Engaged WorkforcePerformance Management & Rewards

Human Capital’s ROI

Linking behavioral information with performance data is the key.
 

By Jason Taylor 
 
 
Today’s economic conditions push executives toward a renewed focus on reducing expenses and growing efficiencies to improve the bottom line. This shift in strategy includes an increased interest in return on investment (ROI).
 
 
Companies tend to focus ROI measurement efforts on conventional areas such as hardware, software, and supply chain management. However, executives are often at a loss when attempting to provide tangible data for their human capital or employee investments. In all forms, human capital is among the most expensive investments.
 
 
According to the American Management Association, the cost of hiring and training a new employee can vary from 25 percent to 200 percent of annual compensation. Organic expenses include customer service disruption, emotional unrest and loss of morale. In addition, absenteeism among remaining employees, as well as the loss of experience, continuity, and corporate memory also hurts the bottom line.
 
 
In order to directly quantify the cost of losing an employee, many experts assign an average cost to each employee. For example, Workforce Management Magazine reports 45 percent of responding companies indicated that turnover costs are more than $10,000 per employee. No matter how the figures are calculated, human capital investment begs for a tangible ROI. There is huge potential for executives to directly improve the end result by learning to accurately quantify the ROI associated with selecting employees that fit within an organization.
 


Maximizing ROI
Calculating ROI starts by aligning the employee selection process to the specific data that will provide results. To do this, companies must design the selection system around the actual data they use to prove the final ROI. Specifically, the system should identify candidates with the greatest probability of producing higher levels of specific performance data while staying longer on the job. In other words, identify prospects with the highest potential ROI. For example, if ROI is evaluated by improvements in dollars sold, then the selection system must be designed to identify the candidates with the highest probability of selling more dollars on the job. To achieve this alignment there are three recommended steps:
 
 
Collect performance data. Executives must realize that each job provides a contribution to profitability and can be quantified in performance terms. In the natural order of business, a job that does not contribute to the company’s objectives and goals will become obsolete. Therefore, it is possible to quantify the contribution of each and every employee. While collecting or measuring performance data for some positions is more difficult than others, a quantifiable contribution still exists.
 
 
Depending on the nature and design of the job, employee performance can be quantified using a wide range of metrics. Consider examples such as average handle time, units sold or produced per hour, and scores on a performance evaluation. By starting with actual performance data that will be used to measure ROI, the selection system will align with the final desired outcome.
 
 
Capture behavioral preferences. Use an assessment system to capture the behavioral preferences of individual employees currently performing at the company. Each person has behavioral preferences—ways we go about our daily tasks. Some individuals are detail-oriented, organized, introverted, ambitious, competitive, or likely a combination of these. Behavioral preferences drive an employee’s thoughts and actions, and these eventually lead to job outcomes. Companies gain valuable information by understanding individual employee behavioral preference. Behavioral information provides the key that will unlock the code to actions most conducive to success at the individual performer level.
 
 
Combine both for insight. Linking behavioral information with actual performance data will provide insight on how successful an employee is in their role. The process uses data to identify common behavioral preferences that lead to success, and aligns the selection system to the desired ROI. The combination of the two data points provides companies with the power to capture the behavioral pattern most conducive to success in a specific job—or what we call a performance profile. The performance profile also alerts hiring managers of potential negative behaviors that will most often thwart success at the individual level.
 
 
The goal is to show ROI by selecting candidates that are more productive and more likely to stay longer on the job. The optimal behavioral pattern provides a direct link between performance data and employees’ future performance on the job. Those new hires matching the behavioral pattern have the highest probability of producing more and staying employed longer, thus providing a direct ROI through retention and improved performance.
 
 
Case Study: Retail Turnover and Performance
After creating its own performance profile, a home furnishings retailer studied a sample of 1,794 employees over 3 and 1/2 years. The retailer compared turnover rates and employee productivity when the hiring process included a performance profile and when it did not. The results showed a statistically significant difference in both retention and productivity.
 
 
In the performance phase of the study, ‘performance profile’ hires surpassed their sales goals with a 54.5 percent shorter ramp-up period over those non-performance profile co-workers. The retailer estimated these results would increase annual sales by $8.75 million when every sales position performed to those standards.
 
 
When the company calculated hire and retention figures, the figures credited performance profile hires with a retention rate that was 25 percent to 28 percent higher over their first nine months when compared to their counterparts during the same period. In the context of this retailer’s average turnover, the improved rates across all positions would account for a $750,000 annual savings in replacement costs. By using the performance profile or a structured behavioral profile, any company can be equipped to accurately predict future success for job candidates.
 
 
Real Substance
The value of ROI lies in factually proving a positive impact to the bottom line. Unfortunately, not all case studies and expressed findings are based on hard evidence. Carefully consider the difference between true case study information and marketing materials that claim ROI, but collapse under close scrutiny. Claims that lack depth and substance do not represent a strong ROI nor do they provide the proof necessary to showcase success.
 
 
Make sure the circumstances of the situation surrounding the ROI claim are sufficiently explained. Describing the circumstances will provide real-world application and meaning to the ROI. Without knowledge of the circumstances, it is easy to get caught up in the numbers and lose the true impact of the findings.
 
 
Here is an example of one way to ensure the circumstances are valid. A company used a performance profile to guide its talent selection system for a call center position. After one year of using the system in the selection process, the company calculated ROI. The study focused on 704 new hires and their average handle time (AHT) percent to target. The data showed hires recommended by the selection tool recorded a statistically significant 3.34 percent improvement in AHT percent to target (102.34 percent versus 98.50 percent). At first glance, a 3 percent improvement seems unimpressive—not so fast!
 
 
Knowing the circumstances provides a more powerful perspective as to the value of the perceived small gain in ROI. First, this number represents average improvement across hundreds of call center professionals. For example, 10 people who improve by 3 percent means minimal gain. However, 800 people improving by 3 percent translates to a major impact. The more impressive value, however, lies in the contracts the call center has with its clients. By contract, for each operator that does not achieve their AHT percent to target goal, the call center must pay back $1,000 to the client each month. Simple math reveals that the 3.34 percent ROI improvement means millions of dollars saved over time. This savings ties directly back to the bottom line of call center operations.
 
 
The greatest value of any human resource strategy is the end result. Over time, expect your selection system to produce ROI that will yield real results in the form of turnover reduction, improved performance, and other tangible measures.
 
 
Jason Taylor, Ph.d, is the chief science officer at PeopleAnswers Inc.

Tags: Engaged Workforce, Performance Management & Rewards

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