The goal for a business is simple: Invest capital so that it maximises shareholder value. But, not so simple are the actions that are needed for a business to achieve this goal.
Successful strategy execution depends on access to intellectual and operational knowhow, customer and supplier relationships, a committed workforce, and other such intangibles. At the heart of making these intangibles come-alive is the firm's investment in human capital.
Capital budgeting and financial planning frameworks offer very little to guide human capital investment decisions; yet manpower costs typically constitute a significant component of operating expenses. However, it is possible to calculate return on human capital with factual analysis, which, in turn, can help develop insights into human capital management and generate sustainable economic returns.
The critical thing is to track critical employees. Our research demonstrates that the flow of pivotal employees in and out of an organisation is a strong predictor of change in CFROI® (Cash Flow Return on Investment).
Talent Quotient (TQ™) is a measure of a company's ability to attract and retain critical employees — those who may be thought of as pivotal to business success. TQ measures two key components, (i) the proportion of pivotal employees joining an organisation as a ratio of all new hires in a given period (TQ-Attract) and, (ii) the proportion of pivotal employees leaving the organisation as a ratio of all employees leaving over a given period (TQ-Retain).
Few organisations understand their employee investments beyond the cost of salary and benefits and fewer still understand the return on their investment in employees. The fact remains that most firms lack a basis for structuring or prioritising human capital investments, and a concrete notion of what return on investment is generated over time.
There are many ways to do it. Let us take a look at a potential area of application, i.e. measuring ROI on talent retention strategies implemented by an organisation.
Measuring ROI on these strategies (e.g. long term incentives, compensation increases, etc.) could appear to be complex, but it actually is a simple task if one de-constructs the key elements that need to be tracked and correlated.
Let us assume that for our purposes 'critical talent' is those employees who are in the top 25% on performance. This would likely translate into these employees also being the top 25% on compensation increases for the time period (this is the investment made by an organisation). The objective should be to ensure that the organisation is able to retain this group of employees better than the rest of the employee population within the organisation (because it has invested more in this segment).
Thus, a way to measure this in a quantifiable manner could be: ROI on talent retention = 1 – (attrition rate of critical talent/attrition rate of all employees). In a market that is constantly witnessing an upsurge in salaries and shortage of skilled workforce, such measurement would enable organisations to invest in human capital in a focused manner. There are other similar simple constructs that explore the viability of talent attraction and other retention investments. The next logical step would be to establish benchmarks and develop predictive tools to help guide organisations make the right investment decisions.
If one were to look beyond the technicalities of any one particular approach, the basic need is for organisations to apply rigor in calculating the returns on the multi-million dollar investments they make each year in their employees and the ways in which they can do so.
Companies need to measure the value that employees bring to the organisation, evaluate their impact on business performance and then align them with the business results. Companies have always measured their investments in more tangible assets such as buildings, equipment and even new products. Why should talent be far behind?
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