Are you in touch with the human capital dimension?

‘Our organisation revolves around people’. Pick up just about any item of corporate communications and you will find this or similar statements. Yet clear performance indicators that clearly link to a company’s strategy and key risks is often missing from those same communications.

For many companies the human capital dimension is still covered off by an annual thank you to employees for their contribution and a note of employee numbers and remuneration costs, with employee turnover and absences occasionally making an appearance. And yet, human capital costs often amount to more than 40% of a company’s total costs.

Growing numbers of companies are recognising that the main driver of their value is people – customers, employees and other stakeholders – and that financial performance is merely the product of the value these people generate. However, it is still relatively rare for companies to even attempt to align sparse employment information with the goals, strategies, and business results of the company.

Reporting environment

The new reporting environment that has emerged in the last few years has created an expectation, and in many countries, requirements for greater transparency around this kind of non-financial information. This has created a stronger need than ever for comprehensive and well-argued human capital data to be available to external stakeholders (including investors, employees, suppliers and customers), as well as management teams and company boards.

To sustain success and compete in the market place, it is becoming strategically important for companies not only to understand the motivation, behaviours and engagement levels of their employees and customers, but also to be able to manage these and take appropriate action in response. Companies that want to stay ahead are not only finding ways of capturing data around relevant indicators, but also measuring how important these indicators are for the organisation and for the individual.

Tapping in to motivations

Empirical research, for example by the ISG institute in Switzerland, shows that people’s behaviour is guided to a large extent by complex factors such as values and ideals, motivations and attitudes that are tied up with motivational psychology. New methods of measuring and assessing individual preferences need to show where preferences lie and analyse the extent to which the organisation takes into account these preferences within its business planning.

Clearly, those organisations that systematically enter into dialogue with their stakeholders and find out what drives their decisions will be ahead of the game. Companies whose customers are very cost-driven, for example, might not need to spend too much energy and resource on highly innovative solutions when cost cutting will be a more successful motivator. Conversely, the loyalty of customers who are very focused on quality is not likely to be much improved by price reductions. Similarly, employee motivations will vary – some may want to earn as much money as possible while others are more motivated by the work content itself or by the feeling of being part of a team.

Powerful insight and communication

With the appropriate methodology, different types of employee and customer preferences can be viewed in relation to each other and correlations made between these and the organisation’s key performance indicators (both financial and non-financial). This can be a very practical tool for management teams that opens up new perspectives and enables them to comprehensively analyse their company’s value drivers and use this insight to inform their strategic decisions. Much of the information gathered will also be of interest beyond the management team – such as to the board and investors – and can therefore be used to really differentiate and add value to external reporting of all kinds.

We expect this kind of internal and external reporting on key stakeholder issues to be a long-term business trend that will create a competitive advantage for those who do it well.

Important role for HR

Human resource executives clearly have an important role in providing relevant human capital information for their boards, investors and other stakeholders to demonstrate the value people bring to the business and its ongoing sustainability.

By measuring on a regular basis the human capital changes occurring through a selected number of relevant quantitative and qualitative metrics, organisations are able to track the pace of their improvements, identify emerging issues and benchmark their position against the competition.

HR executives need to demonstrate a clear link between business objectives and human capital strategy and to reassure shareholders that investment in people is geared to a practical and realistic assessment of business risk and value creation.

It is critical that human capital measurement is accepted by the organisation as an essential activity that requires resource and management. We have found that clear definitions and governance help ensure that human capital measurement is built into the fabric of normal business reporting.

Richard Phelps is the global human resource management leader at PwC and Thomas Scheiwiller is the managing partner of governance and risk at PwC in Switzerland.

The human capital checklist

How HR executives can start to highlight where major action may need to be taken to meet the expectations of company boards and shareholders.

1. What are the priority business challenges facing your company in the next two years?
2. What human capital actions are needed to make the most of the opportunities required to guarantee business success?
3. How will you make these actions happen?
4. What are your KPIs and how are these related to the business challenges?
5. What data is needed by executives to measure human capital performance?
6. Are you fully informed and / or involved in your company’s regulatory reporting?
7. What human capital information will be most useful to your shareholders and in what format?
8. What information gaps exist and how do you intend to fill them?
9. Are the information systems advanced and flexible enough to respond to all recognised demands?
10. Are you satisfied the information you produce is robust and can withstand scrutiny?
11. Are you conversant with key human capital trends that may be raised by shareholders?
12. Is there a direct link between what the HR function does and what the business wants it to do?