West Virginia IPMA HR Fall Conference September 29, 2004

1. West Virginia IPMA HR Fall Conference September 29, 2004 Human Capital – Cost vs. Investment

2. Presented by: Neville Kenning National Director, State Government Consulting Hay Group Los Angeles (213) 892 7017 Neville_Kenning@haygroup.com

3. First, Let’s Deal with the “Buzz” This Too Shall Pass • First we were Personnel and then we became Human Resources • 1930’s – Scientific Management (Time and Motion Studies) • 1960’s – 1970’s – Office Productivity • 1970’s – MBO • 1980’s – 1990’s – Quality Circles and TQM • 1990’s – Broadbanding, Reengineering and Teams • 2000’s – Human Capital

4. First, Let’s Deal with the “Buzz” (cont’d) • Its not a new idea • “We’ve moved to a period where the major criterion for judging things is cost effectiveness. In the 40’s and 50’s it was growth. In the 60’s and 70’s it was morality. Now there is no set of objective ideals except cost benefit. Business is moving to reexamine basic assumptions; the services they use, their portfolios, bank, lawyers, consultants, agencies, philosophy, employee benefits. Companies will be a lot more candid about certain operations that are not working, a lot more willing to say that the Emperor has no clothes. This affects service businesses. The issue of cost effectiveness will be critical. . . . You’ll have to explain everything (in cost-benefit terms).” Florence Skelley, President Yankelovich, Skelley and White, ADWEEK, August 1983

5. First, Let’s Deal with the “Buzz” (cont’d) • “Determining the costs and benefits of HR programs. . . .will be one of the five top issues facing HRD professionals in the 1980s. Jan Margolis, President American Society of Training and Development, 1980

6. First, Let’s Deal with the “Buzz” (cont’d) Yes, it can be measured and proven of value in the private sector. • Human Capital Indices are “popping up” everywhere in consulting practices, publications, etc. • Studies show that superior human capital practices in the private sector not only correlated to financial returns but are also leading indicators of increased shareholder value.

7. 64% 39% 21% High (76-100) Low (0-25) Medium (26-75) HCI Score First, Let’s Deal with the “Buzz” (cont’d)

8. Why is Understanding the Value of Human Capital Important? It can be measured and proven of value in the private sector, but what’s the value in the public sector? • Human resources expenditures are the “big ticket item” in the service sector in general and the public sector in particular. • Human Resources staff are under pressure to become “business partners” (people who add value) rather than overhead (people who cost money). • Becoming a business partner requires our ability to prove our worth and speak the language of our “customers” – dollars. • We have “stakeholders” who view employees as a cost, rather than an asset in which we need to make an investment. “What do you mean, we need to pay that much – I can get my ranch hands for 3 and ¼ per hour and they work hard.”

9. Why is Understanding the Value of Human Capital Important? (cont’d) • We get a much different reception when we present to a case that shows dollar benefits of our initiatives and services. “If I can show you how we can more appropriately spend $200,000 and improve productivity and service, would you be interested” vs. “we need $200,000 for this training program.” • As Human Resources professionals, we have been reluctant/ unwilling or “just don’t know how” to evaluate and measure the effectiveness of what we do.

10. Why is Understanding the Value of Human Capital Important? (cont’d) Why this reluctance? • People do not know how to calculate human capital value. • Fear that evaluation will show that programs do not work, are not worth their cost. • Belief that cost-benefit figures are phony, “fuzzy math.” • It’s a finance thing. • Evaluation is not worth it. • There is no real incentive to do it.

11. Why is Understanding the Value of Human Capital Important? (cont’d) • Major trends affecting the talent pool: • A demographic shift • An aging workforce • Teachers • Nurses • Public Servants • The decline in mentoring • A more mobile workforce • Work/Lifestyle Pressures • Changing Aspirations/Commitments • The need for more “positives” and fun in life

12. The Value of Understanding the Concept of Human Capital The keys to understanding the value of the concept of human capital are: • Understanding the model for human resources effectiveness and the “centrality” of the role of leadership. • Knowing how to value our human capital programs and initiatives. • Valuing and engaging our human capital.

