A company’s employees are typically its largest expense, but often the least measurable when it comes to productivity and profit. Craig Donaldson looks at how HR can help a company measure what an employee is really worth
Michelle Smith, president of the US Forum for People
Performance Management, says that while many organ
isations measure and evaluate an abundance of employee-
related constructs such as output, efficiency, satisfaction
and engagement, few companies have systematic ways
of assembling them into a formal process that calibrates
the long-term relationship between people and organi
Anastasia Ellerby, managing director for Infohrm in the
Asia-Pacific Region, says it is relatively easy in certain
industries to connect people input to business outcomes,
while in others it is far more complex. The industries
that are able to measure the value of their people suc
cessfully are retailers, banking and energy, she says.
“A lot of organisations find it difficult to identify and
agree on an accepted method of connecting people to
business outcomes and provide a key input to decision-
making. For some companies, connecting people to busi
ness outcomes is put in the ‘too hard basket’; for other
organisations it is the ‘holy grail’ and the rest fall some
where in between,” Ellerby says.
Debra Eckersley, a partner in PricewaterhouseCooper’s
performance improvement practice, says the ability to meas
ure profit per employee varies depending on the size and sec
tor of the organisation. Process-and-sales-driven businesses
have greater potential to establish metrics that monitor
employee performance against key events, and are likely
to be better positioned to understand rel
ative productivity, she says.
“However, for more ‘knowledge’ or
‘innovation’-focused organisations, meas
uring an individual’s profitability and pro
ductivity is more difficult. Without strong
information and a clear sense of what is
being measured, it can be difficult to draw
meaningful conclusions to aid decision-
making,” Eckersley says.
Metrics and formulas
There are a number of formulas for measuring
productivity and profit per employee. Rainer
Strack, Europe leader for The Boston Con
sulting Group, says that companies need a supe
rior productivity metric, similar to a value-added
per-person metric, which measures output.
“This metric is not profit per employee, but
more about productivity, because in profit per
employee you include personal costs and it is
better to separate input from output,” he says.
“So in our metric, you divide personal cost by capital-
related costs, such as depreciation, add the cost of capi
tal and multiply by capital employed (for more detail see
The Boston Consulting Group report, Creating People
Advantage: How to Tackle the Major HR Challenges Dur
ing the Crisis and Beyond). Most companies, even in the
old economy, are involved in people-intensive work and
have ratios of 3:1, 4:1 or 5:1 (people cost compared to cap
ital cost), so this clearly indicates value creation is more
on the people side than on the capital side.”
The Forum for People Performance Management has
developed another formula for calculating Employee
Lifetime Value (or ELTV), a long-term metric
that provides insights on measuring the financial value
of an employee to an organisation.
Its white paper, Employee Lifetime Value: Measur
ing the Long-Term Financial Contribution of Employ
ees, reviews the concepts, metrics, and applications of
ELTV so that employees can be viewed as contributors
to the cash inflow of organisations, says Smith.
“The overall goal is to demonstrate how ELTV – much
like the parallel customer/lifetime value framework – fits
into a strategic approach to management that considers
employees and their behaviours the primary drivers of
success,” she says.
Generic productivity levels are usually tracked using
metrics such as remuneration/revenue and remunera
tion/costs, according to Eckersley. “Both methods pro
vide clear indications of whether sufficient revenue is
being created to justify the level of the remuneration bill
and whether it is reasonably controlled against the busi
ness’s total costs,” she says.
Additionally, organisations often look at revenue/full-
time employee (FTE), profit/FTE and cost/FTE. “Organi
sations that achieve a competitive revenue per FTE and high
profit per FTE, with costs per FTE under control, are likely
to possess a workforce with the right numerical strength,
delivering competitive levels of productivity,” Eckersley says.
PricewaterhouseCoopers uses a methodology called
Human Capital Return on Investment (HC ROI), which
provides a comparative measure of added value per FTE.
HC ROI compares the pre-tax profit generated before
employment costs, with the investment in compensation
and benefit costs.
Eckersley says this ratio determines how much pre-tax profit
or earnings are produced for every unit of currency paid to an
employee. “HC ROI is a measurement all HR executives should
understand as it covers all major elements of an organisation’s
potential contribution – including revenues produced, costs
incurred and investment in reward structures,” she says.
“Importantly, HC ROI can also help management
understand how to improve each element relative to an
Working with finance
A key aspect for finance and HR is to understand the rela
tionship between their people and the value they create for the
bottom line, according to Ellerby. Once this understanding is
reached, both then need to agree on consistent measure
ments, report on these measures and act on the outcomes.
“HR can show finance the value creations gained by influ
encing the bottom line through attraction, retention or
engagement strategies,” she says.
Practising workforce composition modelling is another
way that finance and HR can work together to improve
profit and productivity per employee, Ellerby says.
