2005_2006 saratoga wds executive review

8/10/2019 2005_2006 Saratoga WDS Executive Review

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2005-2006U.S. Human Capital Effectiveness Report

Saratoga

Executive Summary


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Introduction

While many organizations tout that the workforce is its most important asset, few

actually manage this investment as an asset. At best, there may be a lot of energyfocused on the individual employee, or on total levels of rewards, but unfortunately there

is little focus on optimizing the investment and return on the workforce. Organizations

are recognizing that they need to focus more on the return on workforce investments.

In recent years, key intangible assets such as the workforce have increasingly been

linked to an organizations market value. The Accounting for People Initiative (http://

www.accountingforpeople.gov.uk/), Enhanced Analytics Initiative (http://www.

enhancedanalytics.com/) and PricewaterhouseCoopers value reporting initiative (www.

pwc.com/valuereporting) are all examples of looking beyond an organizations quarterly

and annual financial numbers to get better transparency and knowledge of the efficiency

and effectiveness of an organization.

Its a fairly intuitive concept. For example, imagine two competitors with similar P&Ls, cash

flows and balance sheets. However, one of these organizations performs in the top quartile

in retaining leadership, while the other is a bottom performer. In which organization would

you be more inclined to invest? Saratogas 2005/2006 U.S. Human Capital Effectiveness

Report allows us to explore such factors.

Summary Overview

Saratogas 2005/2006 U.S. Human Capital Effectiveness Report provides organizations

with hard data to help them optimize the return on human capital investments. While the

information in this summary provides trend analysis, ultimately each company should

leverage this data to assess its own performance and set its own performance goals.

Benchmarks may play a role in setting some of these goals. Study highlights include:

Employee productivity is on the rise; yet, there remains much room for improvement

The single largest expense for organizations continues to be people costs; yet,one in five companies describe their ability to tie pay to performance as poor

or very poor

Organizations continue to spend more time and resources to make hiring decisions,

yet the overwhelming majority of companies surveyed have no means of assessingthe quality of these decisions

As the economy improves, job mobility is beginning to return. Voluntary turnoverrates increased while offer acceptance rates declined

While the per employee investment in the HR function has been rising steadily for

six years, the size of the HR function has been decreasing


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4A PricewaterhouseCoopers Human Resource Services Offering

Saratogas 2005/2006 U.S. Human Capital Effectiveness Report contains 2004 calendar

year data collected from 288 organizations in the United States and represents a wide variety

of industries including banking, financial services, insurance, healthcare, manufacturing,

technology, telecommunications, and utilities. The report contains approximately 350metrics, more than 200 of which are in new areas such as performance based turnover,

quality of hire and employee engagement, and in-depth HR cost and structure analysis of

more than 20 functions. In addition to the all industry results provided in this document,

Saratoga reports results based on industry, size, region, revenue size, revenue growth,

financial structure, and percent of unionized workforce.

In this summary, a discussion of metric results is organized in the following categories:

Organization & Operations: Productivity and structure of the entire organization

Compensation & Benefits: Costs and structure of compensation and benefits

Staffing & Hiring: Costs and efficiencies of the Staffing function

Retention & Separations: Employee retention and separations

HR Staff & Structure: Costs and structure of the Human Resources function

The results described in this Executive Summary represent the All-Industry median. It is

important for organizations to be mindful that demographics such as industry, region or size

can make a big difference when interpreting results. For example, the amount of revenue

generated per employee in the Healthcare industry is $152,139, while in the

Utilities industry, that figure is over $707,366nearly five times as much.

Examples of Metrics in Action

Saratoga clients use metrics for a variety of reasons including:

CFO bringing turnover data to bond rating meetings to demonstrate business

sustainability

Tying leadership bonuses directly to turnover statisticsleadership receives nobonus if targets are not hit

Tracking overtime pay to assess operational efficiencies

Integrating employee opinion survey data and turnover metric data tocommunicate cost of turnover and evaluate the best actions to help stem it

Leveraging human capital metrics to improve effectiveness of assimilatingacquired companies


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Organization & Operations Results

Saratogas results show that since the US recession began in 2001, employee productivity

has steadily risen. Revenue per employee increased 12% in 2004 (a 39% increase since2001). Expense per employee climbed at a slower pace in 2004 (10%) and has increased

14% since 2001. The table below shows the trend of revenue and expenses per employee

during the last four years.

