The Human Capital Scorecard
Jan 24, 2019
By Jac Fitz-enz, Ph.D.
The arrival of the balanced scorecard model has opened a new path to organizing and monitoring human capital information. We can take the concept behind the balanced scorecard and create a human capital version. The human capital scorecard would consist of four quadrants, each devoted to one of the basic human capital management activities: acquiring, maintaining, developing and retaining.
Planning would not be part of the scorecard. By its nature, planning deals with the future. The human capital scorecard would be focused on recent and current events.
The quadrants would reflect a variety of metrics. The choices made, however, should provide a basic yet thorough look at the investment and utilization levels of human capital.
Each of the quadrants should contain cost, time, quantity and quality measures to the extent practical and possible. Across the bottom, a base can be added to cover reaction factors—the reactions of managers and employees to human resource programs are important. Likewise, job satisfaction and employee morale measures can be added to the base if they are carefully crafted and deemed useful.
Let’s consider the four quadrants:
Acquisition. The first activity is to acquire human capital for the organization. This can be done with a combination of three tactics: hiring, renting and developing. Developing is accomplished through any number of activities, from daily supervisory coaching to expensive outside educational ventures.
Our focus in the acquisition quadrant is on the result of the hiring or renting. The term renting, incidentally, is a catchall for contingent workers. It includes paying an agency or a person directly for a period of work without the person’s being on the company’s payroll. This form of human capital is, in effect, being rented or leased and then let go after the requirement is satisfied. The rental period can be anything from a few hours to fill in for someone who was delayed one morning to as long as a year or more to complete a project.
Among the metrics: cost per hire, time to fill jobs, number of new hires, number of replacements and quality of new hires.
Maintenance. This function covers a broad base of activities focused primarily on paying salaries and providing benefits. Any asset needs to be maintained in good condition in order for it to retain its value and, in the case of a human being, continue to contribute value to the goals of the organization.
Pay and benefits are monitored through a combination of cost ratios. This section does not deal with salary surveys, which are designed to provide external benchmarks for decisions regarding pay levels of various jobs. In our case, we want to monitor the effects of managing salaries and wages. Therefore, we can look at pay in terms of average pay of employees, distribution across levels, costs as a percentage of operating expense or other macro measures. The decision of what to put in the maintenance quadrant is left to the user.
Some sample metrics: total labor cost as percentage of operating expense, average pay per employee, benefits cost as percentage of payroll and average performance score.
Development. Tracking and monitoring the development of human assets or capital is the most difficult of the four quadrants. It raises two questions:
First, what is training or development? Second, from a practical standpoint, how do we capture the costs?
So much of development is invisible and even unrecognized that it is truly impossible to know the total cost. Most accounting systems do not easily capture formal training expenditures. To make the situation even more perplexing, everyone realizes that some portion of so-called external training expenses is a surrogate for other expenditures.
For instance, we know that in some cases, training trips simply mask rewards for exceptional performance or are used for purposes outside of the sphere of human development. Having said all that, this topic is too important to ignore. We must create a set of measures that give us some general sense of resources being committed in the nature of development.
Some metrics worthy of consideration: training cost as percentage of payroll, total training hours provided, average number of hours of training per employee, training hours by function, training hours by job group, training ROI.
Retention. Keeping talent will always be an important activity. Even in the severest times, when a company plunges into a negative earnings position, it still must retain a critical talent core. In a merger or acquisition, human capital is a key issue. By far the vast majority of mergers and acquisitions pay scant attention to the talent of the organization. Typically, only in the highest technical buy does the acquirer focus on key talent in the acquired company. I lived through an acquisition in which the buyer poured half a billion dollars into the game before writing it off as a failure. It was largely a case of letting the wrong people go and bringing in people who were ill suited to the task.
Quite often, technical expertise is assigned to the task when the real skill needed is organizational and people management. Experience has proved time and again that when people and people-related issues such as culture are ignored, the potential for failure is well above 50 percent. It follows that separation rates and costs are important and must be part of any human capital scorecard system.
The metrics in a human capital scorecard act as a platform for measuring the human effects within tasks and processes, the next stage in the data-to-value cycle. As we view how well we are designing, making, selling and servicing products and services, the cost, timely acquisition and quality of the human element are some of the factors that go into process evaluation. The others are commitment of equipment, facilities, materials, energy and the overarching financial capital invested.
This article is excerpted, by permission of the publisher, from The ROI of Human Capital by Jac Fitz-enz. Copyright, 2000. Published by AMACOM, AMA’s book division.
About the Author(s)
Jac Fitz-enz, Ph.D., is the founder and chairman of the Saratoga Institute.