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Strategic Human Capital Measures

TrustedInsights forBusinessWorldwide

research reportR-1417-08-WG

Orientation, Accountability, and Communication

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Strategic Human Capital MeasuresOrientation, Accountability, and Communicationby Stephen Gates

Contents

4 Foreword

6 Key Findings

7 Using Human Capital Metrics to Advance Strategy7 A Concept with a Long History

8 HCMs Come of Age

10 Building a Metrics Toolbox

12 What Is the Impact of HCMs on Strategy?

13 Case Study: Royal Bank of Scotland Group

17 Stages of Implementation18 Ranking the Greatest Challenges

18 Organizing the HCM Group

19 Getting the Word Out

19 Different Avenues for Display

21 Communicating Results: To Whom? How Often?

22 Linking Metrics Performance to Compensation

23 Broadcasting HCM Results Externally

24 Case Study: Marriott Vacation Club International

27 HCM Programs at Most Companies Are Still in Transition

28 About This Report

29 About the Survey Participants

Human capital is possibly the most vital, yet overlooked,means of establishing competitive advantage for companiestoday. In nearly every business periodical we read aboutthe “global war for talent,” the need for better ways toencourage innovation, the complexities posed by thematuring workforce, the academic preparedness of thetalent pipeline, etc. Rarely have I picked up a company’sannual report or listened to a CEO without being remindedthat “people are our greatest asset.”

Regardless of how well executives may genuinely extolthe necessity to attract, grow, motivate, and retain talent,our means of measuring the management of talent and,more importantly, empirically demonstrating its impactcontinue to lag behind.

This report provides powerful insight into the current useof human capital measures (HCMs), highlights case studiesof two of the global leaders in human capital measurementand management, and gives a historical context forunderstanding the development of HCMs and their use.

I’m very encouraged by some of the results of the surveyconducted for this study. More than half of the participantsreported that their companies use HCMs for evaluatingtheir managers and calculating their bonuses. Nearlyseven out of every 10 companies used HCM benchmarkingto ensure that they are remaining competitive in theirmanagement practices. Most critically, we are seeingincreases in the use of HCMs to determine whether acompany has achieved its specific goals. These advancesdemonstrate that the value of human capital is gaininggreater attention and that the management of talent isbecoming more aligned with the operation of businesses.

But this research also reveals some continuing challenges.While more than half of the participants used HCMs toevaluate and reward their managers, fewer than 20 percentof them actually provided these measures to managers atall levels of the organization. This raises the question ofwhether managers can—or should be—held accountablefor targets that have little or no visibility.

While a clear majority of companies used some formof human capital benchmarking techniques, more thanhalf reported that benchmarking was, at best, “moderately”effective—and nearly 20 percent of companies usingbenchmarks indicated that these techniques were only“slightly effective” or “not effective at all.”

While it is encouraging to see that HCMs are being usedin establishing performance goals for companies, it isn’tclear whether these are linked to meaningful financialor operational performance goals of the company orare simply being used to evaluate how efficiently thehuman resources function is managing itself. Since morethan half of the respondents indicated that their humanresources department played “no role at all” in developingtheir company’s strategies, it stands to reason that theseadvances in the use of HCMs are less focused on businessstrategies and more on department efficiencies.

This study represents a turning point for The ConferenceBoard and its members. Stephen Gates has providedus with a very clear examination of what the humanresources function has been able to accomplish indemonstrating the importance of human capital. Butin the next phase of this evolution, human resourcespractitioners need to:

• move beyond the efficient use of human capitaland begin to demonstrate how it empirically drivesorganizational performance;

• prepare both themselves as human resources practitionersand the human resources field in general to move beyondunderstanding the importance of “being at the table”and begin developing the tools and competencies thatwill help lead the conversation once human resources“gets its seat”; and

• set the groundwork for moving the management of humancapital beyond being “aligned” with a company’s strategiesand to begin to learn (and then teach) how human capitalcan be powerfully “integrated” into those strategies.

4 Strateg ic Human Capi ta l Measures : Or ientat ion , Accountab i l i ty, and Communicat ion The Conference Board

Foreword

The Conference Board is dedicated to helping our membersaddress these challenges. Through Evidence-Based HumanResources—our new approach to human capital analytics—we are working to equip human resources executives withconceptual models, empirical techniques, and practicaltools to integrate talent into strategy and to measureits impact. We understand that our goals are ambitious.

They won’t be accomplished without active involvementby our members over a period of time. However, with thehelp of our Evidence-Based Human Resources AdvisoryPanel (a collection of world-class thinkers and managersof human capital) and the resources of our ManagementExcellence Research Team, we are confident that we willreach our goals.

John GibbonsSenior Research AssociateManagement ExcellenceThe Conference Board

Strateg ic Human Capi ta l Measures : Or ientat ion , Accountab i l i ty, and Communicat ion The Conference Board 5

Key FindingsCompanies are choosing human capital measures(HCMs) based on specific goals Organizations focusedon differentiating themselves through offering uniqueproducts or services choose innovation metrics;companies primarily interested in cost concentrateon efficiency measures. But whatever a company’sorientation, finding an ideal list of HCMs is less importantthan ensuring human resources is heavily involved instrategy formulation and implementation.

Human resources departments still play a limited rolein strategy development Only 22 percent of humanresources professionals who responded to a 2006 surveyconducted for this report said their human resources function was a full partner in creating business strategy,while 53 percent claimed they either played “no role” or only“implemented strategy once it has been developed.” Whenthe human resources function has limited participation insetting strategy, it is difficult to link HCMs to strategic goals.

While a majority of companies use dashboards, causalmodels may prove a more effective interface Of the69 percent of respondents who used HCMs in a dashboard,53 percent considered such dashboards “moderately” or“less than moderately” effective. Out of the remainingdashboard implementers, 31 percent considered them“significantly” or “totally” successful and 16 percent rated them “slightly” or “not at all” successful. For amore direct correlation between human resources andperformance, some companies are turning from dash-boards to causal models, which show the impact of humanresources on business outcomes.

HCMs are increasingly a factor in setting bonus plansOver half of the survey respondents—57 percent—wereusing HCMs in managers’ bonus plans and 48 percentreported that HCMs received over 15 percent weightingin determining bonus plans. Of the 57 percent who includeHCMs in managers’ bonus metrics, 43 percent reported thatthey were “moderately” or “less than moderately” alignedwith business targets, while 21 percent considered them“not at all” or “slightly” aligned.

HCM reports restricted to top executives The resultsfrom HCMs are most commonly delivered to top manage-ment, which was the practice at 85 percent of survey firms.The finding that only 19 percent of respondents distributedsuch briefings to all their business managers indicatesthat many companies do not view these reports asdecision-making tools for managers. Moreover, therelatively small distribution of results also means that the findings are seldom broken down to the appropriatelevel for action planning.

6 Strateg ic Human Capi ta l Measures : Or ientat ion , Accountab i l i ty, and Communicat ion The Conference Board6

Increasingly sophisticated softwaresystems offer companies the ability tofurther develop the nonfinancial aspectsof their management control systems.These innovative measurement possibilitieshave led to the emergence of a newgeneration of human capital metrics(HCMs). To demonstrate the value addedfrom measuring human capital, companiesmust begin linking HCMs to their overallorganizational strategies. In an effort tounderstand how to forge such bonds, TheConference Board launched two researchworking groups. This report offers findingsfrom their investigations.

While human capital measurement has been gainingground over the past 20 years, it still remains largelydisconnected from business strategy. In a 2004 reportpublished by The Conference Board, only 12 percent ofrespondents reported making significant use of HCMs tomeet their strategic targets or key performance indicators(KPIs).1 Nevertheless, 84 percent of the respondents inthe same survey predicted that their use of HCMs to meetthese goals would increase over the next three years. Thisdisconnect between practice and potential may stem fromhow both the definition of human capital and its link tostrategy have evolved over time.

A Concept with a Long HistoryThe term “human capital” can be traced back to the writingsof Adam Smith and other 18th-century economists. Morerecently, five different economists have won Nobel prizesfor their research in this field.2 Human capital theoryexplores how individuals and society derive economicbenefits from investments in people, and educationconsistently emerges as the prime human capitalinvestment for empirical analysis. From an economist’spoint of view, then, human capital clearly designatesinvestments in improving competencies and skills.

In recent years, however, the management communityhas significantly broadened how the term is understood.Instead of being a notion strictly limited to investment ineducation and training, human capital has come to meanall human resources initiatives to recruit, develop, andretain employees. In this report, human capital measure-ment will be defined practically as the common categoriesof measures that the 104 respondents to a 2006 surveyconducted for The Conference Board Research WorkingGroup on Human Capital Strategy and Measurementfrequently encountered in their organizations (Table 1).


