Linking HR to Corporate Strategy and Costing Issues

High Performance Management Practices

Study done by Dr. Mark Huselid at Rutgers Study done by Dr. Mark Huselid at Rutgers UniversityUniversity

Looked at nearly 10,000 employers across the Looked at nearly 10,000 employers across the countrycountry

Controlled for industry, history, other variables Controlled for industry, history, other variables that might affect profitability and organizational that might affect profitability and organizational successsuccess

Hypothesized that sophisticated HR practices Hypothesized that sophisticated HR practices would positively affect the “bottom line”would positively affect the “bottom line”

High Performance Management Practices Formal information Formal information

sharing devicesharing device Formal job analysisFormal job analysis Nonentry-level jobs Nonentry-level jobs

filled from withinfilled from within Employee attitude Employee attitude

surveys administered surveys administered regularlyregularly

QWL, quality circle or QWL, quality circle or labor-management labor-management participation teams participation teams

Employee access to Employee access to company incentives, company incentives, especially profit-especially profit-sharingsharing

Employee trainingEmployee training

High Performance Management Practices

Employee access to Employee access to formal grievance formal grievance procedure or procedure or complaint resolutioncomplaint resolution

Pre-hiring Pre-hiring employment testsemployment tests

Performance Performance appraisals linked to appraisals linked to compensationcompensation

Formal performance Formal performance appraisals appraisals

Qualified applicants Qualified applicants for frequently filled for frequently filled positions positions

Promotion decisions Promotion decisions based on merit or based on merit or performanceperformance

High Performance Management Practices Result In Employee turnover is lowerEmployee turnover is lower

Increase of one standard deviation in high Increase of one standard deviation in high performance practices decreased turnover by performance practices decreased turnover by 7%7%

Productivity is higherProductivity is higher Increase of one standard deviation showed a Increase of one standard deviation showed a

productivity gain worth $27,000 per productivity gain worth $27,000 per employeesemployees

High Performance Management Practices Result In Profits and market value increaseProfits and market value increase

Increase in one standard deviation associated Increase in one standard deviation associated with increase in gross rate of return on capital with increase in gross rate of return on capital by over $3800 per employeeby over $3800 per employee

And increase in market value of firm by more And increase in market value of firm by more than $18,000 per employeethan $18,000 per employee

Other research supports these conclusionsOther research supports these conclusions

Innovative Management Practices HR is being challenged to align the HR is being challenged to align the

management of human resources with new management of human resources with new innovative management strategies that innovative management strategies that respond torespond to Globally competitive environmentGlobally competitive environment Downsized organizations that must do more with Downsized organizations that must do more with

fewer peoplefewer people Business environment that precariously balances Business environment that precariously balances

competitive demands with employee needs and competitive demands with employee needs and desires desires

Traditional HR Measures Behavioral Behavioral

measuresmeasures LearningLearning Reactions to Reactions to

programs, policies, programs, policies, etc.etc.

Behavior change on Behavior change on the jobthe job

Etc.Etc.

Statistical measuresStatistical measures Ratio of accidents per Ratio of accidents per

yearyear Percentage of turnoverPercentage of turnover Validity coefficientsValidity coefficients Average pay increaseAverage pay increase Etc.Etc.

“Costing” HR The need to measure HR activities and The need to measure HR activities and

outcomes in economic terms is becoming outcomes in economic terms is becoming greatergreater HR professionals have been parochialHR professionals have been parochial Inadequate understanding of the businessInadequate understanding of the business Inadequate understanding of financial mattersInadequate understanding of financial matters

Those HR professionals who are first Those HR professionals who are first business people are becoming business people are becoming strategic strategic partnerspartners

HR Accounting: Costing Approach

Contribution each employee makesContribution each employee makes Each cost element associated with Each cost element associated with

each behavior must be identified and each behavior must be identified and its dollar values determinedits dollar values determined

Costs can be seen in two ways:Costs can be seen in two ways: Outlay (materials) versus time costsOutlay (materials) versus time costs Fixed, variable and opportunity costsFixed, variable and opportunity costs

Costing HR Fixed costsFixed costs

Independent of rate of productionIndependent of rate of production E.g., salaries and benefitsE.g., salaries and benefits

Variable costsVariable costs Increase as production rate increasesIncrease as production rate increases E.g., overtime paymentsE.g., overtime payments

Opportunity costsOpportunity costs What the organization would have earned if it had put What the organization would have earned if it had put

resources to another useresources to another use E.g., profit lost due to absenteeismE.g., profit lost due to absenteeism

Can HR Costs Be Measured?

