Blog Article

It’s time for a real measure of what makes your business perform

Posted by Eric S. Pelletier

Eric S. Pelletier


Can you ever really know what’s driving your business’s performance? It’s relatively easy to gauge the numbers, using tools like cash flow and Return on Capital analyses. But it’s much harder to get an objective measure of how well people are doing. And without this metric, there’s always going to be a missed opportunity to improve. With the Human Performance Equation, Hay Group has developed a formula that will help organizations understand how to make sure their people deliver results as easily as they can analyze their finances. Read the first in our series of blogs on the Human Performance Equation.

Throughout history, the ability to measure has been associated with progress and success. Five hundred years ago, painter Hans Holbein depicted prosperous diplomats against a backdrop of measuring instruments. From the astrolabe to the Large Hadron Collider, measurement has made possible the scientific revolution that created the modern world and continues to drive discovery and progress.

But can business be measured with any sort of scientific rigor today? Or are we still missing something?

Clearly, one of a business’s two components is easy to gauge. Financial capital has been measured for a long time. More recently, the understanding of cash flow measurement has created an integrated view of the financial levers with which a manager can run a company. It leads to a very important financial indicator: return on capital employed (ROCE).

People performance, the other core component of a business, is less straightforward to measure and therefore to optimize. Various different approaches have been refined throughout history. With Scientific Management, Frederick Taylor measured what workers produced, but “Taylorism” is restricted to repetitive, industrial tasks. The IQ test, developed in the early 20th century, gives a (limited) measure of intelligence; and later, psychometric tests were developed to provide an indication of aptitude. More recently, emotional intelligence (EI) has been devised to measure the “soft skills” that have been found to be of great value in the workplace. Each of these indicators can be useful. However they don’t offer the integrated view of human performance that ROCE is able to provide for financial capital.

This is a problem. If we can’t accurately measure what drives human performance, we can’t get the best out of people – and therefore the business will never reach its potential.

Hay Group has been measuring work and people for over 70 years – much of modern business history. We have measured jobs, assigning “points” that help standardize roles and compensation; and assessed leadership capabilities in great detail. Based on the knowledge we have gained, and our work with high-performing companies, we have arrived at a new formula that accurately measures people performance: the Human Performance Equation.

Human Performance Equation

In essence, this equation says that people perform better when they are:

  1. in step with corporate strategy
  2. properly equipped and engaged
  3. in the right jobs
  4. in good, well-led teams
  5. willing to change when necessary
  6. paid intelligently.

And they will also deliver this better performance at a lower fixed cost.

How do we know this works? Our databases cover millions of datapoints on the six different dimensions of the Human Performance Equation. Against this data, we looked at three groups of companies that consistently outperform their peers over time: World’s Most Admired Companies (WOMACs), private equity funds and family-owned businesses. In each group, employees showed different behaviors in all six dimensions. For example, WOMACs’ employees are 28 percent more aligned with their companies’ strategy. They deliver around 20 percent more discretionary effort, a sign they operate in better-managed teams. Also, their remuneration has more focus on variable pay. Taken together, these factors drive returns that are consistently 500 bps (e.g. 10 percent vs. 5 percent) higher than peers over time.

In this blog series, we’re going to look at each dimension of the Human Performance Equation to understand in a concrete way what it is that high-performing companies do differently. In the final post, we’ll explain how you can use the equation to improve your own company’s results.

We believe that this equation has the power to unlock extra performance for businesses everywhere.

 

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1 Comment

  1. Shantaram Sonawane

    Shantaram Sonawane

    June 1, 2015 at 9:32 am

    Nice article. I would like to explore more on Hay’s Human Performance Equation.

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