13. The Model of Human Capital Effectiveness Individual & Team Competence Values & Culture Reward & Recognition Leadership Strategy Results Core Work Processes Management Processes & HR Systems Organization, Team & Job Design

14. The Model of Human CapitalEffectiveness (cont’d) Individual & Team Competence Values & Culture Reward & Recognition • The capability of people — individually and as teams — to carry out the strategy Leadership • The manner in which behavior, capability and/or results are reinforced • The way in which the organizational norms support the strategy Strategy Results Core Work Processes Management Processes & HR Systems • The ability of leaders to mobilize the organization around the strategy Organization, Team & Job Design • The key processes through which management influences people • The sequence of activities through which resources are transformed to meet customer needs • The way in which accountabilities are organized

15. Why the Importance of Understanding the Model for Human Capital Effectiveness? “To think proactively rather than reactively” In order for an organization to achieve success in the future, it must rely on the capabilities of its people. In today’s labor market, the key is to have people with the right skills and competencies, in the right jobs, in the right culture. This requires intelligent planning and effective use of our key asset, that being our people.

16. Why the Importance of Understanding the Model for Human Capital Effectiveness? (cont’d) Attracting, keeping and engaging our workforce is about: • Achieving our organization’s vision and image in a changing economy. • Attracting, retaining and motivating a talented workforce committed to our organization’s purpose. • Aligning what matters most to employees with achievement of our organization’s strategy and success. • Marketing the story of a compelling place to work in the local community, your organization and with employees.

17. Knowing How to Value our Human Capital Programs – A Training Example “Joe, you gotta get us some first-level supervisory training. My first-level folks don’t know anything about management.” Typically, the training director will take this request at face value and develop or buy off-the-shelf a first level supervisory training program. Following the advice to “value the problem” before intervening, the Conversation might go a few steps farther.

18. Knowing How to Value our Human Capital Programs – A Training Example (cont’d)

19. Knowing How to Value our Human Capital Programs – A Training Example (cont’d) • The Training Director has established a baseline cost for a problem that might be helped by management training: turnover due to a lack of performance management feedback and career planning discussions with employees. • More importantly, the Training Director knows how to focus the training to impact on the specific problem. • The potential impact: • If a training program for 20 first line managers costs $60,000, a saving of just two engineers, worth $120,000 – a reduction in turnover of 12.5% - would not only pay for the training but would produce a return of more than 100%. • These make it an easy sell to the line manager.

20. Knowing How to Value our Human Capital Programs – Turnover and Staffing I. Exit Costs

21. Knowing How to Value our Human Capital Programs – Turnover and Staffing (cont’d) II. Entry Costs

22. Knowing How to Value our Human Capital Programs – Getting Selection Right • The value of a selection system is getting good hires while rejecting those who would be bad hires. • What is a good hire? • More productive • Stays longer How to Calculate this? • Number of Good Hires x Average Salary x Value of Productivity x Years on Job as compared to the same formula for Bad Hires.

23. Knowing How to Value our Human Capital Programs – Internal Hirings and Promotions vs. External Hirings • Filling positions from internal hirings and promotions is likely to be more cost-effective than external hiring because: • Acquisition costs are significantly less; and • An internal person’s learning curve is much shorter. • Other benefits include: • Morale and motivation of employees, hence productivity gains.

24. Knowing How to Value our Human Capital Programs – Career Planning • The value of career planning is most readily shown by reduced turnover, increased productivity and the number of internal promotions vs. external hires. • Employees who are in an organization and job they like will most likely perform better, are less likely to leave. • “Career counseling and planning programs that get employees to set performance goals in today’s job and developmental goals for tomorrow’s job can increase productivity by 19%” (Latham and Locke”).

25. Knowing How to Value our Human Capital Programs –Handling Employee Relations Effectively Step 1: Manager-Employee meeting WhoFull cost/hourTimeTotal Labor Manager $38/hour .50/hour $19.00 Employee $12/hour .50/hour 6.00 $25.00 End! Total if manager does handle effectively $25/incident Manager does not handle effectively-issue goes to HR Step 2: Employee goes to HR Employee $12/hour .75/hour $ 9.00 HR $30/hour .75/hour 22.00 Counselor $31.50

26. Knowing How to Value our Human Capital Programs –Handling Employee Relations Effectively (cont’d) WhoFull cost/hourTimeTotal Labor Step 3: HR-Manager-Employee Meeting Employee $12/hour .75/hour $ 9.00 Manager $38/hour .75/hour 28.50 HR $30/hour .75/hour 22.50 Counselor $60.00 Step 4: HR checks with manager and employee Employee $12/hour .20/hour $ 2.40 Manager $38/hour .20/hour 7.60 HR $30/hour .40/hour 12.00 Counselor $22.00 Total if manager doesn’t handle effectively $138.50/incident 5.5 x more expensive! Total if manager handles effectively $25.00/incident Savings Benefit if manager handles effectively $113.50/incident

