for
for intelligence.
intelligence.
3.
3. Integrity
Integrity tests
tests dont
dontwork
work well
well in
in practice
practice
because
because so
so many
many people
people lie
lie on
on them.
them.
4.
4. Integrity
Integrity tests
tests have
have adverse
adverse impact
impact on
on racial
racial
minorities.
minorities.

Reading
Reading1.2
1.2

Seven
Seven Common
Common Misconceptions
Misconceptions
5.
5. Encouraging
Encouraging employee
employee participation
participation isis more
more
effective
effective for
for improving
improving organizational
organizational
performance
performance than
than setting
setting performance
performance goals.
goals.
6.
6. Most
Most errors
errors in
in performance
performance appraisal
appraisal can
can be
be
eliminated
eliminated by
by providing
providing training
training to
to managers
managers on
on
how
how to
to avoid
avoid them.
them.
7.
7. IfIf employees
employees are
are asked
asked how
howimportant
important pay
pay isis to
to
them,
them, they
they are
are likely
likely to
to overestimate
overestimate its
its true
true
importance.
importance.

Reading
Reading1.2
1.2

1.
1.
2.
2.
3.
3.
4.
4.

Seven
Seven Common
Common Misconceptions:
Misconceptions:
Implications
Implications
Select
Select new
new employees
employees on
on both
both intelligence
intelligence and
and
conscientiousness.
conscientiousness.
Assess
Assess intelligence
intelligenceand
and conscientiousness
conscientiousness before
before
values.
values.
Define
Define the
the values
values that
that are
are important
important and
and assess
assess
them
themthrough
through carefully
carefully developed,
developed, valid
valid
procedures.
procedures.
Use
Use integrity
integrity tests
tests with
with ability
ability tests
tests for
for high
high
predictability.
predictability.

Reading
Reading1.2
1.2

5.
5.
6.
6.

7.
7.

Seven
Seven Common
Common Misconceptions:
Misconceptions:
Implications
Implications
Develop
Develop compelling
compelling goals;
goals; enlist
enlist participation
participation
and
and support
support itit through
through rewards.
rewards.
Training
Training and
and feedback
feedback are
are important,
important, but
but errors
errors
are
are difficult
difficult to
to eliminate.
eliminate.Top
Top managers
managers should
should
serve
serve as
as role
role models
models in
in quality
quality of
of performance
performance
reviews.
reviews.
Attitude
Attitude surveys
surveys are
are subject
subject to
to biases;
biases; study
study
behaviors
behaviors as
as well
well as
as attitudes.
attitudes.

Reading
Reading1.3
1.3

Maximizing
Maximizing Human
Human Capital
Capital
Human
Humancapital
capitalisisdefined
definedas
asthe
thecollective
collectiveknowledge,
knowledge,
skills
skillsand
andabilities
abilitiesof
ofpeople
peoplethat
thatcontribute
contributeto
to
organizational
organizationalsuccess
success
Human
Humancapital
capitalisisinfluenced
influencedby
bycorporate
corporateculture,
culture,
organizational
organizationalvalues
valuesand
andstrategic
strategicbusiness
businessgoals
goalsand
and
objectives
objectivesand
andindicates
indicatesthe
thehealth
healthof
ofan
anorganization
organization
Human
Humancapital
capitalcan
canbe
beassessed
assessedvia
viakey
keyperformance
performance
indicators
indicators(KPIs)
(KPIs)which
whichare
arequantifiable,
quantifiable,specific
specificmeasures
measures
of
ofan
anorganizations
organizationsperformance
performancein
incritical
criticalareas
areasof
ofits
its
business
business

Reading
Reading1.3
1.3

Maximizing
Maximizing Human
Human Capital
Capital
The
TheHR
HRscorecard
scorecardisisaakey
keymanagement
managementtool
toolwhich
whichcan
canstrengthen
strengthenHRs
HRsstrategic
strategic
influence
influenceininan
anorganization.
organization. The
Thescorecard
scorecardhas
hasfour
fourperspectives:
perspectives:strategic,
strategic,
operational,
operational,financial
financialand
andcustomer.
customer. These
Thesefour
fourperspectives
perspectivesorganize
organizeand
and
track
trackareas
areasininwhich
whichHR
HRadds
addsvalue.
value.
The
Thestrategic
strategicperspective
perspectivefocuses
focuseson
onmeasurements
measurementsofofeffectiveness
effectivenessorormajor
major
strategy-lined
strategy-linedpeople
peoplegoals.
goals.
The
Theoperational
operationalperspective
perspectiveeereflects
reflectsthe
theeffectiveness
effectivenessof
ofHR
HRprocesses.
processes.
The
Thefinancial
financialperspective
perspectiveeerelates
relatestotofinancial
financialmeasures
measuresof
ofHR
HRvalue
valuetotothe
the
organization.
organization.
The
Thecustomer
customerperspective
perspectivefocuses
focuseson
onthe
theeffectiveness
effectivenessof
ofHR
HRfrom
fromthe
theinternal
internal
customer
customerviewpoint.
viewpoint. Specific
Specificmeasures
measuresfor
foreach
eachofofthese
theseperspectives
perspectivesare
are
provided
providedininFigure
Figure3.3. KPIs
KPIscan
canalso
alsobe
beeffectively
effectivelyutilized
utilizedininthe
theglobal
globalHR
HR
function
functionasasindicated
indicatedininFigure
Figure4.4.

Reading
Reading1.3
1.3

Maximizing
Maximizing Human
Human Capital
Capital
Four
Fourrecommendations
recommendationsare
areprovided
providedfor
fordeveloping
developingspecific
specific
KPIs
KPIstailored
tailoredto
toaagiven
givenorganizations
organizationsstrategy
strategy
1)
1)qualitative
qualitativemeasurement
measurementisisone
onepath
pathto
toassess
assessqualitative
qualitative
characteristics
characteristicsof
ofthe
theworkforce,
workforce,such
suchas
asengagement
engagement
2)
2)employee
employeefeedback
feedbackprovides
providesuseful
usefulperspectives
perspectiveson
onHR
HR
efficiency
efficiency
3)
3)whenever
wheneverpossible,
possible,the
theimpact
impactof
ofrecruiting
recruitingisisbest
best
described
describedin
interms
termsof
offinancial
financialgains
gains
4)
4)retaining
retainingolder
olderworkers
workersfor
forfuture
futureleadership
leadershiproles
rolesdepends
depends
on
onwhat
whattan
tanemployer
employermost
mostvalues
values