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Managing Human Capital Like Financial Capital: The RoadmapBY BRADLEY W. HALL, Ph.D.

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People are our company’s most importantasset.” We’ve all heard it; and many of usbelieve it. But what does it really mean? Do

you know of a single CEO who knows whetherhis/her organization’s human assets are more valu-able this year than last; or even what “more valu-able” means? Our most important asset seemslargely unmanaged.

In the 1950s and 60s when manufacturing capa-bilities were arguably the world economy’s mostimportant asset, Edward Deming re-conceptual-ized manufacturing as a system—an engine ofsorts that reliably produces an output. Demingdefined the engine, the subsystems, and finallythe parts. He then created a system for managingand continually improving outputs from each partto drive year-over-year system improvements.

In today’s economy where many companies arelargely leased buildings and people (e.g., software,media, consulting, dot-coms), strengtheninghuman assets is often the only real source for pro-ductivity gains. It’s time for a Deming-like approachto human capital: one that begins with a clear pic-ture of the “engine, subsystems, and parts” and adisciplined system for systematically measuring andmanaging for year-over-year improvements.

The New Human Capital Strategy does just that asit turns today’s model of disjointed HR programson its head, and it’s about time; we keep doingthings that don’t work. For example:

■ Designing performance appraisals that don’timprove performance

■ Paying annual bonuses that don’t improve productivity

■ Investing in leadership development programsthat don’t measurably improve leadership

Why don’t they work? Because these programsare independent parts and business results requirea working system. In today’s HR, success is mea-sured by programs, generated from the bottomup. “Nice program, but in service to what?” Justas an engine with non-integrated, world-classparts will never produce power, world-class HRprograms without a defined end-state will neverimprove business performance.

Some program developers might say, “We alwaysget buy-off from peers.” But defining the end-state, subsystems and parts is very different from abottoms-up approach where “parts manufactur-ers” (e.g., compensation, staffing, training) createprograms and then seek buy-in from peers.Without a defined end-state, how can peersassess program value?

Others might say, “In our model, Centers ofExcellence create programs and strategic businesspartners assemble these to business unit needs.”Sounds great on paper, but how is that workingin your organization? A 2006 study conducted by the University of Southern California’s Center for Effective Organization summarizesten-year organizational changes in the HR profession:

“There is a significant decrease to which HRpractices vary across business units. Thisfinding suggests that while there may bededicated HR leaders supporting businesses,their role is not to tailor HR practices tothose businesses, but rather to work withcenters of excellence and HR services teams

“

to deliver common services to their parts ofthe organization.”

HR professionals’ opinions on these issues mightvary, but one fact is indisputable—the currentmodel has failed. Economist’s CEO Briefing foundthat HR is perceived by CEOs around the world asthe least important and worst performing of all cor-porate functions. And CEOs are not the only critics.The 2006 USC study found that fewer than 1 out of10 HR leaders felt their organization’s HR practiceseffectively or very effectively connect with organiza-tion performance. After thirty years of aspiring toadd business value, the USC study concludes:

“…the amount of change is surprisingly small.Given the tremendous amount of attentionthat has been given to the importance of HRbeing more of a value-added function,becoming a business and strategic partner,and adding value in a number of new ways,we frankly expected much more change.”

No amount of continuous improvement canimprove a flawed model. It’s time to blow uptoday’s model. It’s time for a new paradigm.

THE NEW HUMAN CAPITAL STRATEGYBusinesses create and maintain competitive advan-tage over time when their core competencies, orthe activities that customers value most, are supe-rior to their competitors in the eyes of their currentand potential customers. The Human CapitalStrategy is a system for improving the performanceof people in critical roles—those with the biggestimpact on corporate core competencies.

Not all roles are equally important for customerand shareholder satisfaction. In most industriestop sales reps create more value than top adminis-trative assistants. In this new paradigm, the ques-tion, “Are our people better than our competitors’people,” may be more accurately stated, “Is theperformance of those in key positions superior topeers in competitor organizations?” For many crit-ical roles, that is knowable.

So, what does success look like? Success is when“our people outperform competitors’ people inpositions that add the most value to customers

and shareholders.” Performance improvementscan come from training, access to information, anew IT tool, replacing low performers with highperformers, or by using one or more of manyother methods. What is critically important is aclear definition of success.

Executing the Human Capital Strategy:The SystemHow will it look when we are done?

The Human Capital Strategy uses four compo-nents (i.e., subsystems) to drive year-over-year performance improvements:

■ Effective Executive Teams

■ Leaders Who Deliver Results

■ Key Position Excellence

■ Workforce Performance

If performance on each strategic component isexcellent, the organization will have sustainedcompetitive advantage through people. Here is aquick preview of each.

HCS Component 1: Effective Executive Teams.Are your executive teams better this year than lastyear? What does “better” mean? Notice the differ-ence between these questions and today’sapproach to executive teaming. Today’s approach isprogram-centric and bottom-up. Consulting firms

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MANAGING HUMAN CAPITAL LIKE FINANCIAL CAPITAL: THE ROADMAP

The Human Capital Strategy is

a system for improving the

performance of people in critical

roles—those with the biggest

impact on corporate core

competencies.

