Measures of Meaning
Individual productivity is a measure of Quality of Hire. In his book The Deming Route to Quality and Productivity (1988), William Scherkenbach, Ford’s former Director of Statistical Methods, states: “If you believe in the Law of Averages, there will always be above-average and below-average.” He goes on to explain that the quest is to raise the average.
Do you know what the “average” is of the talent you obtain with each hiring decision? The wrong hire can actually take your average down a notch. Spencer and Spencer (2001) document the output advantage of people who are one standard deviation above average in their book, Competence at Work. In non-sales positions, the impact is 19 percent to 48 percent more output. In sales positions, the range goes from 48 percent to 120 percent more sales volume. As such, high levels of performance have a much greater impact on the bottom line than was traditionally recognized.
In Watson Wyatt’s 1999 research on the Human Capital Index®, it was found that “by showing a significant improvement in recruiting new talent, companies can achieve a 10.1 percent increase in market value—the largest found among the five areas linking . . . effective human capital practices and shareholder value creation.” In staffing, New Hire Quality is raised by increasing the validity of methods used to make hiring decisions. Research into the validity of various methods used in hiring decisions was conducted at the University of Michigan.
The SHRM/AON 1997 Survey of Human Resource Trends provided summary data suggesting that those firms using more sophisticated selection methods were more satisfied with the quality of their hiring outcomes. The study also presented two contrasting perspectives:
The greatest deficiencies in candidates were work attitudes and basic skills.
The least commonly used selection methods of the survey respondents were the approaches designed to measure basic skills and work attitudes.
Clearly, the lessons learned from research and measurement of factors that link improved organization performance to recruiting and selection suggest that it is critical to raise the bar on how hiring decisions are made.
Creating Value. Selling the value of an investment begins with the end in mind. What will the investment do for the investor? Creating a business case for building a better selection system comes from understanding the value of a performance gap. In its most simple format, the manner to define and present a performance differential is with a visual. An above-average performer sells $2 million per year and an average performer sells $1.5 million. Multiplied over 50 hires, there is a yearly opportunity to move toward $25 million in sales growth using the same head count—but with more efficient people.
This same modeling can be used to capture performance gaps along any lagging indicator: data fields per hour, parts machined, files processed, claims resolved, days absent, and so on.
What investment has your firm’s human resource department made in a system that measures and explores correlations between the leading indicators of staffing and the lagging indicators of organization performance? It is this discipline that creates measures of meaning for impacting organization performance.
Look at Your Emphasis. Management authority and business author Peter F. Drucker once said, “If you can’t measure what is important, what you do measure becomes important.” This is a call for human resource practitioners to reflect on the value of the measures they capture and report to the organization.
In general, companies seek to reduce cost and increase value or quality. Think about the consequences here. If you report costs, you will be asked to make that number smaller. This may mean, “Reduce your cost-per-hire.” While it is a good thing to be cost effective, this may be a low payoff activity. Why? According to the 2001 EMA/SHRM Cost-per-Hire Survey, the average transaction cost was just over $2,500. If you work to obtain a 10 percent reduction, you save $250. No doubt this is real money, and worth being sensitive to. However, it may not cost more to hire a candidate who can perform at a higher level of productivity; it may even be worth spending $250 more to increase the likelihood of hiring a real winner. Spencer and Spencer’s research shows that hiring a real winner is worth at least a 19 percent performance gain, which is worth far more than $250. A quick survey of any line manager can provide you with performance data that demonstrates the value of average versus above-average performers in their department. These people were most likely hired by the same method, at the same cost-per-hire. To verify this assumption, ask the hiring manager if he or she would be willing to invest a bit more in the staffing process to get more above-average performers. This gives you insight into a hiring manager’s view of New Hire Quality.
If you report on the New Hire Quality, you may be asked to increase that quality. New Hire Quality is a term that implies delivering to the customer’s (hiring manager) specifications. For data entry, for example, it may be more keystrokes per hour at an accuracy level of 99.7 percent. For manufacturing, this might mean shorter set-up time on milling operations. When your staffing process measures and demonstrates a sound link between candidate attributes and business outcomes, your system is measuring the quality of hire. This is the key to managing how value is created with every hiring decision. And this is the key to managing the value creation of a human capital investment.
These steps will drive better measures and stronger proof that employees are indeed your most valuable asset. Define appropriate metrics to measure each behavior and each outcome listed in the job models. Your organization will have many metrics already available, but will probably need to develop new data points in order to gain an adequate snapshot of current levels of behaviors and results.
Collect as much data on behaviors and outcomes as possible, before any actions are taken. It is vitally important that you conduct a baseline measurement of your organizational system before conducting any interventions. This way, you can show the precise effects of change to your systems, enabling you to prove the worth of your projects to your executives and your investors.
Continuously monitor selection-level attribute data, behavioral and outcome data to determine the effect of your interventions. Traditionally, this type of analysis has been performed by Indus-trial/Organization (I/O) psychologists. Many large firms have an I/O psychologist on staff. These professionals are highly trained in analysis and can often be hired for project work. Some projects prove to be ineffective at producing the desired results, allowing you to eliminate them without further expenditures. Other projects will prove quite beneficial, and thus may be fortified with increased resources.
Refine and update your job models to reflect changes and new understandings. As you move forward, you will be able to refine your model, rendering it more complete and definite as you go. This will allow you to create increasingly concrete arguments for the effectiveness of your interventions. Ultimately, you will be able to make statements such as “a five point improvement in employee attitudes will drive a 1.3 point improvement in customer satisfaction, which in turn will drive a .5 percent improvement in revenue growth.” (This is an actual finding from linking competencies to results, quoted in The HR Scorecard, 2001.)
Build a budget that includes investment categories for:
Job analysis.
Developing and conducting behavior ratings.
Data collection and storage.
Data analysis and reporting.
Upgrading methods used in evaluating candidates.
Working in a systematic manner, one job at a time, you can add more rigor to your methods, increase the likelihood of hiring more capable performers, and be able to document and report on the numerical consequences of your investments. This will demonstrate the value of HR’s contribution “at the table.”