How do you measure an employee's contribution to the bottom-line?
In job evaluation, worth of a job is calculated while in performance appraisal, the worth of employee is rated
Peter Drucker, the management consultant known more for his concept, ‘management by objectives’ believed, “What gets measured gets managed.” To measure the worth of talent at the workplace, it is important to identify the uniqueness and capability of people at work. It is the job of the HR department to speak for the employees’ when numbers are being reported by other functions in the boardroom.
Companies invest in people and expect a return on investment made in this capital. HR needs to show and prove that its efforts do not only have a return on engagement but also a return on investment. “In order to harness employee grow, we must be able to measure effectively. So running away from it is not an option for HR managers,” says S Varadarajan, Executive President HR, Tata Teleservices.
The question then is, how do we quantify the contribution of an employee on the bottom-line?
The Traditional Methods:
Performance Measurement Systems, PMS, help in identifying specific evaluation and developmental goals. The main idea of this method is to align each individual’s goal to the organisation’s goal. Basically, it is the aggregation of performance appraisal results.
While it is important to put perspective in place so that the CEO and CFO can reflect on tangible growth due to employee performance, this method is not fool-proof. A considerable bias comes into play due to inter-personal relations at the manager-reportee level. Dr. Aquil Busrai , CEO , Aquil Busrai Consulting, says, “Many managers judge an individual employee during the appraisal process. Playing God may give a sense of power and control to these managers but in return they trade- off employee commitment and regret later.”
Another traditional though lengthy method is that of ‘Job Evaluation’. This measure ascertains the worth of each job at the workplace in comparison to the other jobs. Thus, job evaluation is different from performance appraisal. In job evaluation, worth of a job is calculated while in performance appraisal, the worth of employee is rated.
Metrics can be effectively used by HR to provide evidence of the employees’ strategic impact. In many an organisation, employee cost is the highest variable budget expense. Thus it becomes all the more important to know the “economic value added per employee”. Rakhi Sharma of NIIT says, “The calculation for deriving this value needs to be a function of productivity, revenue and people cost.” She explains further that headcount productivity also helps in retrieving ‘revenue per head’ (total revenue/the number of employees), though the vendor cost in these metrics should be included/excluded keeping in mind the effect it has on working capital of the company.
Another interesting way to build measurability for human capital is considering a specific metric. Executives address the workforce issue and select a metric for it. For example, in recruiting, measuring the quality of hire makes sense. For retention, it is about measuring the turnover rate of top-rated employees. Another similar parameter is being established for scaling the increase in domain expertise through Learning & Development.
N.V. 'Tiger' Tyagarajan, President & CEO, Genpact agrees that management needs to look at several outputs to determine performance on a certain measure. He supplements this with an example on succession planning. “To measure if a leader is building leaders from within, one can assess if the leader drives internal promotions hard, or he/she has been able to take people from one business and move them to another; these together reflect the impact that leaders make to business performance as a result of their time and effort investment on people.”
In essence, leaders across industries agree that if the company’s margins are going up then that is clear evidence that the employees are adding value to the customer and the company. By demonstrating the increased results and output on every rupee spent on the employees, it makes sense to showcase the visible impact that employees have made in the growth of the organisation.