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Strategy

Execution

Culture

Structure

Formalized strategydevelopment process

Broadly communicatedstrategies

Makes costs budget

Business unitproductivity plans set

Culture operationalizedand accepted byemployees

Plan to reduceunnecessary bureaucracy

Strategy developmentincludes a variety ofstakeholders

All managers can statethe strategic objectivesand CSFs

Meets key customer,operational and financialobjectives most of thetime

All managers know unitproductivity goal

Systematic, measuredapproach for cultureimprovement set

Unrelenting fight againstbureaucracy

Strategic goal alignmentfrom top to bottom

Ongoing market sensingand feedback

Reliably meets customer,operational and financialquarterly objectives

Productivity improves to plan

Culture improves to planon defined culturaldimensions

Employees feelbureaucracy is undercontrol

TABLE 1: A Scorecard for Assessing Executive Team Performance

Executive Team Result Phase 1 Phase 2 Phase 3

advise executive teams to address team decision-making, participate in trust-building programs, etc.The Human Capital Strategy approach is top-down.It begins by defining executive team performance,by identifying the 3-5 most important outputs forthe executive team, and then by building a systemfor improving performance on each output.

How can you know if an executive team is “bet-ter” than last year? Use a scorecard like the exam-ple in Table 1. Then ask your executive team toassess its progress each year.

HCS Component 2: Leaders Who DeliverResults. Are your leaders better than last year?Think of all the financial investments that go intobuilding leaders, and yet we cannot answer thismost basic question. We cannot answer it becausefew have defined “better.” We spend largeamounts of time and money, but don’t bother todefine success.

The only true measure of leadership is sustainedbusiness results. These results must be achieved in

a way that strengthens the company’s values andculture. Unfortunately, in many leading companiestoday, leadership competencies are overtakingbusiness results as the measure of leadershipexcellence. Leadership competencies can be quiteeffective when hiring candidates whose pastbehavior and performance are unclear, but com-panies should not use competencies to assessleadership performance.

The Human Capital Strategy does not use one-size-fits-all leadership models. Rather, certain lead-ership positions are singled out as critical andmeasured and managed for year-over-year perfor-mance improvements. Table 2 presents a partialexample of a country general manager’s expectedleadership results. This example comes from alarge global technology company. The full modelincludes five results that are most predictive ofprofit growth at the country level. It assumes thatwhen a country manager performs well on thefive, profits will follow. Measure each countrymanager once a year and you will know whose

leadership capabilities are improving year-over-year. How do you know these five are correct? Runa regression between the five and country profitgrowth. You will know.

HCS Component 3: Key Position Excellence.Key positions are defined here as critical roles thatdeserve a higher level of investment than otherroles. For example, at IBM, big deal makers haveno direct reports, but they may sell a $1 billionmulti-year outsourcing deal. Fifteen to twenty ofthe world’s best big deal makers can provide allthe revenue IBM needs to grow its business toplan and in so doing support 400,000 colleagues.What’s the right pay for a person who can consis-tently sell billion-dollar deals? Just about whateverhe/she wants. Shouldn’t we care about internalequity with other professions? Nope. If otherswant to make the same money, tell them to go sellbig deals. Some may bristle as this might seem toviolate the value of internal equity. But this deci-sion is consistent with the Human CapitalStrategy—sustained competitive advantage comesthrough people in key positions outperformingpeers in competitor organizations.

Improving performance starts by defining keypositions, then by objectively defining success (i.e.,if you deliver these measurable results, you will be

successful) for each key position. The next step isto define the 4-5 results (critical things to getright) to achieve that success measure. If you deliv-er these 4-5 results, you will be successful. Notethat major activities define “what to do,” not“whom to be.” Think of a children’s basketballteam. One coach says, “Come on Joey, be aggres-sive!” Joey is not quite sure what that is about,but will try. Another says, “Joey, I want your shoul-der 12 inches from your opponent at all times,”and throughout the game says, “Joey, 12 inches!”Tell employees what to do, not whom to be.

HCS Component 4: Workforce Performance.Jon and Karen Taylor are the parents of four chil-dren ranging from age 15 to 5. The Taylors taketheir parental duties seriously and strive to do theirvery best to ensure their children succeed in life.It’s December 30 and time for the children’s annu-al performance appraisals. Sara, age 15, is the old-est and, as usual, is first.

Jon: Sara, I know that you are anxious toknow your annual rating, so let’s get right toit. Sara, we ranked you third among yoursiblings and gave you a two on our family’sfive-point scale.

Sara: But…I thought you were proud of me.