1 Stephen Gates, Measuring More than Efficiency: The New Role of HumanCapital Metrics, The Conference Board, Research Report 1356, 2004, p. 7.

Using Human Capital Metrics to Advance Strategy

Table 1Frequently Used HCMs

Percent who reportmeasure is

Human Capital Measure “frequently” used

Turnover (voluntary) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 94%Workforce diversity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79Employee engagement . . . . . . . . . . . . . . . . . . . . . . . . . . . 78Workforce age . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65Employee satisfaction . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64Training . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58Health and safety . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48Leadership . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47Readiness level . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44Promotion rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44Employee commitment . . . . . . . . . . . . . . . . . . . . . . . . . . . 40Span of control . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39Competence level . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37Executive stability (or churn) . . . . . . . . . . . . . . . . . . . . . . 32Depletion cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9

2 See, for example, Gary S. Becker, Human Capital: A Theoretical and EmpiricalAnalysis, with Special Reference to Education, 2d ed. (New York: NationalBureau of Economic Research, 1993).

HCMs Come of AgeMuch of the modern effort to measure human capitalstemmed from a more widespread frustration with howcompanies determined their worth. In 1987, H. ThomasJohnson and Robert Kaplan published Relevance Lost, a damning critique of how accounting systems weredisconnected from the drivers of performance and, thus,failed to assist companies in long-term planning.3 Asa result, a number of attempts were made to reformaccounting. One was Activity-Based Costing, whichJohnson went on to champion.4 Another was the SternStewart & Co. concept of Economic Value-Added, whichfound favor with companies seeking to look beyondreturn on assets (ROAs) to understand where value wascreated and lost.5

Calls for a revolution in accounting also led to a numberof initiatives to track the nonfinancial aspects of business.Kaplan and David Norton promoted their Balanced

Scorecard model as a way to systematically recordinformation about customers, internal processes, and thelearning and growth of skills in an organization.6 Therewas also a renaissance of interest in Gary Becker’sconsideration of how to measure the economic valuecreated by education.7

The “competency” movement, too, with its emphasis onseeing internal resources as the source of strategy and valuecreation, added strength to the focus on identifying the valuestored in people.8 Other research in knowledge management9sought to develop methods to capture the value created bywhat Peter Drucker called “knowledge workers.”10 In 1997,the accountancy practice of PricewaterhouseCoopersdeveloped what it called ValueReporting, now subsumedin its Corporate Reporting Framework, to link methods tomonitor human capital and other nonfinancial measuresfor management purposes with the external reportingrequirements of public companies.11


3 H. Thomas Johnson and Robert S. Kaplan, Relevance Lost: The Rise and Fall ofManagement Accounting (Boston: Harvard Business School Press, 1987).

4 H. Thomas Johnson, Relevance Regained: From Top-Down Control to Bottom-UpEmpowerment (New York: Free Press, 1992).

5 Joel Stern, Bennett Stewart, and Don Chew, “The EVA™ Financial ManagementSystem,” Journal of Applied Corporate Finance, Volume 8, Number 2, 1995, pp.32-46.

6 Robert S. Kaplan and David P. Norton, The Balanced Scorecard: TranslatingStrategy into Action (Boston: Harvard Business School Press, 1996).

7 Gary S. Becker, Human Capital: A Theoretical and Empirical Analysis withSpecial Reference to Education, 3rd ed. (Chicago: University of ChicagoPress/National Bureau of Economic Research, 1993).

Despite numerous studies that have attempted to move beyondconjecture to establish direct, causal links between humanresource practices and improvements in financial performance,there has been frustratingly little success in proving thisconnection. This may be because the actual link between humanresource initiatives and firm performance might be the oppositeof what most researchers believe. After an exhaustive review of68 studies on the subject, Patrick M. Wright, Timothy M. Gardner,Lisa M. Moynihan, and Matthew R. Allen found that few of theseinquiries had tested for reverse causality (i.e., the propositionthat good firm performance may lead to better human resourcepolicies).* It’s not such an implausible idea. Good leadershipmight, for instance, create strong financial performance and

thereby the resources to develop generous training anddevelopment, which then add to the functioning of the company.One of the few studies that did control for reverse causalityshowed that firm performance preceded improved humanresources practices. This led the researchers to conclude that“high performing organizations by their nature possess slackresources…. Firms that are profitable may share these profitswith employees in a number of ways.”** This team’s ownanalysis revealed that none of the positive correlations betweenhuman resource’s actions and future performance remainedsignificant once the propositions were tested for reversecausality. The results, they concluded, suggest that any linkwas at best tentative and should be treated with great caution.

Looking at the Human Resources Practices/Company Performance Connection in Reverse

* Patrick M. Wright, Timothy M. Gardner, Lisa M. Moynihan, and Matthew R. Allen,“The Relationship between HR Practices and Firm Performance: ExaminingCausal Order,” Personnel Psychology, Volume 58, Number 2, 2005, pp. 409–446.

** Wright et al., “The Relationship between HR Practices and FirmPerformance,” p. 419.

8 This movement was launched by C. K. Prahalad and Gary Hamel in “TheCore Competence of the Corporation,” Harvard Business Review, Volume 68,Number 3, May/June 1990.

9 See Ikujiro Nonaka and Hirotaka Takeuchi, The Knowledge Creating Company—How Japanese Companies Create the Dynamics of Innovation (Oxford: OxfordUniversity Press, 1995).

10 Although he had coined the phrase much earlier, Drucker elaborated on theseissues in a book that, typically for him, caught the spirit of much of the tech-nology-driven innovation that was just then emerging. See Peter Drucker,The Post-Capitalist Society (New York: Random House, 1993).

11 The PricewaterhouseCoopers Corporate Reporting framework is detailed onwww.corporatereporting.com

Finding a correlation remains an elusive goalDespite this high level of interest among both academicsand practitioners, human capital measurement is still awork in progress. There is no denying that labor costs,which include training and development, contribute tofinancial performance in ways other than as a number tobe subtracted from revenue on the way to calculating profits.Recruitment costs, team building, and other expendituresclearly bear resemblances to spending on research anddevelopment or marketing in that they build a reservoirof value for the future. They are, in some sense, assets.But what is their value? And if that can’t be determined,how can we understand which efforts lead to improvementsin productivity and, ultimately, financial performance?

Although many imitators have used the Kaplan and Nortonscorecard to create measuring tools for human resources,the results of these metrics were often ambiguous. Forexample, as human resources consultant Mark GrahamBrown notes, staff turnover, depending on who is leaving,can be good or bad.12 Even the number of staff developmentobjectives achieved can be misleading because this isoften more a measure of attendance than of learning.Twenty years after widespread interest in human capitalmeasurement emerged, Peter Howes sees little evidencethat its practices have advanced very much. While betterthan nothing, Howes views the available measures as“simplistic concepts of aggregated metrics.”13

Even the concept that good human resources practicesbuild an asset value worthy of being called human capitalhas been difficult to implement. In Sweden, human capitalmeasurement has been widely embraced, most famouslyby the insurance company Skandia, which hired LeifEdvinsson, a leading researcher in the field, as its directorof intellectual capital.14 But Ulf Johanson has detailedhow difficult it can be to implement measurement systemseven in a country with a supportive culture and agovernment that, in the early 1990s, proposed a legalobligation for all but the smallest companies to report onthe full cost of human resources. Even with all of theseaccommodations, companies still had difficulty gettingthe necessary accounting and cost systems in place.15


Table 2

Interest Orientation for HCMs

Human Capital Measure Percent

Extremely high interest

Capacity to innovate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36%

Capacity to identify new opportunities . . . . . . . . . . . . . . 27

Teamwork skills . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23

Organization change efforts . . . . . . . . . . . . . . . . . . . . . . . 21

New specific measures ofemployee productivity . . . . . . . . . . . . . . . . . . . . . . . . . . . 17

Ability of employees to reduce costs . . . . . . . . . . . . . . . . 12

Employees’ cost-conscious attitudes . . . . . . . . . . . . . . . . 8

Entrepreneurial skills . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6

Significant interest

New specific measures ofemployee productivity . . . . . . . . . . . . . . . . . . . . . . . . . . . 52%

Teamwork skills . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43


Ability of employees to reduce cost . . . . . . . . . . . . . . . . . 41



Capacity to innovate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34

Entrepreneurial skills . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19

Moderate or less than moderate interest

Entrepreneurial skills . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75%


Ability of employees to reduce cost . . . . . . . . . . . . . . . . . 47


Teamwork skills . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34

New specific measures ofemployee productivity . . . . . . . . . . . . . . . . . . . . . . . . . . . 31

Capacity to innovate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31


Note: Due to rounding, percentages may add up to more or less than 100.

