Investing in People: Financial Impact of Human Resource Initiatives, Second Edition

Wayne Cascio

John Boudreau

© 2011 by Pearson Education, Inc.
Publishing as FT Press
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This book is the product of an alliance for the Society for Human Resource Management (SHRM). With more than 250,000 members, SHRM is the world’s largest professional association devoted to human resource management.

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Printed in the United States of America

First Printing December 2010

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ISBN-10: 0-13-707092-6

ISBN-13: 978-0-13-707092-3

Library of Congress Cataloging-in-Publication Data

Cascio, Wayne F.
 Investing in people : financial impact of human resource initiatives / Wayne F. Cascio, John W. Boudreau. -- 2nd ed.
    p. cm.
 ISBN-13: 978-0-13-707092-3 (hardback : alk. paper)
 ISBN-10: 0-13-707092-6
 1. Human capital--Accounting. 2. Labor costs--Accounting. 3. Employees--Training of. 4. Personnel management. I.
Boudreau, John W. II. Title.

 HF5681.H8C37 2011
 658.3--dc22
                                 2010036551

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Dedication

From Wayne Cascio:

To my parents, Frank and Joan Cascio, who invested so much of themselves in me.

From John Boudreau:

To my family, who continually inspire me to see the wonderful potential in people.

Acknowledgments

Published books represent more than the words that authors write, for they typically are products of the collective efforts of many people, and this one is no exception. We would like to thank Professor Carolyn Youssef and the inaugural class of the Ph.D. program in human capital management at Bellevue (Nebraska) University for their many helpful comments on material in the first edition of the book. In addition, we sincerely appreciate the enthusiastic encouragement and guidance that we received throughout the project from former Acquisitions Editor Jennifer Simon, Assistant Marketing Manager Megan Colvin, and Project Editor Jovana San Nicolas-Shirley of Pearson Education. We also deeply appreciate the support provided by the Society for Human Resource Management (SHRM) for the development of the software (accessible at http://hrcosting.com/hr/) that accompanies the book, and we thank our software developer and updater, John Jarrard, for the high-quality software that he developed and continues to maintain. Of course, any omissions or errors are the responsibility of the authors alone.

About the Authors

Wayne Cascio holds the Robert H. Reynolds Chair in Global Leadership at the University of Colorado Denver. He has authored more than 150 journal articles and book chapters and 24 books. In 1999 he received the Distinguished Career award from the HR Division of the Academy of Management. He received an honorary doctorate from the University of Geneva (Switzerland) in 2004, and in 2008 he was named by the Journal of Management as one of the most influential scholars in management in the past 25 years. In 2010 he received the Michael R. Losey Human Resources Research Award from the Society for Human Resource Management. His work is cited regularly in the business press. Dr. Cascio is a Fellow of the National Academy of Human Resources, the Academy of Management, and the American Psychological Association. Currently he serves as a senior editor of the Journal of World Business.

John Boudreau is Research Director at the Center for Effective Organizations and Professor of Management and Organization in the Marshall School of Business at the University of Southern California. He is recognized worldwide for breakthrough research on the bridge between superior human capital, talent, and sustainable competitive advantage. He is a strategy, human resource management, and talent advisor and educator in organizations ranging from early-stage companies, to government agencies and Fortune 100 organizations, to large multinational companies. Dr. Boudreau has published more than 60 books and articles, and his work has been featured in Harvard Business Review, The Wall Street Journal, and Business Week. He has won scholarly awards from the Academy of Management. Dr. Boudreau is a fellow of the National Academy of Human Resources and was formerly a professor at Cornell University.

Preface

The demand for accountability among all business functions has never been greater. Recent events show how vital decisions are about human resources in an increasingly uncertain and interconnected world. A key responsibility of organization leaders, human resource (HR) leaders, and consultants is to articulate the logical connections between progressive HR practices and firm performance, and they need to demonstrate those connections with data. This book provides logic and technology to look inside the “black box” between HR practices and financial/business performance.

Investing in people should be as systematic as investing in any other vital resource, based on logical frameworks and focused on optimization, not simply on reducing costs or mimicking best practices. This argues against the common “peanut-butter” approach to talent investments that spreads the same investments (for example, in training or staffing programs) over the entire organization, in an effort to be fair by being equal. Such approaches engender justifiable skepticism from leaders and employees who are asked to invest in programs or activities because HR—or even the CEO—says that “everyone must do it.” That approach is in stark contrast to other resources, such as customers and technology, where investments are targeted where they have the greatest effect. Why not make greater talent investments where they matter most? This “decision science” approach provides the foundation for the techniques we present here. We emphasize that, ultimately, measurement is valuable when it improves important decisions about talent. That requires not simply more or better measures, but an integrated approach that combines those measures with logic, analytics, and knowledge processes (what we call the LAMP framework). Chapters are based on logic diagrams that show the links between particular HR programs, employee behaviors, and operational and financial outcomes. Each chapter also includes a discussion about process, describing opportunities and effective ways to communicate results to decision makers.

We draw extensively on our decades of experience assisting senior-level decision makers to better understand and measure the impact of talent decisions, and also on our research on the connections between talent and organizational outcomes. We have been fortunate to work with both practicing leaders and academic researchers. This combination is essential for talent measurement and decisions that achieve both practical relevance and logical rigor.

Investing in People draws upon research in psychology, economics, accounting, and finance to provide tools that leaders inside and outside the HR profession can use together to describe the financial results of their investments in people. We focus on HR investments with a rich history of data-based research, including staffing, training, workplace health, employee attitudes, and employee turnover, which also represent some of the most important strategic HR functions.