“Looking at the proportion of contracted professional
and technical positions, as well as temporary adminis
tration and service staff, can affect the cost of the over
all workforce and is a trade-off between cost and
flexibility – this process is one way that organisations
can demystify the value of people.”
Smith says that what is ideally needed is a set of met
rics that can be incorporated into standard financial
statements that take into account an organisation’s intan
gible assets. “Or, if the value of these assets is deter
mined independent of the financial evaluation, the
establishment of a model that is universally accepted
and recognised,” she says.
“In order to achieve this goal, HR should campaign
for additional research to be conducted on the direct
link between employee engagement and corporate finan
cial performance, and encourage that these metrics are
incorporated into their financial statements”
HR should be proactive in working with finance to
create the measurements and then getting them into the
hands of senior management and helping them to under
stand the implications of the data, Smith says.
Most HR departments are still in their infancy when
it comes to evaluating human capital, according to
Strack. “When it comes to measuring and managing
investment capital, there has been 500 years of double-
entry book keeping and balance sheet accounting, but
when it comes to human capital I think we are still at the
very beginning,” he says.
“So if HR is going to work closely with finance, it
needs to think about how to increase productivity, under
stand who the key people are in the organisation and
how to further develop them, keep them engaged and
motivate them to improve leadership, engagement and
Making a start
Quantifying employee value and profitability provides an
important opportunity for HR professionals to play a
much broader, more valuable role in the future success
of their organisation.
Smith says HR should become an important part of
strategy development because of the importance of
human capital in the ability of the firm to carry out its
strategy. “HR specialists, along with financial man
agers, should be in charge of measuring employee
value,” she says.
“Aside from the more traditional roles of HR, the new
role of HR practice should include determining appropri
ate organisational structural changes and developing strate
gies to improve employee performance. With the increased
role of people in today’s knowledge-based economy, the
HR department should be included in the strategic business
planning process and top management of a company –
rather than merely serving as a support function.”
Companies should get started with some very sim
ple metrics, according to Strack. “Play with them, get
some experience at using them to learn about the
process,” he says.
“I think a lot of HR people are reluctant when it
comes to analytics because they come from a world of
soft measures. As the old saying goes, ‘What gets meas
ured gets done’, so if HR doesn’t have metrics in place
it will never live up to its full potential in business.”
Eckersley says that without strong information it is
difficult for organisations to effectively monitor this area
and generate real improvements.
“Creating a successful measurement program requires
clarity around how productivity will be tracked (and this
may need to involve some subjective supporting indicators)
and ensuring robust data exists to support managerial
decision-making,” she says.
Jac Fitz-enz on measuring people profit
When it comes to measuring profit and productivity from people, most companies are hardly on track, let alone up to speed, according to Jac Fitz-enz, an expert in human capital analysis and measurement and author of The ROI of Human Capital.
He knows of only a few companies, such as Hewlett Packard and Microsoft, which are seriously doing something in this space. “They have some simple formulas like revenue per FTE, and compensation as a percent of revenue,” he says.
Two formulas he recommends for measuring human capital are:
Human capital ROI = Revenue - (Operating expense - labour cost) ÷ labour cost
Human capital Value Added = Human capital ROI ÷ number of employees
For companies starting out in this area, he advises thinking human capital and not human resources. “Understand HR’s mission is to help management optimise the ROI of people,” Fitz-enz says. “Look for root causes for human capital changes and improvements.”
The people business at Blackmores
The great failure of business around the world, according to Marcus Blackmore, executive chairman of Blackmores, is an inability to define the value of employees.
“Maybe it’s driven by the accounting profession, but we see with great repetition chairmen’s reports saying: ‘Our people are our greatest asset’. Then, when you look through the balance sheet of the financial statements, nowhere in there can you find any value on the people in the organisation,” he says.
“I’ve got a very simplistic view about that. If I go to a bank and borrow a million dollars, at the moment they’ll charge me about 6 per cent, or about $60,000 a year. Now, the least-paid people at Blackmores are on about $45,000 a year. The on-cost of employing those people is something in the order of $15,000 a year. So the least paid person at Blackmores costs the company in the order of $60,000.
“That’s the same amount of money that I can go and borrow a million bucks for. So therefore, from my perspective, is it unreasonable that we should suggest that the least-paid person at Blackmores is a one million dollar investment to this company - an investment in people capital if you like?
“Now if you want to go and buy a new forklift, your operations people will give you pages of forms to justify it, but they will put on an extra person in a flash. It’s just amazing, and I think it’s the great failure of modern business because we might appreciate how much people cost but we don’t appreciate how much they’re worth.”
Tips for starting out
1. Understand the relationship between people and business performance
2. Find a simple and consistent way to measure value and report it
3. Spend time analysing results rather than arguing about the data
4. Act on the outcomes to improve bottom-line performance
Source: Anastasia Ellerby, managing director, Infohrm, Asia-Pacific Region