12 Mark Graham Brown, “Human Capital’s Measure for Measure,” Journal forQuality and Participation, Volume 22, Number 5, 1999, pp. 28-31.

13 Peter Howes, “The New Face of HR Metrics,” IHRIM Link Journal, August-September 2003.

14 Leif Edvinsson, Corporate Longitude: Discover Your True Position in theKnowledge Economy (Harlow, Essex: FT Prentice Hall, 2002).

15 Ulf Johanson, “Why the Concept of Human Resource Costing and AccountingDoes Not Work: A Lesson from Seven Swedish Cases,” Personnel Review,Volume 28, Number 1–2, 1999, pp. 91–107.

Using Strategy to Guide Metrics SelectionWhether their companies have fully implemented humancapital metrics or not, our survey respondents still hadopinions about the types of HCMs they would like to createand put in place. When survey participants were asked abouttheir level of interest in developing different HCMs, onlyone—employee productivity—of the top five measures couldbe considered a cost measure.

Building a Metrics ToolboxDespite these difficulties, the search for predictive metricscontinues and, as with the earlier quest for improvedaccounting procedures, a number of new alternatives haveemerged to meet this demand. Boston Consulting Group usesa system it calls “workonomics” to assess value creation byemployees. “From an employee-oriented perspective,value creation is the number of employees multiplied bythe difference between employee productivity and costper employee,” explains Felix Barber, Phil Catchings, andYves Morieux.16 They suggest a number of comparisonsbetween HCMs and traditional, capital-driven measures,finding similarities between ROAs and employee produc-tivity, balance sheet changes and new hires and attrition,and capital investments and workforce developmentplans. The Saratoga Institute, one of the early advocatesof HCMs and now part of PricewaterhouseCoopers, hasidentified 10 key human resource-based metrics that linkpersonnel practices to financial performance, includingwhat it calls “human capital value added.”17

The software company SAP tried such a model a fewyears ago when it was struggling with its efforts to trackinvestments in human capital. The company’s managementknew these investments were growing in importance, but the systems in place to measure them were not adequate. In response, the company developed a model that measured13 human capital processes that fed into seven humancapital capabilities. One year into its turnaround efforts,SAP found that many initiatives seemed to be payingoff in relatively high process and capability scores.18

Mark Graham Brown suggests companies draw up an initialhuman capital index with even fewer metrics: number ofyears in the business or field, level in the company by jobgrade or organizational chart, performance ratings, andnumber of positions or assignments held. The index wouldthen assign a percentage to each of these categories. Brownalso proposes a more complex index involving a componentcombining experience and performance measures andanother grouping competencies and skills.19

Determining leading indicatorsBut how to establish which indicators are most effective?When the rankings for the most frequently used measuresin Table 1 on page 7 are compared with the ratings for themeasures survey participants found to be leading metrics(i.e., those that predict forthcoming impacts on thecompany) in Table 3, “employee engagement” was theonly one that remained in the top three, indicating a lackof consensus about which metrics are leading. (See theRoyal Bank of Scotland case study on page 13 for anin-depth example of how a company can use employeeengagement to identify correlations between humanresources practices and business metrics.)


16 Felix Barber, Phil Catchings, and Yves Morieux, “Rules of the Game for PeopleBusinesses: Succeeding in the Economy’s Highest Growth Segment,” BostonConsulting Group report, 2005. The report is available at www.bcg.com

17 See Robert J. Grossman, “Measuring Up: Measuring Human ResourcesPerformance,” HR Magazine, January 2005, pp. 28–35. “Human capital valueadded” equals revenue, which is equal to operating expenses minus thecombined compensation and benefits costs divided by total employmentmeasured in full-time equivalents.

18 Susan Cantrell, James M. Benton, Terry Laudal, and Robert J. Thomas,“Measuring the Value of Human Capital Investments: The SAP Case,”Strategy & Leadership, Volume 34, Number 2, 2006, p. 45.

19 Brown, “Human Capital’s Measure for Measure.”

Table 3

Leading HCMs

Percent whoconsider measure

Human Capital Measure a “leading” metric

Employee engagement . . . . . . . . . . . . . . . . . . . . . . . . 69%

Leadership . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39

Employee commitment . . . . . . . . . . . . . . . . . . . . . . . . 37

Readiness level . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34

Turnover (voluntary) . . . . . . . . . . . . . . . . . . . . . . . . . . 29

Employee satisfaction . . . . . . . . . . . . . . . . . . . . . . . . . 29

Competence level . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28

Workforce diversity . . . . . . . . . . . . . . . . . . . . . . . . . . . 24

Training . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21

Promotion rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17

Executive stability (or churn) . . . . . . . . . . . . . . . . . . . 17

Workforce age . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16

Health and safety . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14

Span of control . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9

Depletion cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6

Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0

Although Michael Bokina, former manager at Saratoga/PricewaterhouseCoopers, stresses that every organizationis different, making it difficult to offer “typical” leadingindicators, generic correlation analysis showed that threeHCMs were leading indicators for Saratoga:

Executive stability ratio and voluntary separation rateCorporations with executives having more than threeyears’ executive experience lower voluntary turnover.

Management ratio and promotion rate The fewer thenumber of employees that each manager or executivesupports impacts the number of promotions. Span of controlis important in developing employees professionally.

Training investment factor and promotion rate Moredollars allocated to training will increase professionalemployee development.

Anticipating potential problemsCompanies should be aware that even the most carefullyselected measures can fail to deliver desired results. For example, many metrics are only reported at the highestlevels of aggregation, which may only be sufficient forunderstanding what is happening in functions with a largenumber of largely undifferentiated workers. As MarkHuselid, Richard Beatty, and Brian Becker point out,“Companies simply can’t afford to have ‘A players’ in allpositions. Rather, businesses need to adopt a portfolioapproach to workforce management, systematicallyidentifying their strategically important A positions,supporting B positions, and surplus C positions, thenfocusing disproportionate resources on making sureA players hold A positions.”20 The risk associatedwith having the wrong person in a job is as high as theopportunity cost of keeping an A person in a C job. The implication is that human capital measurement needsto be quite granular. The authors state, “We all knowthat effective business strategy requires differentiating afirm’s products and services in ways that create value forcustomers. Accomplishing this requires a differentiatedworkforce strategy as well.”21

Moreover, even when measures are calibrated for a differ-entiated workforce, HCMs can backfire if not properlyintegrated with the complex system of the organization.John Boudreau and Peter Ramstad find that attempts tolink human resource practices to strategic aims are oftencrude and not really integrated.22 An organization mighthave the strategic goal to increase sales of solutions andthen set a human resources measure to increase bonusesfor solutions-selling activities. But without businessintegration to ensure that products themselves integrateinto solutions or that the right talent pools are in place,the bonuses won’t work.


20 Mark A. Huselid, Richard W. Beatty, and Brian E. Becker, “ ‘A Players’ or‘A Positions’? The Strategic Logic of Workforce Management,” HarvardBusiness Review, December, Volume 83, Number 12, 2005, pp. 110-117.

21 Huselid, Beatty, and Becker, “ ‘A Players’ or ‘A Positions’?”

The Value of Adding Metrics to Business Plans

“ Include HC metrics in the business plan. That will getthe business to take a more holistic approach, ratherthan just focusing on one metric—the financial one.It was instrumental to get three HC metrics into thebusiness plans:

Employee opinion surveys What are response rates,satisfaction levels, and action plans?

War for talent What are we doing to retain people andmonitor turnover?

Embedding diversity What have we done to make thisa way of doing business?

Showing this in a performance scorecard made sure itwas in everyone’s line of sight. HCMs were embeddedinto processes.”Kevin PrueVice President of Human Resources PlanningPrudential

22 John W. Boudreau and Peter M. Ramstad, “Strategic HRM Measurementin the 21st Century: From Justifying HR to Strategic Talent Leadership,”Cornell University Working Paper, 2002.

