Seems like everyone is talking about human capital these days — from the SEC requiring disclosures for public companies and the challenge of the Great Resignation to diversity and racial equity and hybrid work. You might think that these topics are quite broad in focus, but they all have two common goals:
- Accommodate the workforce to generate engagement, retention, and enhanced performance; while simultaneously
- Optimizing the return on investment in human capital
Most HR professionals are familiar with the first concept, but are, for the most part, challenged by the second concept. Traditionally, human capital professionals were never held accountable for the “return performance” on budget allocations to HR programs. No one measured if the investments in programs generated achieved HR goals or, more importantly, achieved an “ROI.” For current and future human capital practitioners, budget optimization and financial rationalization is going to be the new “normal.” The SEC couldn’t have said it any clearer when they released their reporting requirement for public companies: human capital spend is no longer simply an expense, but an investment in an intangible asset, and needs to be reported as such.
“Financial literacy required”
There is increasing demand from management, employees, prospective employees, customers and communities for enhanced transparency related to how well human capital programs are working to attract, retain, motivate and engage productive employees and meet required financial return requirements. For this reason, financial literacy is going to be the new required skill for HR professionals.
Given that for most organizations the cost of human capital is generally the largest expense (often between 40% and 80% of total operating expense), it makes sense that more rigorous scrutiny of the effectiveness and efficiency of human capital programs is required. The good news is that HR professionals will now be held accountable to make sure that every dollar invested in HR generates at least a dollar return in either profitability or reduced expenses.
The “default” solution no longer works
The traditional approach of “throwing money at the problem” is no longer a viable sustainable solution. We learned from the Great Resignation that increasing salaries to current employees or in job offers doesn’t necessarily lead to retention or offer acceptance. In fact, a recent report indicates that compensation is the number one driver of employee turnover, with 55% of employees leaving for jobs with higher compensation.
Chasing talent by upping salaries has diminishing impact. At some point, employees don’t value the higher salary, and the cost of those employees will be higher than the economic value they generate for the organization. There’s no way to win this game strictly with cash alone. What does address workforce-related problems is a well-considered, holistic approach that considers employee needs while optimizing budget allocation to desired outcomes.
How to prepare for the next evolution of the workplace?
Smart organizations are exploring tailored approaches for interventions instead of a standardized “one-size-fits-all” approach. They are considering measurable goals related to organizational outcomes and examining the timing related to interventions to enhance each stage of the workforce journey. Ultimately, this can optimize the level and phasing of investments in employees — using evidence rather than “gut feeling” to drive decision-making. We discuss the foundational principles and design-thinking approaches in our new book, Humanizing Human Capital: Invest in Your People for Optimal Business Returns.
For example, one of the principles is “Personalize the Progression Path.” Instead of investing in generic learning programs, organizations can segment the workforce and invest in job-specific activities and experiences. Organizational culture must empower workers to have a say in their growth and development journeys, using personal tools and their own social networks, while embedding learning in the flow of work. This involves providing developmental opportunities as part of a worker’s regular workday. This can be accomplished in several ways including by offering the chance to learn and apply new skills and how to do the job while working on a team. In addition, learning can be made fun and engaging by including feedback mechanisms in the learning process, using modern technologies (learning experience platforms, APIs and digital content) and gamification.
It is important to provide workers with control over their learning experience to support different learning styles. The results are better trained, longer-tenured employees, who are more productive and generate economic value for the organization. This concept can be applied to any HR program such as diversity, equity and inclusion, performance, development, retention, rewards, etc. Ultimately the program results must be linked to business impact such as human capital return on investment, human capital value added and net promoter score to determine program effectiveness and sustainability.
Companies can reap myriad rewards by instituting mechanisms that enable tailored solutions to address workforce related needs and institute a set of measurements that demonstrate the impact of those solutions. This requires meaningful data-driven investments and a financially literate HR professional to drive enhanced decision-making.
Solange Charas, Ph.D. is the founder of HCMoneyball, adjunct professor at Columbia, USC, and NYU, and a governance researcher and thought-leader. Stela Lupushor is the founder of Reframe.Work Inc., a faculty member at New York University and a workplace futurist. Together, they are the co-authors of Humanizing Human Capital: Invest in Your People for Optimal Business Returns (September 2022).
This post is created in partnership with Weaving Influence.
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