By Deborah L. Kerr and Paula A. Soileau
What would happen if the CEOs scorecard looked something like this?
If these numbers were from sales, supply chain, manufacturing, customer satisfaction, or finance who wouldn’t start pulling their hair, or someone else’s hair, out?
Unfortunately, it is likely that these numbers reflect the actual performance of one of a key business function – talent management – an area most CEOs don’t have on their metrics radar even though human capital costs are over 60 percent of most budgets.
Here are the facts:
While CEOs talk in detail about revenue targets, sales projections, manufacturing costs, and new customer acquisition costs, most struggle to answer questions like:
Building and managing an employee team is a business challenge that needs CEO attention. The focus easily pays off because high performers can increase productivity, revenue, and profit by 20 – 60 percent over average employees. The best way to maximize a return-on-talent investment is to begin working as closely with the human resources director as the CFO and together begin collecting and analyzing talent data.
Begin by collecting data on these three talent measures: revenue per employee, turnover, and cost to hire. This information will improve the understanding of the relationship between talent and financial performance and it will help executives make better decisions about how to improve the bottom line.
Revenue per Employee
RPE = TR / AEFY (TR = Total Annual Revenue /AEFY = Average number of employees during the fiscal year)
Revenue per employee (RPE) is a measure of how efficiently an organization manages employees. Generally, relatively high revenue per employee is positive. Review historical performance. Over time rising revenue per employee indicates increased efficiency, which should lead to better margins and improved profitability. Comparing RPE to other organizations in the same industry can be helpful.
Because human capital plays such a large role in a firm’s financial performance, the negative impact of employee turnover should get the CEO worried: Costs to replace employees are significant and the link between high turnover and lower financial performance is strong. When employees leave, their knowledge and skills also leave. Then the organization spends time processing-out employees, re-allocating existing work, recruiting, interviewing, and orienting a new hire both to the position and organizational culture which can take six months or more. One of the highest costs related to turnover and hiring is the lost productivity and transition time when new employee productivity is less than 100 percent.
T = (NS / EE) X 100 (T = Turnover, NS = Number of separations during the time period and EE = Number of employees during the time period)
Even in tough economic times, the best employees always have options, and can be at risk of turnover. Here are a few ways to think about turnover: Our turnover for the first half of the year was ten percent, but more than half of those leaving were high performers. Or, of the 10 percent who left, almost half were from the same department. Or, the financial performance of divisions with low turnover is significantly higher than those with high turnover.
Turnover is more expensive and harmful than one may think. Analyze the data and translate it into financial terms. That information can help in determining the urgency and scope of solutions required to solve the underlying causes of turnover.
Despite the recession and high unemployment, CEOs still report that finding the right talent is one of their biggest challenges.
The cost-to-hire is substantial, but is rarely reported. The typical, fully-loaded cost-to-hire an employee ranges from about 40 – 150 percent of annual salary. Costs vary as a function of the position – it is more costly to fill positions that require special skills. Measuring hiring costs helps focus managerial attention on the business need to hire right and manage effectively. Measure costs at the organization, division, and department levels to see how these costs are distributed.
Analyzing these three measures, CEOs can begin to better understand bottom line performance and to identify effective solutions for better performance. For example, in one organization turnover results in costs-to-hire of $250,000 a year. If analysis finds one of the causes to be poor management practices, then management training may be part of the solution. If the training costs $40,000, it would be a cost-effective solution.
Measuring revenues per employee, turnover, and cost-to-hire provide a starting place for enhancing the bottom line. Implementing a cross-functional approach to measurement by human resources, finance, and the CEO can pinpoint areas where action is needed to improve the bottom line through higher employee productivity.
Paula Soileau, CPA, is co-founder of Affintus and the former CFO for the American Heart Association, SE Affiliate. Deborah Kerr, PhD, is the co-founder of Affintus and is on the graduate school faculty at Texas A&M University.
#TexasCEO's 10 Most Read Articles Of 2017 #2 The Changing Of The Guard: San Antonio’s #Economic #Development Future texasceomagazine.com/features… @SanAntonioEDF #1 Deep Roots In The Heart Of #Texas: The Kaspar Family’s #Holistic Approach To #Ranching texasceomagazine.com/features…
#TexasCEO's 10 Most Read Articles Of 2017 #4 @Jim_nyquist: At The Inflection Point Of #IIoT texasceomagazine.com/features… #3 Building #Innovation: @turner_talk Builds On Empowering Individuals texasceomagazine.com/features… @Turner_DAL @TurnerSouthTX #MiddleMarket #entrepreneurs
#TexasCEO's 10 Most Read Articles Of 2017 #6 The Cilantro Diaries: #Business Lessons From The Most Unlikely Places texasceomagazine.com/book-rev… @lgomez123 #5 From #Franchisee To #Franchisor: How Gordon Logan Built @SportClips texasceomagazine.com/features… #MiddleMarket #entrepreneurs
#TexasCEO's 10 Most Read Articles Of 2017 #8 #Mexico Is The New #China by @DrPippaM texasceomagazine.com/departme… #7 Growing The Next Generation Of Texas #CEOs: #CEO-to-CEO #Mentoring texasceomagazine.com/features… #Texas #MiddleMarket #business #entrepreneurs
#TexasCEO's 10 Most Read Articles Of 2017 #10 7 Top Trends That Will Shape #Texas In The Coming Decade by @KenGronbach texasceomagazine.com/departme… #9 Peter Huff Of @BlueSageCapital: A Generalist In The Specialized World Of #PrivateEquity texasceomagazine.com/features… #Texas #MiddleMarket