What Is the Impact of HCMs on Strategy?The hope persists that an “ideal” list of human capitalmeasures, especially prospective human capital measures,could exist and that these measures could prove howinvestments in people can deliver bottom-line results forbusiness strategy. Rather than continue this possiblyquixotic search, companies might find it more practicalto investigate the role that the human resources functionplays in strategy. In the 2006 survey, only 22 percent ofrespondents claimed that the human resources function isa full partner in developing and implementing businessstrategy. More than half of the respondents responded thatthe function had “no role” in strategy or simply implementedbusiness strategy “once it has been developed.” Not only doesthis lack of involvement in formulating or implementingstrategy limit the ability of human resources to understandmanagers’ business KPIs, it could also explain why so fewcompanies create HCMs to gauge the organization’s capacityto innovate or to identify new business opportunities.

For executives who wish to manage and measure theirworkforce in conjunction with human resources, Huselid,Becker, and Beatty advocate a human-resources-specificscorecard as a supplement to their companies’ existingscorecards.23 They also encourage senior executives totake greater responsibility for setting human capitalmeasures and targets. In this way, human resources’lack of involvement in setting strategy would not hinderthe execution of the company’s people strategy.


23 Mark Huselid, Brian Becker, and Richard Beatty, The Workforce Scorecard:Managing Human Capital to Execute Strategy (Boston: Harvard BusinessSchool Press, 2005).

0

100%

22%

Human resources is a full partner in developingand implementing business strategy.

(a)

30

Human resources helps implement businessstrategy once it has been developed.

(c)

25Between (a) and (c).

(b)

2Human resources plays no role in business strategy.

(e)

21Between (c) and (e).

(d)

Chart 1

Describe the relationship betweenthe human resources function andbusiness strategy in your company

The Royal Bank of Scotland Group (RBS) is one of theworld’s largest financial institutions, with over 40 brands,35 million customers, 135,000 employees spread across30 countries, and 2006 operating profits of £9.4 billion($17 billion). But the current company is very differentfrom the RBS of the late 1990s, which was a modest-sized bank with 35,000 employees based mainly in theUnited Kingdom.

As might be expected, the human resources function haschanged along with the company. “Pre-1996, the humanresources function was predominantly transactional, moreof an order-taker than a strategic partner,” explains GreigAitken, head of human capital strategy at RBS. “Followingthe appointment of Neil Roden as human resources directorin 1997, we embarked on a business partner/shared servicesmodel that would transform human resources into amore business-focused and value-driven function. Thisincluded centers of excellence, business-facing humanresources teams, and a shared services infrastructure.”

This new model was well in place by the time of RBS’sacquisition of National Westminster Bank (NatWest) in2000. At $30 billion dollars, NatWest was, at that time,the largest purchase in the company’s ongoing programof growth by acquisition and organic growth. RBS’s pur-suit of this multi-brand strategy has allowed it to capturethe benefits of the high awareness of acquired brands intheir various geographic markets. For example, while theRoyal Bank of Scotland isn’t limited to Scotland itself,NatWest had a stronger presence in England and Wales.In North America, Citizens Financial Group, a companythat RBS acquired in 1988, pursued its own strategy ofgrowth through acquisition. By purchasing a host ofsmall banks and then absorbing Charter One in 2004,Citizens has now become the ninth-largest banking groupin the United States by assets. But, Aitken says, it wasn’tuntil after the NatWest acquisition that the company“developed an integrated human capital strategy thatwould have at its core the ability to help RBS leadersunderstand the effectiveness of their people strategy andits impact on business performance—a line of sightbetween intervention and impact.”

This project dovetailed nicely with the broad aim of Sir Fred Goodwin, RBS’s chief executive, to become theworld’s “Most Admired Bank,” an aspiration that wasbased on a strategy of differentiation rather than purecost leadership.24 Achieving Goodwin’s goal in a people-oriented business like banking would require an emphasison the effectiveness of the workforce in delivering qualityservice with a high degree of impact on customers.25

To do so, RBS needed to define its commitment toservice delivery and business outcomes; help corporate,divisional, and local management use human capital moreeffectively; and measure the links between employeebehavior and business results to determine the impact ofits employee proposition, including compensation andflexible benefits plans on employees. In pursuit of theseaims, the company started development of the “RBSGlobal Human Capital Strategy & Toolkit” in 2003.

Measuring PerformanceRBS’s growth-through-acquisition and organic growthstrategy and the need to maintain strict separation ofbusiness types and geographies in a highly-regulatedindustry like banking make it difficult to producecentralized coordination, let alone common practices.But the performance elements needed for strong servicedelivery suggest there are many benefits to pooling bestpractices and disseminating learning widely and quicklythroughout the organization. Bearing this in mind, RBSadopted an approach that was both global and local in


CASE STUDY

Royal Bank of Scotland GroupBuilding a Human Capital Model to CreateGreater Cohesion and Better Communication

24 Differentiation, cost leadership, and niche strategy are the three genericstrategies outlined by Michael Porter in Competitive Strategy: Techniques forAnalyzing Industries and Competitors (New York: The Free Press, 1980).

25 Many of the human resource measures that influence strategy can be sortedinto the three categories devised by John Boudreau and Peter Ramstad:efficiency (the level and quality of human resources practices produced fromthe resources available), effectiveness (the relationship between humanresources practices and the quality of people), and impact (the relationshipbetween changes in the quality of employees and competitive success). As we shall see, this project also yielded efficiencies, as well as effectivenessand impact. See John F. Boudreau and Peter M. Ramstad, “Strategic HRMMeasurement in the 21st Century: From Justifying HR to Strategic TalentLeadership,” in HRM in the 21st Century, Marshall Goldsmith, Robert P.Gandossy, and Marc S. Efron, eds. (New York: John Wiley, 2003), p. 7.

scope and contained a loose-tight mix of componentsbased around a toolkit of survey techniques andmeasurements of behavior that provide comparabledata across business units, by job function, and, whereappropriate, between geographic business units.

The human capital model that grew out of this approachmeasures the central “employee proposition” through avariety of different survey types. The effectiveness ofthis proposition is then set against an array of businessmetrics. These measures then feed into decision-makingprocesses about leadership, incentive design, recruitment,and the business program. It is the predictive nature ofthese measurements that has allowed the group to spreadbest practices throughout the business units.

Taking the pulse of employeesUnder the Human Capital Model, RBS conducts an annualsurvey of all employees. Aitken says, “The survey goesout to 135,000 staff in 30 countries in nine languagesonline and on paper.” In addition to a number of questionsthat also appear in the company’s joiner, leaver, and pulsesurveys, this questionnaire includes 16 questions thatallow the group to monitor what it considers the eightdrivers of employee engagement:

• employee recognition

• performance and development opportunities

• relationships

• total reward

• “the work itself”

• product brands and reputation

• leadership

• work-life balance26

Because of the global consistency of the core questions,RBS is able to segment its employee base and thencompare business units (e.g., the marketing department)in one business with their counterparts elsewhere in thegroup, measure the performance and attitudes of people inone division against those in another, and judge the needsand interests of employees by age, gender, country, etc.

In 2006, some 87 percent of the workforce took part in thesurvey—at least 20 percent higher than is the average inthe financial services sector—which suggests a high levelof commitment to the company.27 Furthermore, high scoresfor the group, the divisions, the business units, and evenindividual bank branches suggest a strong sense of engage-ment among the employees, which, in turn, has a highpredictive value for business performance. According toAitken, engaged employees contribute to the business bysaying (speaking consistently and positively about RBSto colleagues, potential employees, and customers),staying (showing an intense desire to be an RBS member),and striving (giving the extra effort and behaving in ways that contribute to success). This extra effort manifestsitself in financial performance and leading indicators ofperformance, such as the level of cross-selling.

RBS also conducts other significant measurementinitiatives throughout the year:

• All new joiners and all people leaving the companyare surveyed.

• Ad-hoc issues are assessed with “pulse” surveys, andthe results are then mapped against the global databaseof personnel records. In one instance, a survey wasconducted to discover why some people apply for andgo through the recruitment process for certain positionsand then turn down the job when it is offered.

• Outside of the company, RBS measures itself againstits competitors with the use of “paid for” norms.

The consistency and high response rates of these surveys—all of which are undertaken with the promise of completeanonymity for the employee—allow RBS to formulate aproposition for employees and identify correlations betweenhuman resource practices and business metrics like customerservice, profitability of bank branches, staff turnover, andfinancial performance metrics.


26 While this standard “core” questionnaire is used for the whole group, optionsdo exist for business-specific questions as necessary.

27 Source: “Case Study: Capital Performance,” HR Director Magazine, April 2006,pp. 36-37.

Refining the employee propositionThe Human Capital Model has given the group the abilityto monitor its employee attitudes and intentions muchmore closely and fine-tune its offerings accordingly. Oneinitiative tracked employees’ use of RBSelect, the bank’sflexible reward program that allows employees to tailortheir own reward packages. After examining the results ofthis inquiry, RBS was able to identify that the “employeeengagement” scores of employees selecting three or moreitems from the menu were 20 percent higher than the norm.Insights such as this enable RBS to develop a more compel-ling reward strategy and a stronger employee proposition.

