Linking HR to Corporate Strategy and Costing Issues

1. Linking HR to Corporate Strategy and Costing Issues

2. High Performance Management Practices • Study done by Dr. Mark Huselid at Rutgers University • Looked at nearly 10,000 employers across the country • Controlled for industry, history, other variables that might affect profitability and organizational success • Hypothesized that sophisticated HR practices would positively affect the “bottom line”

3. Formal information sharing device Formal job analysis Nonentry-level jobs filled from within Employee attitude surveys administered regularly QWL, quality circle or labor-management participation teams Employee access to company incentives, especially profit-sharing Employee training High Performance Management Practices

4. Employee access to formal grievance procedure or complaint resolution Pre-hiring employment tests Performance appraisals linked to compensation Formal performance appraisals Qualified applicants for frequently filled positions Promotion decisions based on merit or performance High Performance Management Practices

5. High Performance Management Practices Result In • Employee turnover is lower • Increase of one standard deviation in high performance practices decreased turnover by 7% • Productivity is higher • Increase of one standard deviation showed a productivity gain worth $27,000 per employees

6. High Performance Management Practices Result In • Profits and market value increase • Increase in one standard deviation associated with increase in gross rate of return on capital by over $3800 per employee • And increase in market value of firm by more than $18,000 per employee • Other research supports these conclusions

7. Innovative Management Practices • HR is being challenged to align the management of human resources with new innovative management strategies that respond to • Globally competitive environment • Downsized organizations that must do more with fewer people • Business environment that precariously balances competitive demands with employee needs and desires

8. Behavioral measures Learning Reactions to programs, policies, etc. Behavior change on the job Etc. Statistical measures Ratio of accidents per year Percentage of turnover Validity coefficients Average pay increase Etc. Traditional HR Measures

9. “Costing” HR • The need to measure HR activities and outcomes in economic terms is becoming greater • HR professionals have been parochial • Inadequate understanding of the business • Inadequate understanding of financial matters • Those HR professionals who are first business people are becoming strategic partners

10. HR Accounting: Costing Approach • Contribution each employee makes • Each cost element associated with each behavior must be identified and its dollar values determined • Costs can be seen in two ways: • Outlay (materials) versus time costs • Fixed, variable and opportunity costs

11. Costing HR • Fixed costs • Independent of rate of production • E.g., salaries and benefits • Variable costs • Increase as production rate increases • E.g., overtime payments • Opportunity costs • What the organization would have earned if it had put resources to another use • E.g., profit lost due to absenteeism

12. Can HR Costs Be Measured? • According to Cascio, all aspects of HR management can be measured and quantified in the same way as any operational function • Even attitudes and morale can be “costed” • Qualitative assessments are also important • Fit with strategy of the organization

13. Compensation Benefits, especially insurance premiums Personnel taxes Recruiting Training and development Affirmative action Turnover Outplacement Functional HR Areas Critical for Costing Analyses

14. Compensation • Poorly designed compensation programs may pay positions and people ineffectively • Incompetent, overpaid employees will stay • Competent, underpaid employees will leave • The cost of designing and implementing a compensation program often saves money over time

15. Benefits • HR often does not monitor benefits administration adequately • Often dividends are not paid by insurers when premiums exceed benefit payout • Employees often receive more paid sick-leave than allowed • Attendance and punctuality are not controlled by adequate benefit administration

16. Recruiting, Training and Development • Often can be the cause of a great amount of waste • Requires more expertise and skill but often assigned to entry-level personnel • Hiring of over-qualified personnel can be very costly, due to high turnover • Costs of training are very high and often not monitored or evaluated

17. EEO Issues • HR should have the financial responsibility to ensure that affirmative action does not result in declining productivity • The odds of a fifty-year old worker remaining with the company far greater than younger people • Savings from reduced turnover can offset the expense of pensions and higher salaries

18. Turnover and Outplacement • Cost of turnover can be very high • Can be controlled by joint efforts of HR and line managers • Outplacement policies can save money in layoffs • Maintains good relationships with laid-off workers • “Bridging pay” can save serverance expenses; stops when a new job is found

19. Absenteeism and sick leave Effects of workplace smoking EAPs and wellness programs Employee attitudes Labor contracts Economic value of job performance Selection device validity Other Areas Where HR Costing is Useful

20. Example: Utility Analysis • To make decisions about the effectiveness of HR decisions, especially used in selection “Utility of a selection device is the degree to which its use improves the quality of the individuals selected beyond what would have occurred had that device not been used” (Blum & Naylor, 1968).

21. Example: Utility Analysis U = ntrxySDyZx-NC • U = Productivity in dollars • n = Number of people hired • t = Average job tenure of those hired • rxy = Validity coefficient • SDy = Standard deviation of job performance in dollars • Zx = Average predictor score of those chosen • N = Number of applicants • C = Cost per applicant

22. Example: Costing Results of Attitude Change • Three activities needed • Cost model to identify the organization’s direct costs and losses attributed to the program • Effectiveness model for measuring and validating effects of a project on the work environment and attitudes, behaviors and performance • Synthesizing model to compare costs and benefits of the program

23. Behavior Costing Approach • Each behavior had a cost • $17.55 per shortage • $49.14 per absenteeism incident • $5,379.31 per turnover • Correlations:

24. Relating Behaviors to Attitudes and Estimating Benefits: Shortages • Present cost level = Average number of balancing shortages (3.07) x cost per incident 3.07 x $17.55 = $53.88 per month • Estimated behavioral improvement = Planned attitudinal improvement in SD units (.5) x SD of balancing shortages (1.74) x r .5 x 1.74 x (-.23) = -.20 • New behavioral rate = Average number of shortages + estimated behavioral improvement • 3.07 + -.20 = 2.87 per employee per month • New cost level = New behavioral rate x cost per incident • 2.87 x $17.55 = $50.37 per employee per month

25. Relating Behaviors to Attitudes and Estimating Benefits: Shortages • Present cost level = Average number of balancing shortages (3.07) x cost per incident 3.07 x $17.55 = $53.88 per month • Estimated behavioral improvement = Planned attitudinal improvement in SD units (.5) x SD of balancing shortages (1.74) x r .5 x 1.74 x (-.23) = -.20 • New behavioral rate = Average number of shortages + estimated behavioral improvement • 3.07 + -.20 = 2.87 per employee per month • New cost level = New behavioral rate x cost per incident • 2.87 x $17.55 = $50.37 per employee per month