159. Human Resources Management: How to Measure Your Employees’ Value

10 takeaways from this lecture:

00:01:43 As covered in previous lessons: the recruitment process, providing compensation and benefits, talent management, conducting employee surveys and employer branding are both expensive and time consuming, and so Human Resources needs indicator systems in place to estimate and monitor the ROI and human capital value added provided by employees?

00:02:37 Control loop is the fundamental process of employee ROI monitoring:

• Target/actual deviation – checking progress of employee based on expectations
• Causes analysis – determining why any deviation or underperformance by the employee has occurred, or is occuring
• Corrective actions – make the appropriate modifications to ensure employee meets target or that target is realigned to be more reachable
• Repeat

00:04:46 Every number tells you something about your business, and there are many performance indicators HR managers can keep track of, depending on the company’s needs

00:07:18 Recall in my (Armin Trost’s) lecture on Recruitment From Application to Offer that as a rule of thumb a company receives as many applications in a year as they have employees employeed. (10,000 employees? Expect to receive roughly 10,000 job applications per year = nearly 30 CV’s every day.

Take the following indicators (as examples among many) and then think a level deeper: How do you really evaluate these indications? It can be very complicated and subjective.

• Employer branding – what is the number of applications you receive compared to actual employees? Are you viewed as a ‘desired place to work’ for job seekers? The question then becomes distinguishing quality job applicants applying for a position in your company versus a person informally looking for any kind of work they an find as quickly as possible.
• Cost per hire – the dollar amount it costs (advertising or hiring an executive search company, screening, interviewing, psychological testing, sign-on bonus, relocation, onboarding, training, etc.) to go through the entire recruitment process? Recall from the lecture How to Keep Quality Employees that the total turnover cost of employee retention can range from 100%-400% of that position’s salary, depending on how specialized the job is, and whether or not it is a key position.
• Time to fill and early turnover – how quickly can human resources fill an empty position? When does human resources consider the position officially ‘filled?’ How many new recruits quit before their trial period is over?
• Employee training – How many days do your people spend in training?
• Talent development – How long do your identified high performers – your company’s future leaders – stay in a position before they are promoted? Are they fast tracked or stuck in the same position for years?
• Equality spread – What percentage of women, race, and ethnicity are in a leadership position?
• Internal placement rate – How many key positions are filled by existing employees rather than hired externally?
• Span of control – how many employees report directly to the same manager? Is your company too top-heavy or bottom-heavy?
• Bradford Factor – How often are your employees not showing up for work, or absent from their post due to sick leave? For example, employees A and B may both have a total of 10 sick days for the year, but employee A who was sick one time for 10 consecutive days would be considered a more reliable and motivated employee than employee B who calls in sick 10 distinct times during the year, for example ‘sick’ the day following holidays or who are always ‘sick’ on Fridays…

There are so many performance indicators to choose from, that it’s necessary to look at them from several dimensions:

Ask yourself:

• What performance(s) you want to indicate?
• Why is it important?
• For what reason is it really imperative – branding, legal obligation, etc. – to the success of your company?

[EDITOR’S NOTE: Recall in the ycombinator series lecture Optimizing For Growing Your Business at Stanford University that you cannot have 100% control over what everybody else is doing.

Secondly, in their lecture Creating A Successful, Long-Term Company Culture that in order to create your core value worksheet, ask yourself the following questions:

1. As the leader, what personal values are most important for you?
2. What are the most important values for business success?
3. What values will you look for in employees?
4. What could never be tolerated? (Consider the opposite as values)
5. Remember to incorporate your mission into your core value.

The answers to these 5 questions should leave you a list of anywhere from 3-20 generic core values you want your company to be known for such as: honestly, integrity, service, teamwork…

You must then work to very precisely define what your company means by each of those core values, and how you can define them to stand apart from your competitors.

Thirdly, recall in Armin Trost’s lecture Identifying & Developing Key Employees that ideally, a company would promote the person who demonstrates extraordinary growth and ability by learning and improving his or her skills the quickest, assuming that this growth and talent will continue into the future.

Lastly, recall in Keith Rabois’ lecture Operating Your Business For Growth & Success that there are two basic types of employees: ammunition and barrels.

• Ammunition – these employees are good at doing things and getting the job done. These employees are important to the success of your business.
• Barrels – these employees are good at focusing and shooting the ammunition. These employees are crucial to the success of your business because they can take an idea from inception to production and because no matter how much ammunition you have, you need the barrel for the ammunition to be useful. Barrels are VERY hard to find, and when you find one of these kinds of employees, make them a priority. Find barrels and then stock them with ammunition.

To identify the ‘barrels;’ the people to promote in your company, watch:

• How they handle simple, stupid, mundane tasks such as having cold, fresh smoothies delivered to a group of hard-working engineers at 9:00 PM every night. Expanding the scope of responsiblity of your employees until they break shows you how much responsibility each person is comfortable with and ensures that that person is being used to their full potential.
• Which person in your office has the most people approaching his or her desk, particularlt people they aren’t responsible for. In a working environment, people approach people who they believe can help them. If one employee has more and more people approaching him asking for help or guidance, then that person is perhaps a barrel; promote them and give them more responsibilities.]

00:27:17 a balanced scorecard reflects how the key performance indicators (KPIs) for your company’s financials, processes, employees, customer management and customer satisfaction relate to your company’s unique vision & strategy.

One principle vision of your company should be growth, therefore your scorecard should measure and track performance indiators for that.

00:32:09 When implementing an indicator system, you need to inact early warning signs so you can see when things are going wrong before they become a serious problem, for example being able to determine how many emloyees may leave the company in the next year. It’s better for you to have potential recruits to immediately step empty positions than to have several open positions and nobody to fill them in the immediate future.

00:38:52 To be truly efficient, everything you do must as a starting point relate to solving a problem. Problems lead to certain costs which can, and must, be represented by a tangible dollar amount in order to be able to convincingly explain it to decision makers. An employee survey should be made with the intention of solving a specific problem. Going around doing things without knowing which problem(s) you want to solve is not only inefficient, but is expensive.

How much is something worth? You can’t simply predetermine this. It is worth as much as somebody is willing to pay for it.

How much would you pay for a bottle of water? How much would you pay for a bottle of water if you were stranded in the desert? The price (worth) of a product is made up of the components of:

• The material used to make the product
• The material used to run the business (labor & infrastructure)
• The profit made from the sale of the product

00:47:55 Human Capital Value Added is equal to the company’s revenue less total costs less labor costs. The more knowledge- and people-intense a company is, the higher the human value capital added will be.

01:00:03 In key functions in your company, such as in managerial, sales, and R&D departments, for example, their average added value should be worth twice that of non-key job functions. Ideally, managers should be to your company at least twice as valuable as the manager’s employee. If your highest performing employee has the same Human Capital Value Added as your lowest-performing manager, then you’ve identified the employee to promote, and the manager to demote or let go.

The performance of an above-average software developer is 10x the value of an average software developer.

The above chart shows the Human Capital Value Added (HCVA) for each type of employee: How much each employee actually brings into the company after revenue and labor costs have been taken out. In the above example below-average performers both in key functions and non-key functions actually cost the company money, -11 and -25 respectively, while the above-average performers in key and non-key functions bring money into the company, 88 and 14 respectively.

With the above information, you can then calculate the cost of increasing the efficiency of your employers, as well as your ROI of those costs:

01:07:40 In the above slide the benefits of attracting and recruiting above-average A players becomes visibly obvious, and shows the importance of your company’s employer branding strategy and talent recruitment processes.