Great Small Business Ideas to Start: Measuring employees performance
Recent research suggests that the average company spends 40 percent of its revenues on people-related expenses (human capital costs), and 92 percent of financial directors think human capital has a “huge” impact on customer satisfaction and profitability. However, only 16 percent of companies have any real idea of the return on human capital investments. The solution is to measure the direct return on your investments in people.
The idea
Given the sums invested in human capital activities—notably training and development—and the clear link between investment in employees and effectiveness, the need for systems to measure performance is vital. According to General Electric’s former CEO, Jack Welch: “The three most important things you need to measure in a business are customer satisfaction, employee satisfaction and cash fl ow.” Although Welch later changed the last item to shareholder value, the importance of the other two—and their connection—remains strong.
Executives typically encounter one or more problems with performance measurement.
- Too many measures obscure the most significant issues and divert attention from other issues.
- Measures are disconnected, unrelated to the firm’s strategy and business priorities.
- Results are emphasized without necessarily providing an adequate explanation of how they were achieved.
- Rewards are not in line with measures of performance; consequently, the desired behaviors are not encouraged.
- Measurement is divisive, failing to support team-based working and collaboration.
- Short-termism is encouraged, as measurement leads to an intense focus on improving the next quarter’s results.
Watson and Wyatt’s Human Capital Index highlights the impact of people management practices, with five issues directly affecting profits:
- Total rewards and accountability.
- Collegial, flexible working place.
- Recruitment and retention.
- Open and honest communications.
- Focused HR service technologies.
One approach to measuring the link between investments in people and performance is provided by B&Q’s “Employee Engagement Programme.” This prioritizes employee engagement and customer loyalty. Every manager has a regular, one-page report summarizing their performance in two areas: managing human capital and managing traditional finance measures.
As a result, employee turnover reduced from 35 percent to 28 percent (each percentage point of attrition costs at least £1 million), and profits increased, with turnover per employee rising from £87,000 in 1998 to £106,000 in 2002. The role of the finance team is central to the success of the process: designing, funding, and managing the program. Other features of the program include close liaison between HR and retail operations, objective measurements directly focusing actions on enhancing performance, and staff commitment to the program.
In practice
- Recognize that including “people” measures in an overall corporate scorecard raises the profile of human capital and ensures management focus. There is a connection between strong people practices, increased customer satisfaction, and financial results.
- Choosing the right HR measures means finding the link between motivating staff and achieving vital business outcomes— including issues as diverse as product innovation, safety, and customer satisfaction.
- Ensure top-level commitment to finding out and using this information.
- Provide active support for front-line managers.
- Recognize the importance and impact of discretionary behavior.