According to Cascio, According to Cascio, allall aspects of HR aspects of HR management can be measured and management can be measured and quantified in the same way as any quantified in the same way as any operational functionoperational function

Even attitudes and morale can be “costed”Even attitudes and morale can be “costed” Qualitative assessments are also importantQualitative assessments are also important

Fit with strategy of the organizationFit with strategy of the organization

Functional HR Areas Critical for Costing Analyses

Compensation Compensation Benefits, especially Benefits, especially

insurance premiumsinsurance premiums Personnel taxesPersonnel taxes RecruitingRecruiting

Training and Training and developmentdevelopment

Affirmative Affirmative actionaction

TurnoverTurnover OutplacementOutplacement

Compensation

Poorly designed compensation programs Poorly designed compensation programs may pay positions and people ineffectivelymay pay positions and people ineffectively Incompetent, overpaid employees will stayIncompetent, overpaid employees will stay Competent, underpaid employees will leaveCompetent, underpaid employees will leave

The cost of designing and implementing a The cost of designing and implementing a compensation program often saves money compensation program often saves money over timeover time

Benefits HR often does not monitor benefits HR often does not monitor benefits

administration adequatelyadministration adequately Often dividends are not paid by insurers Often dividends are not paid by insurers

when premiums exceed benefit payoutwhen premiums exceed benefit payout Employees often receive more paid sick-Employees often receive more paid sick-

leave than allowedleave than allowed Attendance and punctuality are not Attendance and punctuality are not

controlled by adequate benefit controlled by adequate benefit administrationadministration

Recruiting, Training and Development Often can be the cause of a great amount of Often can be the cause of a great amount of

wastewaste Requires more expertise and skill but often Requires more expertise and skill but often

assigned to entry-level personnelassigned to entry-level personnel Hiring of over-qualified personnel can be Hiring of over-qualified personnel can be

very costly, due to high turnoververy costly, due to high turnover Costs of training are very high and often not Costs of training are very high and often not

monitored or evaluatedmonitored or evaluated

EEO Issues

HR should have the financial responsibility HR should have the financial responsibility to ensure that affirmative action does not to ensure that affirmative action does not result in declining productivityresult in declining productivity

The odds of a fifty-year old worker The odds of a fifty-year old worker remaining with the company far greater remaining with the company far greater than younger peoplethan younger people Savings from reduced turnover can offset the Savings from reduced turnover can offset the

expense of pensions and higher salariesexpense of pensions and higher salaries

Turnover and Outplacement Cost of turnover can be very highCost of turnover can be very high Can be controlled by joint efforts of Can be controlled by joint efforts of

HR and line managersHR and line managers Outplacement policies can save Outplacement policies can save

money in layoffsmoney in layoffs Maintains good relationships with laid-Maintains good relationships with laid-

off workersoff workers ““Bridging pay” can save serverance Bridging pay” can save serverance

expenses; stops when a new job is found expenses; stops when a new job is found

Other Areas Where HR Costing is Useful Absenteeism and Absenteeism and

sick leavesick leave Effects of Effects of

workplace smokingworkplace smoking EAPs and wellness EAPs and wellness

programsprograms

Employee attitudesEmployee attitudes Labor contractsLabor contracts Economic value of Economic value of

job performancejob performance Selection device Selection device

validityvalidity

Example: Utility Analysis

To make decisions about the effectiveness To make decisions about the effectiveness of HR decisions, especially used in of HR decisions, especially used in selectionselection

““Utility of a selection device is the degree to Utility of a selection device is the degree to which its use improves the quality of the which its use improves the quality of the individuals selected beyond what would individuals selected beyond what would have occurred had that device not been have occurred had that device not been

used” (Blum & Naylor, 1968).used” (Blum & Naylor, 1968).