$324,523$312,738

$271,803

$264,429

$198,600

$182,585$204,611

$226,046

$0

$50,000

$100,000

$150,000

$200,000

$250,000

$300,000

$350,000

2001 2002 2003 2004

Revenue per Employee

Expense per Employee

Contrast of Revenue

per Employee Versus

Expense per Employee

As a result of revenue growth outpacing expenses, the profitability of employees is

rising. For the fourth year in a row, organizations have seen an increase in their return

on investment in their employee compensation and benefit expenses. In 2001, the

average organization reaped $29 in profit for every hundred dollars invested in employee

compensation and benefits. In 2004, the average organization saw a $52 profit: an increase

of 18%. Despite double digit growth in healthcare expenses and steady increases in

employee compensation, most organizations are experiencing a greater increase in their

income per employee.


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Despite these encouraging financial results, Saratoga research suggests there is still room

for improvement. Results from a 2004 study commissioned by Convergys Employee Care

and conducted by the University of Michigan and Saratoga entitled Workforce Agility: The

Next Frontier for Competitive Advantage reveal that best practice companies estimate theyare overspending by 10% and underperforming by 10% as a result of not having a fully

utilized workforce. For an organization with $1 billion in revenue, this suggest that a more

agile and aligned workforce could result in an additional $130 million dollars in income. In

addition, while 80% of respondents reported that the workforce is more aligned to business

strategy than three years ago, nearly one in three respondents noted that their workforce

was only somewhat aligned or worse.

Furthermore, data suggests that organizations are still struggling to share talent internally,

as only 5% say they are very flexible reallocating human capital to projects in different lines

of business or cross-line business teams. More than half describe themselves as somewhat

rigid or rigid. Saratoga believes that better alignment and flexibility will help companiescapture additional revenue while cutting costs.

Successful organizations will be forced to adapt to a more fluid and dynamic workforce.

On one end of the spectrum, tens of millions of Americans born during the baby boom will

be eligible for retirement within the next decade. Saratogas results show that 17.4% of

their workforce will be eligible for retirement within the next five years. At the same time,

nearly one in five employees in the average organization has less than two years of service.

This tumult requires that organizations actively manage and work to create a culture that is

aligned to business needs


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Compensation & Benefits Results

Labor costs as a percentage of revenue increased 5% in 2004, meaning that organizations

spend $28 on employee compensation and benefit expenses for every $100 in revenuegenerateda 5% increase since 2003. Once again, this strongly suggests the need to

measure and evaluate the impact human capital has on the bottom line. The table below

shows the trend of labor costs as a percentage of operating expenses and revenue during

the last four years.

While companies often outline strong desires to align pay with performance, one in

five companies describe their ability to do so as poor or very poor, and another 13% ofrespondents report not having a pay for performance system in place whatsoever. On

average organizations spend only $94 of every $1,000 on incentive based payand this

number is even smaller when compensation related benefits, such as retirement accounts

and stock, are taken into account.

While employee compensation costs as a percent of operating expenses saw a three

percent decrease to 28.7% in 2004, healthcare costs continue to rise. Nearly 3% of

operating expenses were devoted to healthcare costs in 2004. Healthcare costs per

covered employee increased 6% to $6,393 in 2004 (a 40% increase since 2001). On

average, employers were responsible for 82% of healthcare costs with employees being

responsible for 18%.

Saratoga also tracks other benefits enjoyed by employees. For instance, employees

enjoyed an average of 28.6 paid days off per year. Additionally, when it comes to

planning for retirement through 401(k) plans, Saratogas results show that 72% of eligible

employees enroll in plans. The average organizational contribution to employee 401(k)

plans is $2,258.

Labor Cost as a

Percent of Revenue28.0%26.6%

25.8%

20.8%

0%

5%

10%

15%

20%

25%

30%

2001 2002 2003 2004


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Staffing & Hiring Results

Saratoga 2004 Human Capital Effectiveness Reports results suggest that organizations

continue to spend more time and dollars to make hiring decisions. Time to Fill (averageamount of time it takes to fill a requisition) increased for the fourth year in a row to 48

(a 4% increase since 2003). Meanwhile, the cost per hire increased 11% to $3,270 while the

cost for recruiters to fill each requisition was $691. In addition to the salaries and benefits

of recruiters, adding the cost of hiring managers time to develop requisitions and interview

candidates illustrates the importance of measuring and optimizing recruiting efforts. Given

the retirement statistics mentioned above, and the pent-up demand to change employers

that developed through the recession, Saratoga believes that the pressure on these numbers

will continue to rise. The tables below show the trend of hiring cost and time to fill positions

during the last four years.