27. Knowing How to Value our Human Capital Programs – Managing Absenteeism Scenario – one employee absent for a day. What is the cost of this event or the benefits of preventing it? • “There is no cost – he or she is getting paid anyhow;” or • “We are paying for that time and not getting any work for this pay, so the cost is a day’s salary;” or • “We are paying salary + health insurance + pension + unemployment insurance etc., so the real cost is salary plus benefits;” or • “I see an empty desk for which we are paying the rent, utilities etc., so the real cost is the full cost of employment;” or • “I still have to get this work done and I have to pay for a temp or pay other employees overtime.”

28. Knowing How to Value our Human Capital Programs – Managing Absenteeism (cont’d) • The major costs of absenteeism are: • The cost of time of the absentee employee; • The cost of managerial time spent coping with the absence – rescheduling work, reassigning work, hiring temps, arranging overtime, etc.; and • Out-of-pocket outlay or “opportunity” costs such as lost productivity, delays, missed deadlines, etc. • Absenteeism runs at about 3% of total time paid in USA industry at an estimated $205billion/year. If a 100 employee department with the average clerical employee salary of $15,000 and average supervisory salary of $30,000 can reduce its current absenteeism rate of 3 per year by 10%, there would be a savings of $16,185 per year. Not much you say – add that up across the size of your organization.

29. Knowing How to Value our Human Capital Programs – Managing our Classification and Compensation Plans The Value Equation

30. Knowing How to Value our Human Capital Programs – Managing our Classification and Compensation Plans The Value Equation (cont’d)

31. Quality of Work Tangible Rewards Work/Life Balance Future Growth/Opportunity Inspiration/Values Enabling Environment Creating an Environment Where Employees Feel Valued and Engaged Engaged Performance Model

32. Competitive Pay • Good Benefits • Incentives for Higher Performance • Ownership Potential • Recognition Awards • Fairness of Reward • Perception of the Value of Work • Challenge/Interest • Achievement • Freedom & Autonomy • Workload • Quality of Work Relationship • Supportive Environment • Recognition of Life Cycle Needs/Flexibility • Security of Income • Social Environment Quality of Work Tangible Tangible Work/Life Rewards Rewards Work/Life Balance Balance • Learning and Development Beyond Current Job • Career Advancement Opportunities • Performance Improvement & Feedback Future Future Future Growth/ Growth/ Growth/ • Quality of Leadership • Organizational Values and Behaviors • Reputation of Organization • Risk Sharing • Recognition • Communication Inspiration/ Inspiration/ Opportunity Opportunity Opportunity Values Values Enabling Enabling Environment • Physical Environment • Tools and Equipment • Job Training (Current Position) • Information and Processes • Safety/Personal Security Creating an Environment Where Employees Feel Valued and Engaged (cont’d)

33. Organizational Personality • Clarity of Purpose • Understanding of Responsibility • Standards for Performance • Linkages to Rewards Good Leadership Supporting Management Styles Work Requirements Individual Motives and Capability • Employer of Choice • Attract • Retain • Recruit • Engaged People • Positive Climate • Motivation • Enthusiasm and Energy • Engaged Performance • Competitive Advantage • Employer of Choice • Sustain Results Superior Performance Creating an Environment Where Employees Feel Valued and Engaged (cont’d)

34. Lessons We Can Learn from the Worlds Most Admired Companies The 8 key attributes that are features of the Worlds Most Admired Companies: • Innovativeness • Quality of Leadership • Long Term Investment Value • Social Responsibility to the Community and the Environment • Ability to attract and retain talented people • Quality of Products and Services • Financial Soundness • Wise use of Corporate Assets

35. Lessons We Can Learn from the Worlds Most Admired Companies (cont’d) What distinguishes the “best” from the rest? • Ability to attract and retain talented people • Culture • Leadership • Performance Management and Measurement • Strategy Implementation • Managing through economic uncertainty These attributes are not just for success in the private sector – they are key components for success and effective management and utilization of human capital in the public sector.

36. In Summary • The Old: • Strategy Structure People Process • The New • Strategy achieved through People • Its not about spending more on our human capital – its about”: • Attracting and Retaining Top Talent • Understanding what engages employees • Clear direction from leaders • Competitive Rewards • Opportunities to Learn and Develop • To be Valued • Good Work Environment • Challenging Work • Feedback • Investing wisely • Being able to calculate the “ROHCI” and sell our value propositions