05 Mar CDF Key Takeaways – Human Capital: Strategizing for the Next Decade
Q: What are shareholders expecting the board to do regarding Human Capital and what are board members doing?
- This is not a new topic, but what is new is how interested the shareholders have become in what the organization is doing. CEO pay gaps have been a big driver of this and opened the door for investors to feel it was important to understand how the workforce is being treated, how much outsourcing goes on, and what pay scales look like, etc.
- At the end of the day, the companies that get it right are more likely to be successful. Engagement efforts are increasingly looking to the board to understand what the leadership is doing.
- We are seeing compensation committees trying to come up with metrics to measure employee engagement (i.e. to quantify how happy employees are).
- Examples of Human Capital issues we are starting to see in Proxy statements:
- Compensation and equity / gender pay
- Culture and initiatives
- Health and Safety
- Skills and capabilities
Q: What do you see from Senior Managers?
- The Board now expects different things from HR. They used to want to know about compensation. Now the trend is broadening to focus more on culture, engagement, turnover, demographics (permanent vs. temporary), etc.
- There are far more questions associated with the risks around human capital than there were previously.
Q: Can you talk about the concept of an Employee Value Proposition?
- An Employee Value Proposition (EVP) is the deal that is brokered between the employer and its workforce. It includes tangible rewards like incentives, pay, benefits, retirement, PTO, etc. as well as intangible rewards that are still very meaningful like values, flex schedules, career paths, learning and development.
- An organization with a well thought out EVP will have a much better ability to differentiate itself in the marketplace, making it easier to attract and retain the workforce they need for success.
- Gallup tells us that 60% of the workforce know that now is a good time to find a job and that in order to change roles they need to change companies. This makes employers vulnerable.
Q: What is the Board’s role in the EVP?
- The Board needs to drive talent strategy through awareness and getting behind the strategy.
- Example: A healthcare company was trying to attract high performing physicians and staff. The Board got behind them and they completely re-evaluated their compensation and rewards program and built out a new EVP, which focused far more on the intangibles than tangibles. The Board participated in and, therefore, supported the EVP.
Q: What are companies doing to make employees “feel good?” What is the definition of “happy” in these cases?
- Usually employee engagement is measured through a survey tool to look at satisfaction. Things like turnover and retention are objective ways to look at happiness. Age diversity creates different priorities among the different groups, which needs to be considered.
Q: How do you evaluate human capital risks?
- Every company has a risk management process and the priority of looking at human capital risk has been low. Companies should start by making a list of all the possible human capital risks that exist and aligning those risks to all other risks and goals, prioritizing the ones that have the largest impact on the organization.
- It is important to measure the programs that are implemented, which is often a forgotten but crucial step. There are a lot of ways to measure ROI on human capital programs: time to fill vacancies, number of applicants in the pipeline, etc.
- There are standard HR metrics that we need to look at, though not all equate to quality. Engagement surveys are helpful to analyze on a year-over-year basis.
- This requires thoughtful planning on the frontend. Ask, “What is our baseline today and what do we think the change should be?” and then actually measure it.
- The analytics behind the engagement survey are just as important. Segment the data by ages, teams, roles, etc. to understand where you really have areas of concern.
- The Board often stays pretty high level when reporting risk factors related to human capital.
Q: How do we see things changing with regard to expectations of the workforce?
- For 10 years, Mr. Berthelot has been asking MBA students “Do you think reporting CEO pay ratio is important?” The majority used to say this was not a helpful metric, but now the majority says this is important and helps them decide how the company views the workforce.
- The ways in which you/employees talk about the company, whether in` the proxy statement, social media, or websites, etc. should set a tone for the brand.
- Recently a consulting company did a study for multinational organization where they looked at how the organization is viewed from an Employer Brand. They conducted interviews, reviewed competitors, looked at website and articles, etc. They found that the way employees talk about what they like about working for company internally is not the way they were representing themselves externally.
- Alignment is critical from a branding and recruiting perspective.
- Boards should know what the messaging from the company needs to be and then make sure that it matches the conversations happening in the boardroom.
- Organizations need to understand what the current workforce is saying and what they want, as well as what the market and prospective workforce wants and how they measure up.
- Employees today do focus on different things than they used to in the past. We need to understand why employees would choose to commit themselves to an organization and then help them see why they would select us. This process helps to flip the initial conversation from being compensation focused, to being about why they want to be with the organization.
- The Board can help drive decisions around the total rewards program and may offer up ideas around things that are not traditionally seen as a reward. The Board should be involved in conversations surrounding rewards.
- In light of more recent employee activism activities occurring in large companies, it becomes necessary to listen to employees early and make them feel their voices are truly heard. Organizations need to open up new ways for employees to communicate what they need and want (i.e. town halls, etc.). This can prevent external harm, like an employee airing grievances on social media.
- Transparency is key in this process.
Q: Do you see challenges with a virtual workforce?
- Many teams are virtual with people in many countries. It is crucial to have adequate and reliable technology and to have support in place should something go wrong. Employees will leave and/or be less productive if there are consistent problems.
- Coronavirus is going to be an interesting test for companies that do not normally allow work-from-home. This is going to be the future of our workforce, so we need to figure out how to make it work.
Q: When employee activism starts to show up, how should the Board and C-Suite executives react?
- There really needs to be a plan in place for how to respond in order to react quickly. Organizations should also think about their engagement with investors and be prepared to address these issues. Organizations need to consider how the customer base will react or respond to activism concerns.
Q: What is the difference between Human Resources and Human Capital. Is Human Resources outdated?
- Human Resources (HR) is making a comeback. HR is the group that runs the human capital programs. Human capital is used to define the assets that can walk out the door.
- They are one and the same. HR has been called different things, but it is all the same.
Q: How do we measure and disclose human capital issues? There is a coalition for human capital management with a proposal. What do you hope to see from that proposal?
- The proposal standards are to encourage more consistency on the human capital elements, including the number of employees, compensation ratios, and other metric-driven information. A new proposal has also emerged that is encouraging more detailed information and guiding companies to include objectives they have related to human capital and goals, etc.
- The SEC website has information about what is being proposed, and there are many companies commenting on these proposals. It is going to be challenging to standardize this information. There should be more than just metrics, which need to be provided with organizational context. Statistics alone are not going to tell the story.
Words of Wisdom (WOWs)
David: If it has not already been on the agenda for the board to address human capital in a comprehensive fashion, it really should be. Talk about how to: measure information, prepare for employee activism, encourage dialogue with employees, increase transparency, and prepare to discuss these topics with investors.
Andrea: It is the Board’s responsibility to understand and help drive a talent strategy for the organization. How is it working today? What needs to happen to support and drive it?
Michelle: It is necessary to understand how the employer brand is being represented, both within and outside the company.
Mike: If your board does not have someone with an HR background on it, you need to fix that. If people are our most important asset, then you are in trouble if someone with that background doesn’t have a seat at the table. A seasoned HR officer needs to be there to translate the human side of the organization to the financial and operational sides of the business.