Example: Utility Analysis

UU = Productivity in dollars = Productivity in dollars nn = Number of people hired = Number of people hired tt = Average job tenure of those hired = Average job tenure of those hired rrxyxy = Validity coefficient = Validity coefficient

SDSDyy = Standard deviation of job performance in = Standard deviation of job performance in

dollarsdollars ZZx x = Average predictor score of those chosen= Average predictor score of those chosen

N = Number of applicantsN = Number of applicants C = Cost per applicantC = Cost per applicant

U = ntrxySDyZx-NC

Example: Costing Results of Attitude Change Three activities neededThree activities needed

Cost modelCost model to identify the organization’s direct to identify the organization’s direct costs and losses attributed to the programcosts and losses attributed to the program

Effectiveness modelEffectiveness model for measuring and for measuring and validating effects of a project on the work validating effects of a project on the work environment and attitudes, behaviors and environment and attitudes, behaviors and performanceperformance

Synthesizing modelSynthesizing model to compare costs and to compare costs and benefits of the programbenefits of the program

Behavior Costing Approach Each behavior had a costEach behavior had a cost

– $17.55 per shortage$17.55 per shortage– $49.14 per absenteeism incident$49.14 per absenteeism incident– $5,379.31 per turnover$5,379.31 per turnover

Correlations:Correlations:Absenteeism Turnover Shortages

Satisfaction -.81* -.20* .10

Involvement -.08 -.29* -.12

Motivation -.26* -.16* -.23*

Relating Behaviors to Attitudes and Estimating Benefits: Shortages

Present cost levelPresent cost level = Average number of balancing = Average number of balancing shortages (3.07) x cost per incidentshortages (3.07) x cost per incident3.07 x $17.55 = $53.88 per month3.07 x $17.55 = $53.88 per month

Estimated behavioral improvementEstimated behavioral improvement = Planned = Planned attitudinal improvement in SD units (.5) x SD of attitudinal improvement in SD units (.5) x SD of balancing shortages (1.74) x rbalancing shortages (1.74) x r.5 x 1.74 x (-.23) = -.20.5 x 1.74 x (-.23) = -.20

New behavioral rateNew behavioral rate = Average number of shortages + = Average number of shortages + estimated behavioral improvement estimated behavioral improvement 3.07 + -.20 = 2.87 per employee per month3.07 + -.20 = 2.87 per employee per month

New cost levelNew cost level = New behavioral rate x cost per incident = New behavioral rate x cost per incident 2.87 x $17.55 = $50.37 per employee per month2.87 x $17.55 = $50.37 per employee per month

Relating Behaviors to Attitudes and Estimating Benefits: Shortages Present cost levelPresent cost level = Average number of balancing shortages = Average number of balancing shortages

(3.07) x cost per incident(3.07) x cost per incident3.07 x $17.55 = $53.88 per month3.07 x $17.55 = $53.88 per month

Estimated behavioral improvementEstimated behavioral improvement = Planned attitudinal = Planned attitudinal improvement in SD units (.5) x SD of balancing shortages improvement in SD units (.5) x SD of balancing shortages (1.74) x r(1.74) x r.5 x 1.74 x (-.23) = -.20.5 x 1.74 x (-.23) = -.20

New behavioral rateNew behavioral rate = Average number of shortages + = Average number of shortages + estimated behavioral improvement estimated behavioral improvement 3.07 + -.20 = 2.87 per employee per month3.07 + -.20 = 2.87 per employee per month

New cost levelNew cost level = New behavioral rate x cost per incident = New behavioral rate x cost per incident 2.87 x $17.55 = $50.37 per employee per month2.87 x $17.55 = $50.37 per employee per month