The ability to segment employees according to a varietyof criteria also helps focus communication about thesebenefits. “For every pound or dollar spent on segmentedcommunication to these groups, it appears to be twice aseffective compared to nonsegmented communication,”Aitken says. In effect, it doubles the effectiveness ofinternal communications.

All of the bank’s individual efforts have also helped directglobal human resources policy. The following objectivesfor 2006 from the RBS Corporate Responsibility Reportwere heavily influenced by the Human Capital Strategyand the Group’s employee opinion survey:

• Implement actions to improve customer focus andperformance management and development scores.

• Use the Human Capital Toolkit to identify and addressspecific areas of the business where improved employeeperformance would most directly result in increasedlevels of customer satisfaction.

• Introduce the Human Capital Toolkit to RBS businessesin North America.

• Introduce a new executive leadership program todevelop the innovation skills of senior management.

• Introduce measures to meet the needs of disabledemployees.

The Advantages of an Online ToolkitJust as RBS has used its Human Capital Model to create arich warehouse of data, the bank has innovated new waysof disseminating both findings and the information andmethodology behind them to individual businesses andtheir human resources functions. One of the primary vehiclesfor spreading this information has been the company’sonline Human Capital Toolkit, which was launched inJanuary 2005 after only six months of development.Aitken and his team, drawing on lessons from the group’scustomer websites, designed the site so that it would takeno more than five clicks to get to anywhere from the frontpage. (See “Key Elements of the Human Capital Toolkit”for a detailed list of the site’s contents.)


Key Elements of the Human Capital Toolkit

1 Survey toolkit This element offers a do-it-yourself surveyutility that allows business units to conduct ad-hoc and“pulse” surveys, view global survey results, and accessmore than 1,000 interactive tools.

2 Reporting toolkit This knowledge bank allows visitorsto read internal management reports and external humancapital reports. It also provides access to presentations fromthroughout the group that staff can use in their own briefingswithout having to replicate all the drawings or reproduce allthe text and explanatory documents.

3 Benchmarking toolkit This component contains comparablemetrics from a selected range of peer group companies.

4 Research toolkit This section offers access to externalresearch that is collected and collated to avoid duplicationof data while ensuring breadth.

5 Measurement toolkit Human resources managers can usethe metrics contained in this section to drill down to humancapital measures for every cost center worldwide.

The current secure intranet site contains both analytic andsurvey tools, benchmarking norms, links to externalsources (including the RBS Business School created inconjunction with Harvard Business School), and third-party research data (e.g., reports from The ConferenceBoard). Because of their new access to these resources,human resources teams no longer have to make requeststo the head office or seek external support when they wantto conduct their own research.28 Moreover, the Toolkitpermits human resources professionals to commissionresearch and analysis on any topic straight from thedesktop of human resources staff. Once a request isreceived, external partner researchers in Washington andLondon begin work on the subject and report back to thequestioner within two weeks. Conversely, the site preventsbusiness unit managers from “making up their own surveys”and allows RBS to benchmark and segment their pulsesurveys in a manner similar to their global survey.

Surprisingly, the cost of the Toolkit was relatively modest.Most of the work was done internally, using manycomponents—including security features—from otherinternal sites and customer banking websites developedelsewhere in the group. Aitken also used internal design,marketing, and technology resources from around the group.Not only was the initial price tag low, but Aitken’s intro-duction of consistent pulse survey design, delivery, andreporting tools (developed internally within RBS) savedthe business over £340,000 in the site’s first 10 monthsof operation. The toolkit gives access to analysis anddiagnostic tools (e.g., benchmarks and historical analysis).“It’s been a real boon for us to be able to share keyinformation globally from one single site,” Aitken says.


28 While only authorized human resources professionals have access to the fullsuite of applications, the usefulness of the information on the site has led RBSto consider releasing select components to business managers.

The first step in strategic HCM formation is the determinationof an accurate headcount, which can be a formidable taskfor large global companies. Once this figure is calculated,human resources departments can begin tracking the cost ofactivities with efficiency measures of time and cost. As theirprocesses mature, companies can move on to monitoringinvestments in workforce capability with HCMs regardingefficiency and effectiveness (e.g., ability and motivationmetrics). In the final step, companies can introduce impactmeasures to concentrate on business process and strategicoutcomes. Only 43 percent of survey respondents describedthemselves as having reached these last two stages, whichare the phases where the greater benefits of linking HCMsto strategy are realized (Chart 2).

Even though they may not have attained their desiredlevel of HCM implementation, respondents to the surveyfound few of the challenges they were asked about in thesurvey “extremely” difficult. It is particularly encouragingto note that buy in—whether from senior management,middle management, or human resources business partners—was allocated a “moderate” difficulty rating by over three-quarters of the respondents (Chart 3). This would seem toimply that attitudes have changed since a 2003 survey byThe Conference Board in which one of the participants,in response to an open-ended question on the reasonsbehind resistance to implementing HCMs, wrote,“Management doesn’t consider HR a business partner.”29


Stages of Implementation

We are working on defining HCMsand beginning to collect data.

0

100%

We have efficiency, effectiveness, and impact(on business process and strategic outcome)HCMs in place.

We have efficiency and effectiveness(ability, motivation, and performance)HCMs in place.

Our company does not measure human capital.

Chart 2

Stages of HCM implementation

We have efficiency (time and cost)HCMs in place.

7%

28

36

2

28

Note: Due to rounding, percentages add up to more than 100.

29 Stephen Gates, Linking People Measures to Strategy: From Top ManagementSupport to Line Management Buy-in, The Conference Board, Research Report1342, 2003, p. 24.

Chart 3

Rating challenges to HCM implementationExtremedifficulty

Significantdifficulty

Moderate or less thanmoderate difficulty

0 20 40 60 80 100%

Implementation across global operationsgenerates many inconsistencies.

Common human capital definitionshave been challenging to determine.

Needed technical capabilities (IT andstatistical analysis) are unavailable.

The usefulness of HCMshas not been proven.

The HR business partners do notbuy into the use of HCMs.

Middle management does notbuy into the use of HCMs.

Senior management does notbuy into the use of HCMs.

The cost of generating sufficientHCM data is considered too high.

9% 31% 60%

7 30 63

7 31 62

6 24 70

410 86

3 11 86

2

11 87

2

22 76

Successful and strategic application of HCMs—from initial conceptionto execution to distribution of results—is a long and difficult process.

Ranking the Greatest Challenges

Facing an institutional digital divideInstead of citing resistance from colleagues as a significantchallenge, survey participants pointed to the difficulties in-volved with the operational aspects of defining, harmonizing,and executing an international HCM program. When the“extreme” and “significant” difficulty scores are combined,lack of necessary technical capabilities is second only toinconsistent global implementation as a difficulty. Tech-nology issues were also frequently mentioned by researchworking group members. “One challenge which limits theimpact of HCMs is that our HR metric updates competefor HR IT resources with many other high priority projects,”says Amy Balensiefen, employee research consultant,John Deere & Company. “Moving forward, it is criticalfor us to educate our organization on the value that HCMsprovide the business.”

As for diagnosing business problems using the analyticalcapabilities of HCMs, one research working group membersays, “Linking human capital data with measurement fromoutside human resources (customer, business operational,financial) isn’t as easy as you might think. In addition,we want to focus on positions in the company that arestrategically important. That requires a lot of process, andit requires a redesign of IT capabilities to allow decisionsupport over only that subset of the position.”

Matters of definitionThe problems associated with the third place “extreme”/“significant” challenge—“Common human capital definitionshave been hard to determine”—are widespread. In an SHRMsurvey of American companies in 2002, two-thirds of therespondents did not have a consistent way of describinghuman capital.30 As the experience of one research workinggroup member indicates, even harmonizing the definitionof “promotion” worldwide can create quandaries. In somecountries where the company operated, a promotion wasdefined by upward movement in the company. In others,promotions were primarily associated with an increase insalary and benefits. Since nearly 80 percent of employeesare working under one definition, the company’s HCM teamis hoping that the remaining 20 percent will slowly adoptand accept the majority definition.

Organizing the HCM GroupAnother issue of special interest to research workinggroup members that was not included in the survey is theformation of the HCM group. While some organizationshave a clear organizational unit devoted to HCMs, manyresearch working group members say that such work intheir organization is spread across various corporate humanresources services. While much can be gained from havingsuch a group, there are also potential liabilities.


