The value of human capital

Despite massive layoffs and cutbacks that took place in response to the global financial crisis, companies should understand that human capital isn’t cheap. With the economy bound to turn around sooner than later, businesses need to focus on retaining and developing existing employees.  

 

During the recession, companies may have developed a “false sense of security” because they had the upper hand on employees who were grateful for whatever job they could keep, Aon Managing Director Dan MacLean said 

“Companies were letting people go. People were hanging on to what they had,” he said during the Cayman Islands Society of Human Resources Professionals ninth annual HR Conference, held 17 May at The Ritz-Carlton, Grand Cayman. 

However, the ability to ‘attract and retain talent’ has consistently been one of the top risks to business in recent years. “Yet right now what we’ve found is companies are less in a position to address that than they were a few years back,” MacLean said. 

MacLean discussed the results of four Aon reports on the topics of global risk management, risk maturity index, talent and total rewards. 

  

Risk management  

The biennial Global Risk Management Survey was conducted at the end of 2010, representing 960 organisations from 58 countries. 

Just as in 2009, the top perceived risks to business in the 2011 report were the economic slowdown and regulatory/legislative changes. 

In the 2007 report, compiled before the recession, the top perceived risks were damage to reputation and business interruption. 

In 2007, failure to attract or retain staff was the number seven risk. In 2009, that dropped to number 10. In 2011, that rose back to number seven, just below the related risk of failure to innovate/meet customer needs. 

According to the 2011 survey, failure to attract and retain talent was the number one risk in the government sector, which loses employees to the better-paying private sector. It was the number two risk among Canadian companies and in the Asia-Pacific region. 

According to assessments of how prepared companies were to meet challenges posed by the top 10 risks, companies were actually less ready to deal with failure to attract or retain talent in 2011 than they were in 2009. Indeed, according to the 2011 survey, that was the risk companies were the least prepared to meet. 

Globally, companies will have to respond to regional differences and disparities in talent pools. For example, 43 per cent of the US workforce will become eligible for retirement in the next 10 years, while half of India’s population is under the age of 25. In China, 40 per cent of firms report difficulties in finding suitable senior managers. In India’s information technology sector, wages are increasing by more than 15 per cent per year, while staff turnover is 40 per cent. 

 

Risk maturity  

A collaboration between Aon and the University of Pennsylvania’s Wharton School, the Risk Maturity Index is designed to capture and assess organisations’ risk management practices. The results cited by MacLean drew upon information provided by about 400 companies. 

He highlighted differences in human capital management between companies posting below average and above average scores according to the index. 

“It matters because we’re finding there’s a correlation between companies that effective in managing risk, and value and financial performance,” MacLean said. 

For example, nearly all of above average companies had established performance expectations for key human resource processes and programmes, conducted reviews to assess the effectiveness of HR programmes, and had established metrics to monitor HR process performance. 

Additionally, nearly all of above average companies understood employee engagement as a business performance driver, established employee engagement metrics and utilised employee engagement as a factor in evaluations. 

Also, 90 per cent or more of companies had proactively identified skill gaps, established formal succession plans for critical positions and maintained a talent review process. 

In contrast, the percentage of below average companies that had any of those components or practices in place ranged from 18 to 36 per cent. 

 

Talent survey  

Aon’s 2011 Talent Survey Report is derived from input by more than 1,300 HR professionals. 

According to the report, there are different drivers for attracting, retaining and engaging employees. MacLean said the drivers for attracting, retaining and engaging tend to start out from hard measures, such as salary, and evolve into ‘softer’ ideas, such as ‘teamwork’. 

The top drivers for attracting employees, according to the report, were competitive base pay, competitive health care benefits, financial stability of company, flexible work schedule and competitive retirement benefits. 

The top drivers for retaining employees were senior leadership making right decisions for the future, necessary resources, health care benefits, necessary resources and reliable workgroup. 

The top drivers for engaging employees were clear career path, ‘involved in decisions that affect my work’, necessary resources, career development and teamwork. 

“From Aon’s perspective as a big publicly traded company who’s got shareholders to answer to, we’re not attracting and retaining people because we’re paying them gobs and gobs of money. We’re hopefully compensating people fairly, but hopefully what we’re offering at the end of the day is more sort of an overall employment experience,” MacLean said. “At least that’s what I try hard to achieve anyway.” 

  

Total rewards  

Aon’s 2012 Total Rewards Survey is focussed on compensation programmes offered by about 750 organisations. The results support MacLean’s observation that companies are placing more emphasis on the individual employee’s work experience, as opposed to generic companywide programmes. 

MacLean presented a graph that visualises the types of rewards that a company offers, with four dimensions of company, personal, financial and experiential. 

‘Compensation’-oriented awards, such as base salary, annual incentives and stock/LTI awards, fall into the financial/personal field. ‘Benefit’-oriented awards, such as health/wellness, retirement/savings and paid time off, fall into the financial/company field. ‘Environment’-oriented rewards, such as leadership/culture, physical work environment and work life balance, falls into the company/experiential field. ‘Development’-oriented awards, such as career opportunities, learning/development and goals/coaching, fall into the experiential/personal field. 

According to the report, companies are planning to shift investments into development-oriented awards, in the experiential/personal field, and away from the benefit-oriented awards in the financial/company field. 

 

Planning for a turnaround  

When the metaphorical floodgates open and new opportunities rush into the marketplace, the reality is that the best employees are the ones who will be most tempted to look elsewhere, said University College of the Cayman Islands professor Bonnie Nelsen. 

“Frankly, who’s going to be the first to leave? Your most marketable employees. Who are your most marketable employees? Your top performers,” she said. “They’re going to be the ones to go because they can. And that leaves you with … who?” 

Companies, especially ones with limited development budgets, need to direct training programmes toward targeted employees – namely ones who add value to the product and differentiate the company from competitors, Nelsen said. On the other end of the spectrum, employees who do not add value to the product and do not differentiate the company (for example, landscapers and janitors) are prime candidates for outsourcing to third-party specialists, she said. 

Sherry Johnson, a field services director in the US Southwest Central Region of the Society for Human Resource Management, said the importance of retaining and developing in-house talent is a bottom-line, dollars-and-cents objective, because replacing employees is much more expensive than keeping the ones the company already has. For example, she said, “Flex-work is not just a benefit. It’s a business strategy.” 

CISHRP goup

The Cayman Islands Society of Human Resources Professionals held its ninth annual conference Thursday.

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