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HUMAN RESOURCES - FIRMS SHOULD QUANTIFY COST OF EMPLOYEES

Taking a head count

IT has become a common saying that the biggest competitive advantage that companies have is their people. All HR conferences are full of CEO platitudes such as "People are our most important asset". Of course they are.

IT has become a common saying that the biggest competitive advantage that companies have is their people. All HR conferences are full of CEO platitudes such as "People are our most important asset". Of course they are. That is because people shape the intellectual capital of the firm. Even better, people are a thinking part of the firm's intellectual capital. But people will never be fully valued unless their contribution is measured with the same interest and consistency as other assets.

Many CEOs like measurements and numbers to know that their business is thriving. If they want to discuss the status of their production, sales, marketing or IT units, they get the data and benchmark it against their competitors' data. Why not do the same with human capital?

For example, Saratoga, a firm that Pricewaterhouse Coopers recently acquired, measured human capital based on local and international data from over 10,000 organizations including banking, manufacturing, telecom-munications, retail and IT firms. Using various methods, Saratoga analyzed and compared various cost ratios and made strategic decisions based on its findings.

Results of such measurements have recently influenced a vast majority of strategic company decisions. It can even determine when it is best to move services offshore.

To gain an overview of human capital in any company, it is very important to correctly interpret added value and productivity data.

PricewaterhouseCoopers uses the relation of profit before tax and remuneration to calculate added value. This figure, called human capital return on investment (HC ROI), shows how much money you get from every single crown invested in your employees.

While the pan-European number of HC ROI is lower (1.13), in Slovakia there is a higher return on investment in human capital. For each crown spent on employees, companies get almost Sk1.50 back (1.38).

In terms of productivity, it is useful to adopt a few measurements. The most straightforward method is to relate remuneration to revenues. This number is easily benchmarked and says much about the sustainability of your costs for your reward system.

Out of each crown of revenue, 13 percent goes to remuneration in Slovakia. The European ratio is much higher, 21 percent. This finding matches well with the reasoning for moving businesses offshore, which has brought many new investments to Slovakia.

Similarly, it is useful for a company to use human capital data to measure its ability to recruit and retain talented employees. We chose the top 20 companies with exceptional financial performance from the local Slovak database. We were interested in seeing how good they are in the area of HR.

Even in such a "soft" area as recruitment, they outperformed other companies.

The top 20 showed higher effectiveness through lower costs for filling vacant positions, too. Their cost per hire coefficient was Sk16,700 (€433) compared to Sk29,700 (€770) for other companies. Their time per hire coefficient was lower as well. On average, the top 20 companies fill a vacant position within 23 days, while the process can take up to 37 days for other companies.

In the effort of nurturing internal talent, there has been a need to benchmark training as well. There are particular figures covering the broader area of training and development to address organizational needs.

Measuring return on investment in training is one such figure but companies do not use it very often. When we look at the companies showing the best financial performance and investing up to 150 percent more than other companies in training their employees, only 6 percent of them use some measurements to determine return on training investments.

All these figures are based on basic formulas that can be useful for simple benchmarking. Aligning the HR function with the company's needs as well as linking selected figures with desired goals is the important part of measuring human capital processes.


Branislav Hunčík is a manager of human resources advisory with PricewaterhouseCoopers Slovensko.

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