Gaining Accountability for HCMsWhen asked in an informal survey about accountabilityfor HCMs, a majority of research working group membersindicated that the lines of responsibility are not clear.The written comments of those who said their companieshave transparent accountability for such projects offera range of possibilities for the use of HCMs:

“Human resources is responsible for collecting data;senior executives for use.”

“If the HCMs are key corporate measures, humanresources measures them and business managers reportthem to the chairman.”

“HCMs are included in the business plan.”

“HCMs are inserted into business processes, workforceplanning, and annual incentives.”

“HCMs are tied to business results and individualexecutive compensation.”

“HCMs are included in the scorecard and performanceevaluation process.”

Table 4

Top Four Challenges to HCM Application

Implementation across global operationsgenerates many inconsistencies. . . . . . . . . . . . . . . . . . . . 40%

Needed technical capabilities (IT andstatistical analysis) are unavailable. . . . . . . . . . . . . . . . . . 38

Common human capital definitionshave been challenging to determine. . . . . . . . . . . . . . . . . 37

The usefulness of human capital metricshas not yet been proven. . . . . . . . . . . . . . . . . . . . . . . . . . 30

Note: Percentages represent a combination of the “extreme”and “significant” difficulty scores for these challenges. Multipleanswers allowed.

30 Aligning HR with Organization Strategy Survey, SHRM Research, November2002.

Getting the Word OutPartners in the application of HCMs, therefore, mustunderstand the metrics and know how to apply them.Responses from the survey about the use of HCMs inlinking people activities to business managers’ KPIs,which was considered the most effective application of suchmetrics, reveal there is a divide between the two tasks.Although 75 percent of respondents said they recommendedmeasures to managers as a way to meet these KPIs, only15 percent reported that business managers used the met-rics for this purpose to a “significant” or “total” extent.This low use rate may be due to inadequate communicationof the benefits of HCMs to human resources businesspartners, who, in turn, are unable to advise their managersabout using such metrics.

Different Avenues for DisplayHCMs work best when they are considered in relationto each other. This is why many companies choose to putthem in one of two types of frameworks:

Scorecards provide a means by which HCMs are viewed inalignment with execution of the company’s overall strategy.

Dashboards are graphic interpretations (gauges, dials, etc.)of trends based on selected benchmarks or metrics.31

A comparison of the HCMs found in working groupmembers’ scorecards uncovers clear metrics preferencesfor the manufacturing (efficiency measures), high tech-nology (effectiveness or innovation measures), andfinancial services (efficiency and effectiveness measures)sectors. No matter what metrics are incorporated intoa scorecard or dashboard, they can serve as useful toolsfor focusing management attention.


31 Definitions are taken from John Gibbons and Christopher Woock, Evidence-Based Human Resources: A Primer and Summary of Current Literature,The Conference Board, Electronic Report 15, 2007, p. 8 (scorecards); andMarc S. Miller, Establishing Value for HR Technology, The Conference Board,Research Report 1350, 2004, p. 17 (dashboards).

Chart 4

Rate of recommendationof HCMs to meet KPIs

Moderate or lessthan moderate

0

100%

75%

Total orsignificant

25

Chart 5

Rate of use ofHCMs to meet KPIs

Moderate or lessthan moderate

0

100%

14Significant

85

1%Total


Of the 69 percent of our survey respondents who used eithera dashboard or a scorecard, a majority (53 percent) said theywere “moderately” or “less than moderately” effective.

One of the reasons for this tepid response may be the limitationsof the format itself. “A scorecard keeps the score, which is fine,but that is all that it does,” says one research working groupmember. “On the other hand, creating and testing a causal modelshows impact on business outcomes so you can become moreof a strategic consulting partner.”

For example, when this member was working at a large trans-portation company, injuries in the workplace were on the rise.

When the human resources department was tasked withreducing accident costs, team members investigated theproblem using a causal model. Since safety managers couldnot agree on the source of the problem, many differenthypotheses were used. Some suggested poor safety training;others, traffic conditions or weather. After reviewing a safetysurvey, the HR team created a causal model including multiplefactors related to safety training, promotion, and climate.

Two of the factors that caught the attention of theinvestigators were equipment availability and training.The causal model provided evidence that these two factorswere the source for a significant percentage of injuries. In essence, employees were getting hurt because they werecarrying multiple heavy boxes on their shoulders when theyshould have used the proper equipment. Unfortunately,the lack of such equipment, which could be obtained atminimal cost, was the cause of workplace injuries. A majorinvestment in equipment led to significant savings inaccident costs, not to mention the avoidance of employees’physical pain. One year later, the company reported thelowest amount of accidents ever, even though the numberof drivers was at its highest.

In order to reinforce this equipment-based safety practice,targets in managers’ scorecards were changed. Managers arenow evaluated on whether equipment is fully available andworking at all times. In addition, as part of the employeesurvey, managers are rated on their efforts to promote safety.

Causal Models: The Framework of the Future?

Does your companyuse HCMs in a dash-board or scorecard?

No

0

100%

69%Yes

31

If so, how effectivedo you consider your

dashboard or scorecard?

0

100%

16Not at all

Moderately or lessthan moderately53

31%

Significantlyor totally

Communicating Results:To Whom? How Often?Once HCMs have been carefully assembled and usedto gather data, who should receive the final results andthe related analysis? In terms of releasing results to topmanagement, 78 percent of respondents said they releasedtheir findings on a quarterly basis and 52 percent distributedthem on a monthly basis. The latter reporting schedule ispreferable because it allows the measures to be of greaterhelp in identifying where corrective action is neededat an earlier stage.

Not only does the timing of the reporting vary fromcompany to company, there were wide differences in thenumber of measures presented to top management aswell, ranging from 24 percent of companies that reportedone to three HCM measures to 26 percent that deliveredthe results from more than 10 HCMs. Half of respondentcompanies offered between four and 10 HCMs, reflectingthe belief of performance management experts thatmanagers may have difficulty focusing on more thanseven measures at a time.32

Widening the audience for HCM resultsWhen asked who received the internal human capital reportin a 2004 survey conducted by The Conference Board, 78 percent of the respondents said that top managementreceived the “people measure” report and only 19 percentindicated that all business managers were given thefindings.33 Responses to a similar question in the surveyconducted for this report indicated that nothing had changed:the percentage of companies offering these documents to allbusiness managers still stood at 19 percent.

Companies who do broadly release their HCM reports are working to make sure that the results are spreadthroughout their organizations. According to one researchworking group member, her organization plans to cascadeHCMs downward through the company to increase theirimpact on core, strategic, and people-plan specific KPIs.


33 Gates, Measuring More Than Efficiency, p. 30.

Monthly 52%

Quarterly 78

Semi-annually 58

Annually 81

Chart 6

Frequency of reportingto top management*

* Multiple answers allowed

Chart 8

How many HCMsdo you report totop management?

0

100%

26%Over 10

Between 6 and 1021

Between 4 and 529

Between 1 and 324

Top management 85%

Selected business managers 43

Board members 31

All business managers 19

Chart 7

Distribution of theHCM internal report*

* Multiple answers allowed

32 See Antonio Davila, Robert Kaplan, and Robert Simons, PerformanceMeasurement and Control Systems for Implementing Strategy, (Upper SaddleRiver, NJ: Prentice Hall, 2000), pp. 239-240.

Linking Metrics Performanceto CompensationEmbedding HCMs in managers’ bonus plans is anotherway to sharpen managers’ focus on human capital metricsand targets. While they might not agree with the constructionof the metrics or the measures as targets, managers willcertainly become more aware of the company’s peoplegoals. Results from a 2003 survey by The ConferenceBoard showed that many survey respondents believedputting HCMs in bonus plans correlated with successfullinks between business strategies and certain measures(turnover, leadership, and health and safety).34 Despitetheir confidence in these measures, only 39 percent ofparticipating companies in that survey said they includedthese measures in bonus plans. In the survey conductedfor this report, 57 percent of respondent firms rewardedmanagers based on HCMs and 60 percent used them insetting managers’ management by objectives (MBO).Moreover, 48 percent reported that HCMs receivedover a 15 percent weighting in bonus plans. At that levelof weighting, managers should have a strong interestin taking HCMs and people activities more seriously.

One working group member says his company’sperformance evaluation process relies heavily on HCMs:“First, we update divisions regarding their degree ofoverall differentiation in terms of the percentage andnumber of high/core/low performers. Second, we providedetails around that differentiation by key demographicgroups to help divisions get a better sense for howperformance has been evaluated across groups. Finally,we provide similar information for actual bonus/meritdollars that have been allocated to determine whetherthe financial rewards are equally differentiated.”

