HR as a Source of Shareholder Value

Companies with the best people management deliver nearly twice as much value to shareholders as their average competitors - Watson Wyatt Consultants

What is HRM ?
Human resource management is the management of an organization's workforce, or human resources. It is responsible for the attraction, selection, training, assessment, and rewarding of employees, while also overseeing organizational leadership and culture, and ensuring compliance with employment and labour laws. In circumstances where employees desire and are legally authorized to hold a collective bargaining agreement, HR will typically also serve as the company's primary liaison with the employees' representatives. The human resource management traditional approach focuses on personnel functions such as recruitment, performance appraisals, payroll administration, and the like, with some employee-centric development initiatives such as training and development interventions, motivation initiatives

Traditional View of HRM

Traditionally HRM was considered as Salaried model. The traditional approach the human resource management was designed according to industrial environment, applicable to blue-collared factory workers, is a controlled work atmosphere marked by narrow, rigid job definitions and detailed workplace rules and procedures.

Workers have much autonomy and deviating from the written policy and procedure attract disciplinary action, with discretion remaining an exclusive prerogative of management. The trade union dominates collective bargaining settlements define pay scales, and seniority decides promotion opportunities.

Traditional View of HRM

Focus on Functional Activities and Process Orientation Human resource management traditional approaches focus on functional activities such as human resource planning, job analysis, recruitment and selection, maintaining employee relations, performance appraisals, compensation management, and training and development. The traditional approach toward human resource management also focuses on establishing policies, procedures, contracts and guidelines, and attempts to drive employee performance and achieve organizational goals by making employees adhere to such carefully crafted documents.

Control Activities A major activity of a traditional human resource management approach is monitoring and supervision of the workforce to ensure compliance to the established rules, procedures, guidelines, and contracts.

Traditional view of HRM

Reconciliation Between Management and Workforce A major role of traditional resource management is reconciling the interests of management and the workforce. The traditional approach presumes management and workers having distinct and conflicting goals and needs, with the goal of human resource managers being to effect a reconciliation to drive the organization.

Traditional human resource management remains a staff function, and the exclusive responsibility of the human resource department

HRM was considered as mainly a cost to the organization rather than any value adding function.

Current view point on HRM

With the return to real-world economics after the unwinding of the 1990s and bursting of the 'tech' bubble HRM gained ground and considered as strategic function for the organization New approach it is the quality of a company's people management that determines its real success or failure. HRM develops and manages these people it can transform the crisis into opportunity.

Current view point on HRM

Work Environment:
A safe and happy workplace makes the employees feel good about being there. Each one is given importance and provided the security that gives them the motivation and incentive to stay. This is usually achieved through internal surveys to find out whether they are satisfied and if not what they think needs to be changed.

Open Management:
Employees dont like the feeling of being kept in the dark about what is happening in the company. They feel motivated and develop enthusiasm only when the management opens up to them and discusses the company policies, sales, clients, contracts, goals and objectives. This encourages participative management. Asking them for ideas on how to improve will get their creative juices flowing. Being open about everything related to the company will help in building trust and motivating the employees. This open management policy can be practiced using several tools.

Current view point on HRM

Performance Incentives: Pat on the back, bonuses or giving some other compensation Keep up with the attrition rate Individual as well as the team level Getting the best out of the employees Performance Feedback: 360 degree feedback Fair and fast Employee Evaluation: Apart from being done by the boss, should be done by another person at a higher level. This ensures a fair and accurate rating of each and every employee Sharing of Knowledge: Knowledge sharing is a wonderful strategy that helps in the betterment of the employees and their work. Keep all the knowledgeable information in central databases that can be accessed by each and every employee. Publicize Good Performances: Motivation

HRM as competitive advantage to the organization

Earlier patent, economies of scale, market regulation all are considered as competitive advantages, But these are not relevant in current economic environment. Instead , the core competencies are capabilities of employee to develop new product, provide more better services to the customer and implement the strategies of the organization. HRM manage develop and sustain these kind of invisible asset of the organization and become a competitive advantages.

HUMAN CAPITAL MANAGEMENT

Human capital management (HCM) is an approach to employee staffing that perceives people as assets (human capital) whose current value can be measured and whose future value can be enhanced through investment. An organization that supports HCM provides employees with clearly defined and consistently communicated performance expectations. Managers are responsible for rating, rewarding, and holding employees accountable for achieving specific business goals, creating innovation and supporting continuous improvement.

Two competencies required for Human Capital Management

1. Professional HRM Capabilities-these are related to the delivery of traditional HR activities such as recruiting ,selection and compensation 2. Business related capabilities reflect the understanding of business and implementation of competitive strategy.

SPECIFICALLY
HR must focus on business level outcomes rather than HR level inputs HR must become a strategic core competency rather than a market follower. Strategic competencies are more important than functional competencies. The most important missing element in HR functional expertise is a systems perspective.

Architecture for Intangibles

Level 1 Area of focus Keep promises Action outcome Build reputation among stakeholders for delivering what you promise to deliver. Define growth strategy , manage trade offs in customer intimacy, geographic expansion to achieve growth Provide full support to current capabilities , build competencies in R&D, sales and alike. Develop capabilities of shared mindset, talent, leadership and alike throughout the organization.

