The Right ROI Is "Return on Individual"By Tom Steinert-Threlkeld | Posted 2003-05-01 Email Print
Calculating what each employee is worth to your organization is real name of the game.
Information is what you gather, distribute and present.
Information on the most critical business processes and assets your company has. So products can be sold and decisions made.
Then, ask yourself: What is your company's most critical asset?
If you answered people, you score 100. Everything else is inert matter, controlled by the people you hire.
Now, ask yourself: What is your true return on investment?
That is to say, your information system should be telling your CEO, COO and CFO what the return is on every individual in your organization. It's the information organization's job to take the lead in figuring out what the important measures should be, what data needs to be collected and what system is required to support the analysis—both before and after hiring.
This is far from a science. But it's worth solving.
One pioneer in measuring the financial contribution of individuals to organizations is Dr. Jac Fitz-Enz, founder of the Saratoga Institute in Santa Clara, Calif.
His term for this emerging area of analysis is the ROI of Human Capital. You can start with information already collected for your existing P&L statements. Then, you can apply some simple math to deliver benchmarks on how well you are using your human resources, as Fitz-Enz does.
He uses lots of measures. But, if you're looking for a basic cut at the Return on an Individual, try this one:
- Start with sales, on a useful frequency, such as once a quarter.
- Subtract all operating expenses, except interest and depreciation. Those last two items aren't influenced by day-to-day business.
- Subtract payroll and benefits.
- The residue is all "nonemployee" operating expense.
- Subtract that amount from sales, and you get an amount you can call your "people profit."
- Divide your people profit by the number of employees (preferably, the number of "full-time equivalents.")
This yields a useful profit per person.
This is a measure your company's managers can manage. Is it going up, quarter to quarter? Or, down? Just watching that will put a handle on the hardest decision any manager must make: whether to reduce headcount or not.
Such measures, though, are only half the equation. They reward efficient teamwork. The real challenge is bringing the information gathering and analysis down to the individual level. For one thing, it means the role models—the leadership—will have to subject themselves to at least as much scrutiny. Otherwise, a self-destructive culture likely would emerge, a la American Airlines.
To avoid that, every manager must negotiate with each employee a set of fair metrics to judge individual performance. After all, for decades the toughest part of performance reviews has been to figure out what fair performance measures are for each person. Particularly, when collecting such information means actual research. Who is responsible, for instance, when a machine breaks down? An incompetent designer? A bad operator? A poor maintenance planner?
It's little wonder there hasn't been a stampede to develop and manage a system to figure out the Return on Individuals, in America or around the world. One Swedish company, Skandia Group Worldwide, though, has tracked a wide range of "human capital indices" for years. In its annual report, you can see the guideposts it employs, as basic as "premiums written per employee."
You may feel alone on this. But if you have people in your organization and your company's goal is to make money using that asset, you should be thinking—and working hard—at showing how the individuals you hire generate great returns.
What more important information could you deliver to your executive team, directors and owners?