When respondents who included HCMs in bonus plans wereasked if their metrics were aligned with business targets,64 percent admitted that they were “moderately or lessthan moderately” or even “not at all or slightly” alignedwith bonus plans. Roughly the same percentage ofrespondents—65 percent—reported moderate or lessstrategic alignment of HCMs in managers’ MBOs. This lackof alignment does not bode well for the role of HCMs inhelping managers achieve their strategic business goals orKPIs. Such imprecision can lead to dissatisfaction with themeasures used and result in poor manager evaluations ofthe HCM program.


34 Gates, Linking People Measures to Strategy, p. 26.

Chart 9

Does your companyuse HCMs in

managers’bonus plans?

0

100%

57%Yes

No43

48%Over 15 percent

11–14 percent8

6–10 percent24

1–5 percent20

If yes, whatweighting do you

give to them?

0

100%

Chart 10

Does your company useHCMs in determining

managers’ MBOs?

0

100%

60%Yes

No40

If yes, how well alignedare these HCMs with

business targets?

4%Totally

Significantly31

Moderately orless than moderately65

0

100%

Chart 11

How well alignedare HCMs with

business targets?*

Totally orsignificantly36%

Not at allor slightly21

Moderately orless than moderately43

0

100%

Results are only for thosewho indicated they used HCMsto determine MBOs.

*

Once again, it is not enough for managers to buy into or be“sold” on the idea of HCMs; they must also understandthe measures well enough to use them to improve on theirown performance. Training programs and concrete actionplans are two ways to help generate greater acceptanceamong managers. One working group member from aglobal IT company also suggested it might be easier to“sell” HCM projects to managers if they are positioned asa means to help business leaders manage their workforcerather than as a way for the human resources departmentto improve its own functional activities. Managers atMarriott Vacation Club International (MCVI) were trainedto coach their employees toward higher engagement andperformance. The HCMs used in this process provided bothguidance and proof that their talent relationship managementprogram delivers higher business performance. (For moreinformation on how they achieved this result, see the casestudy on page 24.)

Broadcasting HCM Results ExternallyHCM reports also have potential uses for when a companyneeds to provide findings about its human capital activitiesto outside organizations and interested individuals. Whilethe primary reason for external reporting may be to help inrecruitment efforts, companies can also target investors—especially socially responsible investors—NGOs, andlocal governmental authorities. Just under half of the surveyrespondents—48 percent—released HCM reports externally,a significant improvement over the 15 percent of companieswho released reports in this manner in the 2004 survey.35

Over one-quarter of the respondents also said that theirHCMs were verified by external audit.

Although traditional financial analysts have difficultyincorporating information about human capital into theirvaluation models, there are encouraging signs that suggestlong-term and socially responsible investors take HCMsinto consideration. In the survey conducted for this report,20 percent of respondents said that investment analystsasked their companies to report or discuss HCMs.


35 Gates, Measuring More Than Efficiency, p. 30.

Chart 12

Do you reportHCMs outside ofthe organization?

If yes, are yourHCMs verified byan external audit?

0

100%

48%Yes

No48

Don’t know4 0

100%

28%Yes

No58

Don’t know14

Chart 13

Have investment analystsasked your company to

report or discuss HCMs?

0

100%20%Yes

No80

When Marriott Vacation Club International (MVCI) wasestablished in 1984 as the vacation ownership division ofMarriott International, Marriott became the first brandedhospitality company to enter the time-share industry.Today, MVCI operates 57 resorts across four distinctbrands: Marriott Vacation Club, Horizons by Marriott,Grand Residences by Marriott, and The Ritz-Carlton Club.In 2006, in addition to delivering its 10th consecutive yearof 20 percent or greater average annual growth, it alsocollected the award for “Best Sales Organization inAmerica” at the 2006 American Business Awards.

According to Karl Sweeney, MVCI’s senior vice presidentand chief administrative officer, the use of talent relation-ship management tools to achieve higher performancehas been a driving force behind the company’s positiveperformance. He explains, “The credo for Marriott hasalways been take care of your associates and they’ll takecare of your customers, who, in turn, will take care ofthe bottom line.” Sweeney also notes that the supportof Peter J. Watzka, former executive vice president andchief customer officer for MVCI, for several cutting-edgeinitiatives over the past several years has led to greaterinvestment in associates as a strategy for increasing associateengagement and driving financial outcomes.

More specifically, the company has found that there isa compelling correlation between (1) selecting the rightassociates for customer-facing positions, focusing managerson associate engagement through frequent engagementsurveys, and training associates and managers to focuson their strengths; and (2) engagement and multipleperformance outcomes. This connection is the result ofa process that MVCI has been creating, implementing,and tracking since 2002.

Looking for the Right FitIn the spring of 2002, Watzka’s customer relationshipmanagement organization (CRM) turned its focus tofinding employees with the “right fit” as a way ofincreasing performance. In its initial project, the CRMcollaborated with The Gallup Organization on applyingthe latter’s talent-based hiring process to associates insales roles. Over the next several years, MVCI rolled outsimilar selection tools for its customer acquisition, servicefulfillment/delivery, and customer experience subprocesses.On every associate engagement survey and across multiplebusiness outcomes (such as productivity, customer metrics,and turnover), associates that were selected using thesetools were found both to be more engaged than associatesnot selected through these tools (Chart 14) and tooutperform their less-engaged counterparts.


CASE STUDY

Marriott Vacation Club InternationalEnhancing Engagement and Performancethrough Talent Relationship Management

Chart 14

Associates chosenusing selection tools

are more engagedFQ2 grand mean relative toGallup database, fall 2005

No selection toolRecommended by tool

Marketingcoordinators

Salesexecutives

N=228

85th

N=153

92nd

N=176

86th

N=351

92nd

Servicefulfillment

N=87

75th

N=134

88th

Frontoffice

N=627

72nd

N=98

92nd

Source: MVCI

Two years later, MVCI piloted the use of Gallup’s 12-question (Q12) survey tool as a way to find out itsassociates’ levels of engagement and the impact theirengagement had on business outcomes. The Q12 identifiesthose elements that matter most to employees, startingwith basic needs and then advancing through leadership,support and teamwork, and aspirations for growth. Bymeasuring associate engagement in these categories atsix-month intervals, MVCI was able to accumulate datathat showed a clear correlation between increased engage-ment and business metrics of productivity, profitability,customer satisfaction, retention, and safety. By 2005, theQ12 was being offered to approximately 100 percent ofMVCI’s almost 10,000 associates, and the survey enjoyedan 85 percent reply rate. Comparisons between the 2004and 2005 test dates showed improved scores.

When MVCI is compared to other companies in Gallup’sdatabase, almost seven out of 10 MVCI work groups areat the 75th percentile and 3.6 out of 10 are at the “world-class” level (95th percentile compared to Gallup’s world-wide database). Sweeney says that the ability to benchmarkMVCI against the more than 400 companies, 4,000 workgroups, and 4 million employees in Gallup’s worldwidedatabase is one of the greatest values of this measurement.The company’s efforts have also resulted in an engaged toactively disengaged ratio that is 4.5 times better than theoverall U.S. working population.

As MVCI administered repeated Q12 surveys, the datashowed that managers who took certain steps in con-junction with each survey were able to positively impactassociate engagement. MVCI leadership has not onlyaggressively trained its managers to perform the steps, buthas included three questions (called the “AccountabilityIndex”) as supplements that measure manager performanceto the semi-annual Q12 survey.

The steps managers took were (1) providing one-to-onefeedback on the work group’s survey results to each ofhis or her associates, and, following these discussions, (2) letting the work group formulate an action plan that itthen strives to achieve. Associates then rate their managerson the subsequent Q12 survey Accountability Index whichasks whether they received feedback, if an action plan wasmade, and, if so, what progress was made against that plan.

This feedback loop to MVCI’s associates is stronglycorrelated with higher engagement. The AccountabilityIndex has also been incorporated into the balanced scorecardmeasures that are used to report on the company’s achieve-ments against goals. By doing so, the company ensuresthat this remains a focus for management (Chart 15).

Developing Strengths across the CompanyAlong with the implementation of talent selection toolsand Q12, MVCI has also adopted two other Gallup tools.The Clifton StrengthsFinder®, a newly-created develop-mental assessment tool, was added to help associatesdiscover how they can maximize their performance. MVCIalso began using Gallup’s two-day StrengthsCoachingcurriculum and certification program, which allowsassociate-facing managers the opportunity to understandtheir own talents and strengths and improve their ability tocoach associates to success, build effective relationships,and acknowledge associates in an appropriate manner.