Cost per Hire$3,270$2,936

$3,092$2,477

$0

$500

$1,000

$1,500

$2,000

$2,500

$3,000

$3,500

2001 2002 2003 2004

Time to Fill

48

46

4544

42

43

44

45

46

47

48

49

2001 2002 2003 2004


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Despite the greater time and financial investment in recruiting efforts, results reveal that

nearly seven out of ten organizations do not measure new hire quality after the hire. Quality

of hire is an especially subjective measurevarying dramatically company by company,

both in definition and in ability to track.

Nevertheless, Saratoga has developed a number of metrics to help organizations understand

the quality of their new hires, and compare these results externally. Results revealed that

six percent of new hires left the organization within three months and 55% of them left

voluntarily. First year employees in organizations received a performance ranking eight

percent below the overall workforce, suggesting that newly hired employees are able to

adapt well to the demands of the organization.

Measuring Quality of HireTraditionally, organizations have measured the staffing function with metrics such as

Cost Per Hire and Time To Fill. While helpful in assessing staffing efficiency, they do not

provide insight into hiring effectiveness. Saratoga offers additional metrics for evaluation

of new hire success.

Poor Quality Hire Ratemeasures the percent of total hires that voluntarily or

involuntarily left the organization within their first 3 months of service during the

survey period.

New Hire Voluntary Separation Ratemeasures the percent of total hires that voluntarily

left the organization within their first 3 months of service during the survey period.

New Hire Performance Ratecompares the average performance ranking of new hires

compared to the performance ranking of the overall organization. A result under 1

suggests that new hires are performing below levels of the overall workforce while a

result over 1 suggests new hires are rated as performing above the overall workforce.


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Retention & Separations Results

As the economy improves, so do job prospects for employees. For the first time since2001, Saratoga results showed a decrease in the Involuntary Separation Rate to 4.3%

(the percentage of employee headcount leaving the organization involuntarily), a 14%

decrease since 2003. On the contrary, voluntary turnover rates rose. The 2004 Voluntary

Separation Rate was 9.3%: a 6% increase. The table below shows the trend of voluntary

and involuntary separations during the last four years.

For the first time in five years there was a slight decrease in the percentage of offersaccepted by employees from 94.8% in 2003 to 93.9% in 2004. Taken together, these

results suggest an increased level of mobility for employees as the job market opens up.

To provide organizations with a better understanding of their vulnerability to turnover,

Saratoga measures turnover rates by length of service. For the sixth year in a row, more

than half of all turnover occurred within the first three years of service, and nearly a quarter

(22.4%) in the first year of service. Nevertheless, since the recession began in 2001,

organizations have seen a decreasing percentage of employees leave during their first

three years. In 2001, 58.7% of employees left the organization during the first three years

of service, while 51.5% left in 2004a decrease of more than 12%.

Contrast of Percentage of

Employees Leaving

Voluntary and Involuntary

Voluntary

Involuntary

9.3%

4.3%

8.8%

8.8%

10.5%

5.0%5.0%4.7%

0%

2%

4%

6%

8%

10%

12%

2001 2002 2003 2004


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Given the complexity of many organizations, seasoned employees can often be some

of the top performers. High Performer Voluntary Separation Rate measures the percent

of headcount within the top 20% of an organizations performance ranking system that

voluntarily left the organization. Results for this years study indicate that 5.6% of highperformers voluntarily left the organization. This metric will be closely tracked to monitor

the loss of top talent within organizations. On the opposite end of the spectrum, Saratoga

provides results on the percentage of low performing employees managed out of the

organization. Results revealed nearly two out of five employees in the bottom 20% of

an organizations performance ranking system left the organization in 2004.

Finally, given the cost impact of turnover (estimates range from half an employees annual

salary to three times the annual salary), it is interesting to note that for more than half

the respondents less than 5% of Non HR Executive time is devoted to turnover issues.

Additional responses provided a clue as to why this is the case.

Measuring the Cost of Turnover

Quantifying the cost of turnover has long been an elusive goal of HR professionals. In

2004 Saratoga began collecting cost of turnover for the first time. A search on Google

will provide a number of options and formulas for calculating turnover. All of these

formulas rely on hard costs (hiring, orienting, training, technology, etc.) and soft costs

(estimates of lost productivity due to employee who left and amount of time needed for

new hire to reach optimal productivity levels).

All of these formulas require a degree of estimation for the user (e.g., time required for a

hire to be a successful manager). To minimize the use of estimation, Saratogas formula

for calculating turnover is one half the projected salaries of Nonexempt employees andone and a half times the projected salary of Exempt employees.