This book provides specific formulas and calculations that you can use to evaluate the impact of your own talent decisions. To make the formulas easier to use, we developed software to accompany the chapters on the following topics: absenteeism, turnover, health and welfare, attitudes and engagement, work-life issues, external employee sourcing, the economic value of job performance, payoffs from selection, and payoffs from training and development.

The Society for Human Resource Management (SHRM) provided generous support for the development of the software, and you can access this software at the SHRM website (http://hrcosting.com/hr/), regardless of whether you are a SHRM member. The software performs the calculations of measures so that readers can focus on the logic, analytics, and processes necessary to improve strategic decisions about talent.

Business leaders, inside and outside of the HR profession, need more rigorous, logical, and principles-based frameworks to understand the connections between human capital and organizational success. We hope that this book serves as a “go-to” resource for those frameworks.

Plan for the Book

Chapter 1, “Making HR Measurement Strategic,” introduces the fundamental principle of this book, that HR measurement is valuable to the extent that it improves vital decisions about talent and how it is organized. This decision-based approach to HR measurement leads to different approaches from the traditional focus on HR services or resource expenditures. It emphasizes that effective HR measures must be embedded within a system that recognizes their role in enhancing decisions and organizational effectiveness. The elements of that framework are the guiding logic for each of the chapters that describe specific techniques and measures in selected HR areas.

Chapter 2, “Analytical Foundations of HR Measurement,” describes four levels of sophistication in HR analytics, along with several analytical concepts that recur throughout this book. These are similar to foundational principles in finance or marketing, such as risk, return, and economies of scale. New to this edition is a discussion of conjoint analysis, a technique that researchers in a variety of fields use to identify the hidden rules that people use to make tradeoffs between different products or services and the values they place on different features. This chapter provides a primer on fundamental ideas that all organization leaders should understand about good measurement.

Beginning with Chapter 3, “The Hidden Costs of Absenteeism,” we update the material from our first edition and also from Cascio’s Costing Human Resources (4th ed., 2000) volume—revised, reconfigured, and presented in the context of the LAMP framework. Chapter 3 shows how to estimate, interpret, and manage absenteeism costs and other effects.

Chapter 4, “The High Cost of Employee Separations,” describes how to calculate the fully loaded costs of employee turnover, and how to incorporate them into a complete framework of turnover effects. We show that turnover rates can easily be misinterpreted, and we show how to avoid that with better logic and measures. We also discuss the hidden costs of layoffs, a factor often ignored when organizations use layoffs to reduce labor costs.

Chapter 5, “Employee Health, Wellness, and Welfare,” presents methods to assess the costs and benefits of employee assistance and worksite health-promotion programs. It also addresses the economics of employee smoking and obesity. In addition, the chapter discusses the value of disease-prevention investments and the role of health, wellness, and welfare programs in an age of rising health costs.

Chapter 6, “Employee Attitudes and Engagement,” begins by distinguishing three important attitudes: job satisfaction, commitment, and engagement. It focuses on the economics of employee engagement, including research on how engagement and the feeling of working at a “best place to work” connect with customer service and financial results.

Chapter 7, “Financial Effects of Work-Life Programs,” includes new findings on the economics of work-life programs and how to measure them. These techniques are useful as organizations increasingly struggle with fundamental questions about how to optimize their investments in talent to enhance employee work-life fit in an increasingly competitive work environment.

Chapter 8, “Staffing Utility: The Concept and Its Measurement,” introduces utility analysis, an important research framework for understanding how investments in HR programs, such as staffing, training, and compensation, produce financial outcomes, and how to calculate them. New to Chapter 8 is a discussion of supply-chain analysis, an integrative framework whose objective is to optimize investments across the various elements of the staffing process, not simply to maximize payoffs within each element.

Chapter 9, “The Economic Value of Job Performance,” addresses one of the most important financial issues related to talent: the financial value of improved job performance. It provides a framework for understanding where improving performance makes a big difference and where its effects are smaller. We also look at approaches to actually estimate the value of improving performance in particular jobs or roles.

Chapter 10, “The Payoff from Enhanced Selection,” combines the utility analysis framework from Chapter 8 and the economics of job performance from Chapter 9 to calculate the economic value of staffing, including recruitment and selection. The formulas are based on decades of scholarly research and show how statistics such as correlations can be clues to significant organizational value. The software that accompanies the book simplifies the calculations so that readers can focus on the strategic implications of their findings (available at http://hrcosting.com/hr/).

Chapter 11, “Costs and Benefits of HR Development Programs,” addresses one of the most significant organizational enterprises: employee development. Despite the massive investments in this area, across all developed countries, specific payoffs are often unknown; at a broader level, we cite research that shows that investments in training predict future stock prices. In this chapter, you learn how to use the utility analysis and performance value frameworks of Chapters 8 and 9 to estimate payoffs from learning and development within a logical and research-based framework that leaders can actually apply.

Chapter 12, “Talent Investment Analysis: Catalyst for Change,” provides a capstone chapter that integrates the previous material. It’s not enough to have solid logic, analysis, and measurements that show the economic effects of talent investments. Key decision makers must listen and act on them. This chapter describes strategies that we have used to communicate the financial implications of investing in people to employees and leaders outside the HR function. This chapter also describes opportunities to integrate the decision science approach to talent with ongoing organizational processes, such as strategy, budgeting, and performance management.