CRM led the way in using both of these processes. These tools had unique descriptors of Gallup’s 34 themes,and personalized plaques displaying associates’ signature“themes” soon began dotting CRM offices, creating internalmomentum for change. By late 2004, MVCI had created anadditional intervention called Great Manager Fundamentals.During this four-day training session, managers learn moreabout selecting for talent, building one-to-one associaterelationships, coaching for performance, and problemsolving in the context of team building. This program istaught in the “Strengths” vernacular and ideally followsthree to five months after StrengthsCoach certification.


Chart 15

Grand Mean and AccountabilityIndex move concurrently

2004 2005 2006

4.18

4.01

4.24

4.07

4.394.32

Grand Mean Accountability Index

Source: MVCI

Under the direction of Roy West, MVCI’s masterstrengths trainer and vice president, customer acquisitiontalent, the company has now trained 1,200 strengthscoaches and given over 5,000 of its associates theopportunity to complete the StrengthsFinder assessment.Each associate completing the StrengthsFinder processtakes part in a one-to-one strengths interview with his/hercertified coach or manager. Also, over 500 of MVCI’scoaches, managers, and leaders have gone through theGreat Manager Fundamentals program.

Higher Engagement EqualsHigher PerformanceAnalysis of the results of the first survey of managersthat had been trained on StrengthsCoaching and GreatManager Fundamentals confirmed that higher associateengagement was linked to higher associate performance.Participation in Great Manager Fundamentals has also beenfound to correlate with manager and associate engagement.Managers trained and certified as StrengthsCoaches werenot only more engaged than those managers who had nottaken part in the program, their associates were also moreengaged and outperformed associates who were managedby noncertified managers (Chart 16). Because of theseresults, other parts of the MVCI organization startedasking for access to these programs. In 2006, West’s TalentRelationship Management (TRM) training group led MVCI’sefforts to deploy the new tools throughout the company.

When employee engagement is correlated with variousbusiness metrics, its impact is clear. For example, ifemployee engagement scores from the bottom quartile,middle 50 percent, and top quartile are correlated withtwo key MVCI business metrics (sales volume per guest(VPG) and percentage of tours closing on time-sharecontracts), those who are most engaged are also thehighest performers (Chart 17).

MVCI is now using this fully-integrated approach toTalent Relationship Management, a group which wasformerly viewed as not having a direct impact on financialresults, as the means to achieve many of the targets setwithin the quadrants (associate, process, customer, financial)of its Balanced Scorecard. Concludes Sweeney, “Ourparent company’s CEO, Bill Marriott, is fond of saying,‘Success is never final.’ In that vein, while we’re excitedabout our progress to date, we’re just beginning to harvestvalue from linking our TRM initiatives with engagement.”


Chart 16

Managers with talent relationshipmanagement training havemore engaged employees

Q12 grand mean

Managers with training Managers who havenot had training

StrengthsCoach Great ManagerFundamentals

(GMF)

StrengthsCoachand GMF

N=3,487

90th

N=3,687

77th

87th

N=5,065

83rd

N=2,079

89th

N=5,802

82nd

N=1,342

Source: MVCI

Chart 17

Most engaged sales executivesare more productive

Percent difference fromsales location averages

Sales volumeper guest

Percentage of tours closingon time-share contracts

Bottom 25%

Middle 50%

Top 25%

-2.25

-0.38

3.03%

-3.03

0.43

3.70%

-3

-2

-1

0

1

2

3%

Source: MVCI

When the survey results, research working group membercomments, and outside sources are taken together, theyreveal that much is left to be done in the successfulcreation, application, and innovation of HCMs. This isespecially true for using HCMs in the implementationof a strategic human capital orientation, which remainsa high priority for many human resources directors.The strong ties that should exist between HCMs and acompany’s overall strategy, which by definition should beunique and inimitable, are often weakened by a relianceon standardized HCMs and the overuse of benchmarksagainst competitors. Instead of developing HCMs tosupport a differentiation strategy, most companies keeptheir efforts concentrated almost exclusively on costmeasures of human capital.

As for HCMs’ predictive abilities, there is little scholarlyconsensus about which HCMs are most effective atpredicting future performance. This uncertainty maybe why respondents to our survey prefer retrospectivemeasures over forward-looking metrics. The Royal Bankof Scotland and Marriott Vacation Club International casestudies provide in-depth examples of how companiescan use employee engagement—the single prognosticmeasure used by a significant number of companies—to enhance performance. Companies hoping to go beyond“just keeping score on a scorecard” should also considerthe use of causal models to ascertain the impact of humancapital on business problems.

Companies must also struggle to have business managerstake accountability for the application of HCMs. To do so,companies will have to equip managers with the know-ledge they need through investments in training. If sucheducation is provided, managers will more readilyunderstand how these metrics relate to KPIs and how themeasures can help them meet the human capital targetsset in their bonus plans and/or MBOs. Another wayto raise awareness would be to increase the frequencyand the breadth of distribution of HCM reports. Makingmonthly HCM reports available throughout the manage-ment ranks would increase managers’ familiarity withhow they are used and allow them to more easily takecorrective actions based on the results. This principle ofgreater dissemination is also applicable to stakeholdersoutside of the company, who can use the reports to learnhow the workforce can create value for both the companyand the larger community.


HCM Programs at Most CompaniesAre Still in Transition

During 2006, The Conference Board organized a series ofworking group sessions to address the topic of human capitalstrategy and measurement. Key questions included:

• How can HCMs align people investments with businessstrategy?

• Which people measures can be used as prospectiveindicators of performance?

• How can human resources make business managersaccountable for their performance on people measures?

• How can people measures be used to improvecommunication about strategic people priorities?

Through responses to a 2006 survey of 104 human capital exec-utives, a review of relevant secondary sources, and companyexamples and observations, this study provides provisionalanswers to these questions. It illustrates how companies aresuccessfully applying human capital metrics to add value totheir workforce’s ability to implement strategy.

All findings and data in this report register the collectiveexperience of survey participants and reflect the overall resultsof the study, not necessarily the views of individual companiesor employees, unless otherwise specifically indicated.

AcknowledgmentsThe author appreciates the input and participation of themembers of two Research Working Groups on Human CapitalStrategy and Measurement that met several times during 2006.This report also owes much to the human resources professionalswho agreed to be interviewed, and especially to those whoassisted in writing The Royal Bank of Scotland and MarriottVacation Club International case studies.

Within The Conference Board, the author gratefully acknowledgesthe professional contributions of Amanda Humes, Gregg Mauro,Laura Pilossoph, Judit Torok, Wennie Lee, Henry Silvert, TimothyDennison, and Peter Drubin. In addition, Pascal Langevin andDonald Nordberg provided invaluable assistance.

Dr. Stephen Gates, CFA, is professor of strategy at AudenciaNantes Ecole de Management and the author of a seriesof reports on performance measurement: performancemeasurement during merger and acquisition integration,strategic performance measurement systems, performancemeasurement in European executive compensation, and humancapital measurement. He is currently council director for theEuropean Council on Corporate Strategy and the EuropeanCouncil on Investor Relations.

Gates was a principal researcher at The Conference Board from 1993 until 2005. A Certified Financial Analyst, he workedfor seven years as an investment and securities analystat JP Morgan Chase and Crédit Agricole Indocam.

Gates holds a Ph.D. and MBA from New York University’sStern School of Business, where he taught graduate courses ininternational business strategy, as well as at various businessschools in France (HEC, ESCP-EAP, EM-Lyon, and EDHEC). His publications have appeared in such journals as MIT SloanManagement Review, Long Range Planning, World at Work, Journal of Applied Corporate Finance, and Journal of InternationalBusiness Studies. He is a member of the Academy of Managementand the Association for Investment Management and Research.

Publications TeamPublishing Director Chuck Mitchell

Author Stephen Gates

Editor Timothy Dennison

Design Peter Drubin

Production Andrew Ashwell


About This Report About the Author


About the Survey Participants

Revenues

0

100%

46%More than $5 billion

$1 billion to $5 billion30

24Under $1 billion

0

100%

77%North America

Europe16

7Other

Headquarters

Publicly ownedvs.

privately held

0

100%

65%Publicly owned

Privately held35


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Copyright © 2008 by The Conference Board, Inc. All rights reserved. Printed in the U.S.A. ISBN No. 0-8237-0911-6The Conference Board and the torch logo are registered trademarks of The Conference Board, Inc.

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