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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.
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.
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.