Anticipate future while investing in present

Put money where strategy is

Build value through organization and people

Why HPWS ?
High Performance Work Systems adopted by HR functions across organizations as a means to contribute to the strategic goals of the organization . Is specific combination of HR practices, work structures, and processes that maximizes employee knowledge, skill, commitment, and flexibility. Systems composed of many interrelated parts that complement one another to reach the goals of an organization, large or small. Success of an HPWS lies in its inimitable nature which becomes a source of major competitive advantage.

Elements of HPWS
Principle of Shared Information Creation of culture of information sharing amongst employees as well as higher level executives , both ways . Requires a shift from traditional mentality of central command and control. Principle of Knowledge Development Requires people who are multi skilled and are also able to learn real time and solve problems using new approaches . Principle of Performance-Reward Linkage Helps in aligning employee and organizational goals. When rewards are connected to performance, employees will pursue outcomes that are mutually beneficial to themselves and the organization. Principle of Egalitarianism Egalitarian work environments eliminate status and power differences and, in the process, increase collaboration and teamwork. When this happens, productivity can improve if people who once worked in isolation from (or opposition to) one another begin to work together.

Evaluating the HPWS

To determine if the HPWS program is succeeding in reaching its goals, managers should look at finding answers to questions:
Are desired behaviors being exhibited on the job? Are quality, productivity, flexibility, and customer service objectives being met? Are quality-of-life employees? goals being achieved for

Is the organization more competitive than in the past?

Accounting of HRM
Unlike conventional assets human resource can not be seen in the balance sheet of the firm. It is the present value of future cash inflow of the firm. There is no scientific method to measure this intangible assets of the firm.

Watson Wyatt's Global Human Capital Index

Human Capital Index(HCI) - methodology of Watson Wyatt used to calculate the correlation of human capital and shareholder value Human Capital Index shows that the better an organization is doing in managing its human capital, the better its returns for shareholders Calculated based on the following
1. 2. 3. 4. 5. Recruiting Excellence Clear Rewards and Accountability a Collegial and Flexible Workplace Communications Integrity Prudent Use of Resources

BENEFITS OF HR SYSTEM
Recruitment and Training
Major responsibilities of the human resource team. HR managers come up with plans and strategies for hiring the right kind of people And if any missing skill is required - a training program is designed. These help in increasing the revenue for the company

BENEFITS OF HR SYSTEM
Performance Appraisals
HR encourages the people, to work according to their potential Gives them suggestions that can help them to bring about improvement When taken on a regular basis, motivate the employees --> Results in improved performance for the employee and the employer

BENEFITS OF HR SYSTEM
Maintaining good Work Atmosphere
Vital aspect of HR, because this effects the individual work atmosphere or work culture Good working condition will help bring out the best in an employee ---> Job Satisfaction --> Increase in the output of an individual

Managing Disputes
In an organization, there are several issues on which disputes may arise between the employees and the employers. The human resource department acts as a consultant and mediator to sort out those issues in an effective manner

BENEFITS OF HR SYSTEM
Developing Public Relations
Organize business meetings, seminars and various official gatherings on behalf of the company in order to build up relationships HR department plays an active role in preparing the business and marketing plans for the organization Good Public Relations improve the chance to attract new talent, new investors and improve relationship with the existing employees and investors

HR as a Value to Shareholders

Linking HR Strategy to Shareholders Value

Are the decision-makers in the organization aware of the link between human resource planning and profits ? Some firms in negative growth choose to layoff thousands of employees so that profits and share price increase immediately. Slash and burn tactics do not always work and can lead to irreversible damage to the companies performance. Remaining employees cannot compensate for the loss of productivity and at least 7% of the remaining employees quit in the 6 months following a layoff.

Linking HR Strategy to Shareholders Value

Loosing valuable employees to layoffs can lead to loss of clients because the level of expected services may decrease, giving the competitors to cut deals to steal the business. In the study HR as a source of Shareholder Value: Research and Recommendations, it was found out that combining HR initiatives with strategies like performance management systems has a 50% larger effect on firms performance than implementing single policies alone. In the research, Becker and his colleagues focused on strategic impact of HRM system on both market-based and accountingbased measures of firms performance.

Linking HR Strategy to Shareholders Value

Use of market-based measures of firms performance is appropriate in this line of research because they reflect the present value of the firms future cash flows which is net of any additional costs associated with implementing these systems. Thus organizations which fix their objective on share price, may achieve short term success but they are bound to encounter long term costs if their objectives are achieved at the expense of productivity and customers. Employee and customer needs frequently change, due to which an integrated workforce development strategy helps the organization adapt to shifting goals.

Linking HR Strategy to Shareholders Value

An HR strategy should translate business goals into individual accountability, thus creating long term value for the organization. This is because engaged employees are able to drive customer loyalty as well as corporate profits through their consistency and quality of service. Investing in employees performance confirms to the shareholders that you are concerned with growth and not minimizing costs, which provides a much smaller competitive advantage Thus the number one priority for the value-creating HR function is to point to human capital problems that limit the ability of the firm to achieve important business priorities and can provide solutions to those problems.

HR Factors affecting Profits

Management participation Open management style Taking some risks, but not too many Top managers spending 20% of the time with customers Around 20% of top management should be outsiders Management training is deemed important Top managers should be effectively incentivized Succession plan is done A good appraisal plan is in place Employees should get regular feedback

HR Factors affecting Market Value

Use of knowledge and contract workers Recruiting excellence Good union-management relationship Teamwork and 360 degrees feedback Customer focused environment Remuneration Sharing information with employees