Note: This “think piece” is designed to stimulate your thinking around updating and publicly reporting your strategic human capital metrics.
The SEC now requires listed firms to report their human capital metrics publicly, so this topic should be our #1 HR issue. However, few in HR seem even to be aware of these new requirements. No less the tremendous impact that these new public reporting requirements will have. Already in effect, the new SEC reporting rules will force HR to focus on identifying, quantifying the impact, and then publicly reporting each of its major human capital initiatives.
The Goal Is To Improve Investor Decisions
These new reporting requirements are designed so that external investors can better understand the value that is being added by the workforce and the HR function. And therefore, investors will be able to make more informed stock purchase decisions. And one final result will be that obviously, companies with the strongest human capital initiatives and the best results will have their stock more highly recommended by financial analysts. And that will eventually raise your stock price.
The SEC has finally declared that “Human Capital is a primary driver of value.”
This brief article is intended to make you aware of these new reporting rules. And then to help you understand the impacts of these regulations and the HR metric areas that you should consider including in your annual report and your 10K.
Public Accountability Has Many Impacts
Although I have been championing “Business Impact HR” for decades, most corporations have been happy to stick with mostly transactional HR metrics that are reported internally. However, because these new SEC rules require public disclosure, increased exposure will dramatically change everything. There are many positive and negative impacts associated with the public reporting of human capital business impact measures. They include:
- The impact on the stock price – the breath of your HR offerings and the fullness of your descriptions will directly impact whether investors will purchase and keep your stock as well as how they vote in shareholder elections.
- Investor lawsuits are possible – if your financial reporting of human capital metrics has omissions or errors, you will be subject to multibillion-dollar investor and shareholder group lawsuits. Also, expect unions to get involved if it appears that what you are reporting is not actually happening on the shop floor.
- An increase in metric accuracy will be necessary – the public visibility of your human capital metrics will mean much more intense scrutiny by everyone. Your metrics and the data behind them will need much more rigor, so they are completely defensible.
- Executive credibility will grow – publicly placing human capital metrics where they are more visible will mean that they will be used and quoted more often by managers, executives, and the press. That visibility may eventually impact executive awareness and human capital funding.
- There will be pressure to provide a competitive advantage – because the descriptions of your competitors will also be publicly available in their 10K’s. Executives can quickly make benchmark comparisons, so they will learn to expect that your company’s coverage and human capital performance levels to be continually higher eventually.
Human Capital Metric Areas That You Should Consider Reporting On
When you include any human capital area in your 10K report, you need to describe the initiative so that an outside investor could fully understand it. Next, you also include a metric that qualifies your performance in that area, so the extent of its business impact is clear. It is important to note that the SEC does not specify which Human Capital metrics should be provided. It is up to the company to pick the ones that best represent its HR programs’ contribution. Typical human capital areas where “disclosure would be material to an understanding of the registrant’s business” might include any of the following metric areas.
Overall human capital performance (quantifying performance in each of these areas) – measure the entire workforce’s productivity using one or more of these measures. Each dollar of labor costs generates how many pennies of profit, the average revenue per employee each year, and HR and labor cost expenditures as a percent of revenue. Also, cover your performance on each major human capital goal/objective. Finally, look for positive correlations between program usage and improved program and business results.
Recruiting initiatives (quantifying performance in each of these areas) – investors like to see a workforce that can grow rapidly to drive and support business growth. So, it makes sense to demonstrate the effectiveness of recruiting using one or more of the following measures. The quality of hires (on-the-job performance) in key positions, the number of position vacancy days, the new-hire failure rate, the new-hire early turnover rate, the percentage of positions that were never filled, the percentage of exceptional candidates that dropped out, and your new-hire/candidates/hiring manager satisfaction rates. Targeted recruiting initiatives that you might report on include: the percentage of referral hires, percent of Boomerang rehires, and the use of talent communities, and a talent pipeline. Employer branding initiatives that you might include: best place to work listings, glassdoor/indeed website employee ratings, and the number of applicants each year.
Retention initiatives (quantifying performance in each of these areas) – investors like to see a stable workforce, so use your metrics to show that you have stability. Consider including these metrics: the retention rate of regrettable’s/professional and top-performing employees, the retention rate of those on the succession plan, the giveaway/take away ratio with your talent competitors, and the percentage of employee turnover that was preventable.
Internal movement (quantifying performance in each of these areas) – the percentage of critical positions filled internally, the percentage of all positions filled internally, the percentage of employees that moved internally, internal churn rates, and manager satisfaction with internal redeployment. Also include performance in these areas: M&A, involuntary turnover, and major layoffs.
Employee development (quantifying performance in each of these areas) – the number of developed leaders, % of employee participation in training, # of T&D hours offered, % of the budget devoted to training, and % of existing employees that mentioned weak development as a reason for leaving.
Risk reduction (quantifying performance in each of these areas) – the dollar costs of HR-related lawsuits, initiatives proactively reducing turnover, initiatives proactively reducing accidents, and the proactive reduction of human capital insurance costs.
Targeted human capital initiatives (quantifying performance in each of these areas) – innovation initiatives, diversity percentages in professional and higher-level positions, percentage of diversity hires in higher-level positions, gender pay initiatives, and diversity retention programs. Also consider including employee representation demographics, corporate culture building programs, performance management initiatives, employee engagement levels, pay per performance initiatives, 360 employee feedback survey results, employee health and wellness, and employee safety initiatives.
How you manage human capital is essential for business success. First, we know that between 60% and 90% of all variable expenditures go to people costs. As a result, people costs may be the highest single cost item in a company. We also know that human capital initiatives are essential to business success because research by the BCG has shown that excellence in high-impact human capital areas like recruiting, retention, and onboarding has a high correlation with increasing corporate revenues and profit. This recent SEC attempt to develop human capital results metrics follows a similar ISO metric proposal attempt in 2018.
Unfortunately, very few corporate HR functions have even attempted to quantify their human capital initiatives’ business impacts for years. However, that must change immediately because these new regulations are already in effect, and they are not voluntary. It’s also safe to assume that the scrutiny that these reported human capital metrics will receive will be intense and continuous. So, it is now essential that HR begin developing defendable strategic metrics that reveal each of their major human capital initiatives’ business impacts. And next, HR leaders will need to look at the human capital 10K metrics of each of your competitors to ensure that your reporting makes owning your stock appear to be the best choice in your industry for most investors. Finally, any new HR initiatives need to be selected at least partially on how well they make the organization look in its public human capital reporting.
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