Increasing the Return on Human Capital Investments

In today’s information age, many companies—for example Microsoft—are essentially leased buildings and people. Business success is a function of one workforce consistently outperforming its competitor workforces. We frequently hear CEO pronouncements about the importance of people. But ask them what success looks like and the conversation goes silent. People may indeed be a company’s most important asset, but few CEOs seem to know precisely what that means or how to get there.

This confusion was apparent in a Yahoo! Finance column by Ram Charam. Charam wrote that boards recognize the importance of people and are beginning to add employee satisfaction to their CEO’s annual business performance objectives. Is that because employee satisfaction is a demonstrated driver of business performance, or is it that they don’t know what else to measure?

After decades of research on employee satisfaction, the answer is clear–increases in employee satisfaction do not drive business performance improvements. There is a correlation, but no causality. In fact, causality flows the opposite way. Ed Lawler of the University of Southern California, one of the world's most respected HR researchers said definitively: "Satisfaction does not lead to performance; it is caused by it." Make employees successful and they will be happy.

Think about it: does a room full of sales reps that are not making quota want a bowling night, or do they want help making quota? Not getting causality right is like identifying a relationship between winning football games and celebrations and deciding that if a community celebrates more, their local team is bound to win more games. HR professionals who focus on parties, happy birthday greetings, etc. will neither improve business performance nor employee satisfaction.

If employee satisfaction is not the secret sauce of productivity, what is? The New Human Capital Strategy’s prescription for producing a sustained competitive advantage through people is when:

• Executive team performance is clearly defined, measured and improves year-over-year
• People in positions most important for customer and shareholder satisfaction objectively outperform their competitor peers
• Leadership performance is known (by individual manager) and improves year-over-year
• A performance culture is understood, measured, and strengthens year-over year

Notice how this is a results-based strategy. Contrast this with today’s continuous stream of new, disconnected "world-class" HR programs. Like pellets from a shotgun, new programs are fired across the workplace from siloed HR subprofessions—compensation, staffing, talent management, etc. Few HR professionals stop to ask, "In five years what will success look like and where does every current program fit?" Think about it. No automaker would begin building an engine without defining the end-state. That would be chaos. One parts manufacturer builds a piston for a forklift while another builds a valve for a race car. Engines are systems that start with a blueprint and are made up of parts that work together to deliver a predefined result. Engines need just enough parts and no more and all parts must fit. Having almost all the parts ("We have everything except spark plug wires") may produce no value at all.

Similarly, a Human Capital Strategy is a blueprint for a disciplined, measured system that improves business performance through people. It includes HR programs (i.e., parts) that fit tightly together and are just enough, but not one more than is necessary. This output of the system is a workforce that outperforms those at competitors. Changes in workforce capabilities and business performance are measured and managed with the same discipline that is expected when managing financial capital.

CEOs look to us for a plan to make their workforce more effective. Let’s present a plan that will convince them that we can deliver real results rather than impressive programs. Start with the four Human Capital Strategy objectives and set metrics for each. Contrast current versus desired performance to set a performance gap. Then for each objective, name a leader that is accountable and support team (with non-HR reps) and have the team design a blueprint that is at least 90 percent likely to close performance gaps. Turn HR’s program-based approach on its head and you will have a happy CEO.