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HR Staff & Structure Results

Developing a workforce that delivers strategic results requires a properly structured HR

department. Saratogas Human Capital Effectiveness Report 2005/2006 report revealed thattalent diversity and succession planning, improving service delivery models, and developing

data for decision making were all key issues in structuring HR.

Results also show that, consistent with the past three years, approximately 65% of senior-

most HR executives directly report to the CEO.

For the sixth consecutive year, HR Spend per Employee (previously called HR Investment

Factor), which measures the investment in HR per employee, has increased to $1,554

(a 5% increase since 2003). When viewed in conjunction with the financial results outlined

previously, the investment in HR seems to be paying dividends. The table below shows the

trend of HR Spend Per Employee during the last four years.

HR Spend per

Employee$1,554

$1,472

$1,432

$1,342

$1,200

$1,250

$1,300

$1,350

$1,400

$1,450

$1,500

$1,550

$1,600

2001 2002 2003 2004


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HR Headcount Ratio

87

84

84

86

82

83

84

85

86

87

88

2001 2002 2003 2004

Additional results provide greater understanding of the standard HR function. The

Recruiting and Staffing function is the largest in terms of size (nearly one in five HRemployees is classified in this function) and labor costs ($120 per employee served).

The Benefits function seems to require the greatest amount of outside expertise to

manage effectively. The outsourcing and program strategy/design cost for the Benefits

function per employee served was $87.

Saratoga provided results for a number of HR related areaswhich it does not roll up

into total HR statistics. To begin, Training Headcount Investment Factor (investment

in training per employee) jumped 35% in 2003 to $676, the first increase since 2000.

Since 2003, Training Cost Factor (average dollars spent on training per training session

attended) dropped precipitously to $121, a 30% decrease. This years results show that

organizations are investing in their leadership. Over 53% of responding organizations

reported that the leadership had taken one or more leadership development course.

Finally, Saratoga also began evaluating Payroll cost and efficiency. Payroll Cost Per

Employee was $93 while the average cost per processed payment was $3.

The number of employees supported by each HR employee continues to grow. HR

Headcount Ratio (number of employees each HR employee supports) increased slightly

from 84 to 87 in 2004. The impact of HR outsourcing, whether selective or comprehensive,

shows up in these numbers. Therefore, companies decide that all tasks delivered by HRdo not need to be produced by internal resources. The table below shows the trend of HR

support levels during the last four years.


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Conclusion

With a flattening global economy, companies must find new ways to sustain competitive

advantage. Improving processes has been a tactic since the mid-70s through initiativeslike TQM, business process reengineering, ISO 9000, and Six Sigma. Since the mid 90s,

companies have looked to maximize the relationships with customers and to expand the

impact of their brands. Saratoga believes that the next great area of sustained competitive

advantage comes from optimizing the workforce.

The dual-edge sword of workforce improvementdriving revenue up and costs down

represents the next trajectory in corporate value. Companies that foster HR departments

that can deliver the tools, information and expertise to optimize manage workforce

investments will be at an advantage.


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Summary of Results

The tables on the following pages summarize 2005/2006 Human Capital Index report for

the metrics reference in this document. Please note that:

HR results exclude training, safety, payroll, and security

Contingent employees are excluded from all calculations

Organization and Operations

Metric Formula Result

Revenue Factor Revenue/Regular FTE $324,523

Expense Factor Operating Expenses/Regular FTE $226,046

Human Capital ROI

(Revenue - (Operating Expenses- (Regular Compensation Cost +Benefit Costs EPTNW)/(RegularCompensation Cost + BenefitCost EPTNW)

1.52

Rookie RatioRegular Headcount with 0 to 2 Yearsof Service/Regular Headcount

20.4%

Percent of EmployeesEligible for Retirement InNext Five Years

Employees Eligible for Retirement inNext 5 Years/Regular Headcount

17.4%


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Compensation and Benefits


Labor Cost Revenue Percent(Regular Compensation Cost + BenefitCosts EPTNW)/Revenue

28.0%

Performance Pay PercentPerformance Based Compensation/Regular Compensation Cost

9.4%

CompensationExpense Percent

Regular Compensation Cost/Operating Expense

28.7%

Healthcare Costs as a Percentof Operating Expense

Healthcare Benefit Payments/Operating Expense

2.7%

Healthcare FactorHealthcare Benefit Payments/Employees and Retirees Participatingin Healthcare Plans