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MANAGING HUMAN CAPITAL LIKE FINANCIAL CAPITAL: THE ROADMAP

Best sales force inthe industry

Integrate globalbusiness unitsand offerings

Customer sat with oursales force versus ourcompetitors

Sales productivity vs.competitors

Percent of total salesas solution sales

Customer sat withsolutions

Average number ofproducts sold withsolutions

+5 pts

$1.1M/ee

72%

73

4.56

+6 pts

$1.15M/ee

75%

70

4.72

TABLE 2: Leadership Results for a Country General Manager

Leadership Results Metric Dec 2007 Dec 2008

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Fairness andaccuracy offeedback

Risk-taking culture

Emphasis onstrengths inappraisal

Understandingperformancestandards

Internalcommunication

Managerknowledgeableabout performance

+39.1

+38.9

+36.4

+36.1

+34.4

+30.3

Forced ranking

Increasing the number offormal reviews

Emphasis in informalfeedback on personalityweaknesses

Emphasis in appraisals onpersonality weaknesses

Emphasis in informalfeedback on performanceweaknesses

Emphasis in appraisals onperformance weaknesses

-0.1

-1

-3.2

-5.5

-10.9

-26.8

TABLE 3: Best and Worst Performance Drivers

Percent PercentTop Drivers Improvement Bottom Drivers Improvement

Jon: Sara, as you know, we have high stan-dards in this house—a two is not so bad. Ifyou work hard next year, you might improveyour score and rank.

Sara: But, what did I do wrong?

Karen: Well, for one thing you neglectedyour chores at least five times this year. Just aminute; I have it documented right here…

Sara: But that was last February. I haven’tmissed my chores even once since then; Ithought you forgave me for that.

Karen: That may be true, but you need toremember that this is an annual appraisal—February problems count.

How might this appraisal affect Sara? Will it accel-erate her growth, performance and confidence?Will it help her be a better big sister to her sib-lings? Will it strengthen the bond of trust and thefree-flow of information with her parents?

This example may seem absurd for a parent/childinteraction. Why then are forced rankings, toughconversations, and the like considered necessaryfor building a high performance workforce? Atwhat point in the human life cycle do the scientificprinciples of human behavior do an about-face?The answer: they don’t.

In 2003, the Corporate Leadership Council con-ducted a study of 19,000 employees in 34 organi-zations from 7 industries and 29 countries to findout which performance improvement activitiesand programs actually delivered performanceimprovements. The study began with 106 perfor-mance drivers and ranked each on its impact onperformance. Table 3 summarizes the results.

Look at the right-hand column. Except for the lastdriver, they look suspiciously like “best practiceperformance management,” don’t they?

Think about these results as best and worst practicesfor raising children. Look in the left-hand column.

■ Do good parents encourage children to stretchand take risks?

■ Do they emphasize strengths when giving feed-back?

■ Do children benefit from clear standards?

■ Is communication important to helping themdevelop?

■ Are good parents knowledgeable about their chil-dren’s performance in sports, class, clubs, etc.?

It reads like good parenting in the left-hand column and child abuse in the right-hand column,doesn’t it? Perhaps this is why many excellentmanagers are often resistant to do annualappraisals and why performance appraisals do notseem to improve motivation, confidence orstrengthen the manager-employee relationship. Ifperformance appraisals don’t improve perfor-mance why do we do them? And what aboutannual bonuses? Research clearly shows they donot increase productivity, yet we use them anyway.

The biggest fallacy of all, however, may be themistaken belief that employee satisfaction causes

performance improvements. Decades of researchand hundreds of controlled studies conclude thisis wrong. In fact, the causal relationship isreversed: “Make people successful and they willbe happy.” Think of a failing sales rep. Does shereally care about a company-sponsored aerobicclass? It’s the same with parenting, isn’t it? Astrong focus on child happiness will not result ina happy child.

CONCLUSIONExecutives often say that people are the only realsource of competitive advantage, but few canclearly explain what that means. If people truly area company’s “most important asset,” shouldn’texecutives know whether their assets are more orless valuable each year? The problem is that fewcompanies can; they don’t know what “morevaluable” means or how to measure it. It’s time tomeasure and manage human capital with thesame discipline as financial capital.

It’s time to blow up today’s model and replace itwith a fundamentally new Human CapitalStrategy. ■

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MANAGING HUMAN CAPITAL LIKE FINANCIAL CAPITAL: THE ROADMAP

Bradley W. Hall, Ph.D., has worked in some of the world’s top HR organizations. He was formerly Senior Vice President,

Talent Management for ABN AMRO Bank in Amsterdam. Previously, he was Executive in Charge of Organizational

Effectiveness and Executive Capabilities for IBM’s Asia Pacific region, a $25.5 billion, 60,000-employee organization. He

has also been Director of HR and Training for AT&T Global Services. Dr. Hall consults and is the author of The New Human

Capital Strategy (AMACOM). He is based in Brookfield, Connecticut.

Adapted from The New Human Capital Strategy: Improving The Value of Your Most Important Investment—Year After Year byBradley W. Hall, Ph.D. © 2008 Bradley W. Hall, by permission of the publisher, AMACOM Books, a division of AmericanManagement Association, New York, NY, www.amacombooks.org

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