The U.S. - and, indeed, the world - is entering a knowledge era, but while capital investments in equipment, buildings and the like are well reported in the economy, investments in intangibles are notably missing. That's why some economists claim the U.S. economic picture doesn't reflect a "shadow economy" of unreported future-focused investments in innovation, branding, training and other intangibles - investments that foretell a brighter economic picture, according to an article in the February 13, 2006, issue of BusinessWeek. Ben Bernanke, chairman of the Federal Reserve, said such business investments "may be significantly understated in the U.S. official statistics." These investments, essential for long-term growth, averaged as much as $977 billion for 2000-2003, according to economists.
This challenge to demonstrate the value and effect that human capital investments have on corporate financial performance, as well as the economy, is being played out in organizations every day. According to Jac Fitz-enz, founder of the Saratoga Institute and an early contributor to the field, pioneers are beginning to apply "assessment and workforce analytics to human capital management." Still, the proportion of HR departments doing this is small, perhaps less than 10%, with very few "consistently applying decision science and statistical tools to their operation."
Until there is an accounting and reporting system that fully reflects the value of human capital in today's knowledge era, many firms continue to struggle in developing human capital measurement programs. Laurie Bassi, CEO, and Daniel McMurrer, vice president for research, at McBassi & Company suggest that among the attributes a measurement program possesses, it should be "credible," "predictive" and "actionable."
Still, the measures used most regularly are those related to compensation and benefits, according to the 588 U.S. employers surveyed in The Bureau of National Affairs' HR Department Benchmarks and Analysis 2005-2006. But a survey of 138 top executives by Boston HR consulting firm Veritude found that, while employers more frequently measured the effectiveness of HR through turnover and labor costs in 2005, employee ROI is the measure more likely to be used in the future.
Scorecards and employee surveys are popular tools for collecting and reporting data, too. Hyatt Corp., with 38,000 employees staffing hotels in the U.S., Canada and the Caribbean, tracks and manages performance on a corporate scorecard using such measures as RevPAR (revenue per available room), market share, customer service ratings and vendor diversity. Hyatt also tracks customer responses to 16 questions to gauge how well employees have "moved the needle." Doug Patrick, vice president of human resources, says that in 2005 Hyatt was "statistically improving on 13 out of those 16 measures."
While external influences such as shareholder demands for accountability and Sarbanes-Oxley legislation have increased the focus on establishing better measures, the organization itself may have the most to gain by raising the bar on human capital measurement. Jay J. Jamrog and Miles H. Overholt of the Human Resource Institute say in Strategic HR Review, "The most important goals for HR measurement should be to enhance human capital decisions and connect human resources to strategy."
And there is evidence that organizations are making progress on this front. According to data from The Conference Board, human capital measures and targets are now included in the majority of firms' strategic plans, annual budgets and bonus plans. As this increased focus on measurement and performance accountability permeates the organization, the link between human capital measures and the bottom line may strengthen.