$6,393

Employer Contribution toHealthcare Coverage forActive Employees

Employer Contribution TowardsHealthcare Coverage for ActiveEmployees/Employer ContributionTowards Healthcare Coverage forActive Employees + EmployeeContribution Towards HealthcareCoverage

81.8%

Employee Contribution toHealthcare Coverage forActive Employees

Employee Contribution TowardsHealthcare Coverage for ActiveEmployees/Employee ContributionTowards Healthcare Coveragefor Active Employees + EmployerContribution Towards HealthcareCoverage

18.3%

Paid Time Off RatePaid Time Off Days/Regular Headcount

28.6

401(k) Plan UtilizationEmployees Participating in 401(k) Plan/Employees Eligible for 401(k) Plan

72.0%

401 (k) Costs PerParticipating Employee

Employer Contribution to 401(k) Plan /Employees Participating in 401(k) Plan

$2,258


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Staffing and Hiring


Time to Fill Total Days to Fill/Total Hires 48

Cost Per Hire (Total Hiring Costs * 1.1)/Total Hires $3,270

Poor Quality Hire RateTotal Separations with 0 to 3 Months ofService/Total Hires

6.0%

New Hire VoluntarySeparation Rate

Total Voluntary Separations with 0 to 3Months of Service/Total Hires

3.3%

Retention and Separations


Involuntary Separation RateTotal Involuntary Separations/Regular Headcount

4.3%

Voluntary Separation RateTotal Voluntary Separations/Regular Headcount

9.3%

Percent of Total VoluntaryTurnover Occurring in FirstYear of Service

Total Voluntary Separation Rate With0 to 1 Years of Service/Total VoluntarySeparations

22.4%

Voluntary Separation Rate with1 to 3 years of service

Total Voluntary Separation Rate With1 to 3 Years of Service/Total VoluntarySeparations

29.1%

High Performer VoluntarySeparation Rate

Total High PerformerVoluntary Separations/HighPerformer Headcount

5.6%


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HR Staff and Structure


HR Spend Per Employee Direct HR Costs/Regular Headcount $1,554

HR Headcount RatioRegular Headcount/Regular HRHeadcount

87

Recruiting & StaffingFTE Percent

Recruiting & Staffing FTE Percent/DirectHR FTE

18.0%

Benefits Non Labor Costsper Employee

Benefits Non Labor Costs/RegularHeadcount

$87

Training Headcount InvestmentFactor Total Training Costs/Regular Headcount $676

Training Cost FactorTotal Training Cost/Total Number ofTraining Sessions Attended

$121

Payroll Cost Per Employee(Payroll Labor Costs + Payroll Non LaborCosts)/Regular Headcount

$93

Cost Per Payment(Payroll Labor Costs + Payroll Non LaborCosts)/Number of Payments Processed

$3


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About Saratoga

Saratoga teams with HR Departments that wish to maximize the intangible value of their

people and make a significant impact to their corporate value. We help clients apply amore rigorous scientific and evidence-based approach to workforce and HR department

decision making.

The purpose of our Human Capital Effectiveness Reports is to provide a set of

comprehensive organizational measures that serve as the standard for organizational

effectiveness and efficiency. These reports provide an objective means of monitoring,

evaluating, and reporting organizational efficiency and effectiveness, allowing Human

Resource departments and leaders of organizations to view trends, identify problems,

recognize performance milestones and benchmark with similar organizations.

This document is provided by PricewaterhouseCoopers LLP for general guidance only,

and does not constitute the provision of legal advice, accounting services, investmentadvice, or professional consulting of any kind. The information provided herein should not

be used as a substitute for consultation with professional tax, accounting, legal, or other

competent advisers. Before making any decision or taking any action, you should consult

a professional adviser who has been provided with all pertinent facts relevant to your

particular situation.

The information is provided as is, with no assurance or guarantee of completeness,

accuracy or timeliness of the information, and without warranty of any kind, expressed or

implied, including but not limited to warranties of performance, merchantability, and fitness

for a particular purpose.


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2005 PricewaterhouseCoopers LLP. All rights reserved.

PricewaterhouseCoopers refers to PricewaterhouseCoopers LLP

(a Delaware limited liability partnership) or, as the context requires, othe

member firms of PricewaterhouseCoopers International Limited, each o

which is a separate and independent legal entity. *connectedthinking is

trademark of PricewaterhouseCoopers LLP (US). SJ_06_0048

SaratogaTMProviding Human Capital Intelligence to Optimize

the HR Functions www.saratoga-institute.com

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2005_2006 saratoga wds executive review

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