WORKSPAN DAILY |
Decision Time for Rewards Professionals: Lead, Follow or Get Out of the Way
olgart / iStock
“Things are
different now!”
We’ve heard this
hundreds of times over the course of our careers, and each time we hear it with the same
skepticism — dealing with small waves
that result in small changes. But this time it’s really different! We’re not
just rearranging the furniture — the house is being remodeled. This fundamental
change is characterized by three significant disruptions:
Human Capital Disclosures. The SEC has reclassified
human
capital cost
from
an “expense” to an “investment in an intangible asset,” representing the biggest
fundamental change to hit since the
days of the industrial revolution, when we moved workers into factories. The
SEC’s new view of human capital introduces an accountability to quantify its direct
and indirect costs, to calculate return on investment in human capital (HCROI),
and to evaluate the corresponding materiality impact. (Materiality is the
extent disclosures would influence the investors’ understanding of the business
as a whole.)
Stakeholder Transparency. All stakeholders,
as defined by The Business
Roundtable, are demanding greater transparency and reporting related to their
own specific area of interests. For example, investors want transparency about the
efficiencies and impact of human capital management on the sustainability of
financial performance. Employees want transparency on the degree to which the
organization delivers equitable treatment (fairness of pay, training,
mobility/advancement).
Changes in the Labor Supply and Workforce
Expectations. The global
population is growing at a slower rate than at any point in history — about 1.03% in 2020
and projected to drop another 22% in the next 10 years. Declining fertility combined with the exodus
of baby boomers and women from the labor
force will significantly shrink the workforce available for hire. It’s going to be harder
to both find and retain talent. Employees are starting to demand
customer-grade experiences at work and personalization of careers, development,
and rewards will be necessary to deliver the kinds of experiences required to
attract, retain, and motivate the workforce.
The days of
rewards standardization — the “one-size-fits-all” — is becoming a thing of the past, and our traditional concept
of rewards as merely “compensation and benefits” no longer suffice. Reframing
rewards makes the role of rewards professionals even more complex. They
will need to design and administer traditional and non-traditional programs to
satisfy the needs of the workforce. They will also have to incorporate disclosures,
transparency, and the wide range of stakeholder expectations into program
design.
The focus on program
efficiency, articulated in a financial language, is broadening the rewards
professional’s accountability. The same kind of disclosure rigor applied to
executive compensation will exist for every dollar spent on the workforce.
The New Reality
In light of the
changes described above, the role of the rewards professional is evolving from
being about HR process efficiency to one that is accountable for supporting the
achievement of organizational goals through human capital. The single largest
expense for most
organizations is the cost of human capital. As such, it’s natural for this accountability to be taken up
by the rewards professional, as their skill sets are best suited to the
analytics and financial literacy requirements of the task. The opportunity for
the rewards professionals is to expand into strategy development, design, and
execution of all rewards programs (traditional and non-traditional),
including basing decision making on an analytics and cost/benefit (“utility”)
approach.
Perhaps the most
critical aspects of this evolving role are to quantify the effectiveness of rewards programs in terms of year-over-year performance, to
examine and explain the relationship between rewards programs and other human
capital programs’ performance and demonstrate how human capital supports
sustainable corporate outcomes. Some of the areas the rewards professional will need to address include:
Answerability: providing facts and evidence to answer
questions such as how much of total organizational expense is represented by
human capital programs? This is referred to as the organization’s human capital investment intensity (HCII). Is HCII
going up or down over time? What is the relationship between rewards and the
performance of other programs including pay equity, attrition and attrition
equity, tenure, productivity, engagement, innovation, employer brand and so on?
Accountability: helping executive management
and the board understand the relationship between human capital performance and
enterprise-level outcome by answering how closely correlated is the effectiveness of rewards programs and
enterprise-level performance? What is the organization’s HCROI, human capital value-add (HCVA), enterprise earnings performance, profitability
performance, market share, net promoter score (NPS) and other indicators — monitored by the
CEO and the board — of corporate
performance? How do these performance indicators trend over time? How is
performance tracking against benchmarks?
Analytics: assessing how successful are the decisions
about budget allocations among rewards programs based on the results of the data
analysis? The rewards practitioner will need to articulate the tradeoffs
between investing in different rewards programs to optimize HCROI. What impact
do these decisions have on culture, employer brand and other indicators of
organization attractiveness to talent?
Recommended Action Plan
Rewards
professionals should be proactive in preparing themselves for their new
accountabilities. Our recommendations include gaining skills and experience to address
two fundamental levels of impact: program level and enterprise level.
At the program level, rewards professionals will
need to assess efficiencies and effectiveness of investments in the rewards
program portfolio, and each discrete rewards program. Data analytics should be
used to baseline, monitor, and benchmark performance of programs. It should also
be used to understand rewards programs’ impact on other human capital
performance indicators, such as: retention; attrition; absenteeism; mobility;
functional, team and individual performance trends; training effectiveness.
For example, Bank of
America (see Figure 1) found that there was a
strong correlation between employee engagement scores and reduced turnover, but
they did not link this performance to any financial indicators. To what do they
attribute their positive engagement performance? The job of the rewards
professional will be to create a stronger narrative about the relationship
between rewards and behavioral and financial outcomes.
Figure 1
At the enterprise level, rewards professionals will
need to address the expectations of executive management and the board of
directors in delivering information about materiality. Competencies that focus
on analytics, data interpretation and storytelling with data will be
required by the rewards professional. Being able to correlate human capital
performance to key business metrics, combined with financial utility analysis,
will be necessary to communicate performance to management, the board and
investors.
What insights can
the rewards professional gain about how programs both affect one another and
enterprise-level performance? For example, by adding financial information, we
can understand human capital performance’s trends against financial trends.
In Figure 2, HCII and asset size are added to the
graph. This provides more insights for stakeholders and human capital
professionals about correlations between the level of human capital investments
and asset growth (which is critical for a bank), creating a context for
investors about the impact of engagement and attrition on asset performance.
The story the graph reflects
is that the greater the investment in the right people programs (HCII), the
greater the level of engagement, which leads to low levels of turnover. The figure shows that a
more engaged workforce is less likely to leave, and more likely to drive asset
growth. These relationships would have to be tested for statistical
significance to draw conclusions about causation, but this view allows for a
good starting point.
Figure
2
The rate of change
is accelerating in the human capital space, and especially in the rewards
segment of the profession. If rewards practitioners aren’t getting ready for
this change by being ahead of the changes, then they should be prepared to
follow the pack. Don’t be left in the dust because of a lack of analytics
skills and financial literacy. As Lee Iacocca said: “Lead, follow, or get out
of the way.” The future is bright for those that get in the driver’s seat.
About the Authors
Solange Charas, Ph.D., is the founder of HCMoneyball.
Stela Lupushor is the founder of Reframe Work Inc.