1) If you don’t like the phrase human capital, then you might not like today’s article. 2) Having just got back from Mexico and two five hour plane rides I had lots of time to read and think about many things, including a fair bit on how we can improve HR by applying financial theories to our organizations talent.
While older theories on the workforce saw labour as easily replaceable cogs in a greater machine, more modern theories view each individual as having positives and negatives, as well as the whole being greater than the sum of the individuals. This is most easily observed in championship sports teams that look average (or even bad) on “paper” but proceed to win because of how they play together. This is no different than investors using modern portfolio theory – assets in a portfolio should not be selected individually on their own merits but rather on how each asset changes relative to the other assets.
So, which lessons from financial management can we use to improve our human capital (the sum of the competences, knowledge and personalities in our workforce). I think there are three keys:
- Diversification
- Balance
- Risk vs. Reward
Diversification. This doesn’t just mean hiring different backgrounds or ethnicity – that’s far too superficial. What we are looking for here is a combination of variables that need to be reviewed: cultural background, education, work experience, personality and others. Diversity of your organization has been shown to correlate highly with the organizations success over time. Of course, being diversified just for the sake of it isn’t enough. You need to carefully select individuals who, when they work together, create more value than as individuals. I think, a modern HR department, needs to focus heavily on who is in their organization, and how they work together. I think the Edmonton Economic Development Corporation did an excellent job of this recently (highlighted at the HRMAE’s Bootcamp last fall, presentation, key learnings). While some would say the outcome had less cultural diversity than expected (hey…it’s Edmonton), I saw the diversity in professional experience and the incredible design of the final team. the EEDC did not just choose the top four employees, but instead designed an entire tree of possibilities. If employee X accepts, than we want Y and Z, if employ X declines, the team needs employees a and b. This is an example of the approach HR and the line area need to use when building, or rebuilding teams within an organization. Ensuring personality types are diverse, but work well together, as well as ensuring the inter-cultural competencies of the group are high enough to allow effective cultural diversity.
Balance. This one is difficult. My thoughts here are of investment portfolios that break up the financial capital into quintiles of various items, for example: 20% in North American Equities, 20% in International Equities, 20% in commodities, 20% in real estate, and 20% in cash and bonds. The idea being, that you are hedging yourself against a loss because one of the other areas will increase during this time. So even if international equities go down 3%, your commodities will raise 6% offsetting the loss. That is part one, part two involves re-balancing by spending some of the gains across the portfolio at designated time (annually, bi-annually etc.). This forces an investor to purchase assets while they are low (buy low, sell high…or don’t sell if they are key talent).
How does this work for HR and organizations? Lets recall post-dot com bubble when computer engineers quickly became a dime a dozen for 2-3 years. There was a surplus of them in the market, meaning this would be an ideal time for an organization to build up their reserves of these positions when looking ahead. This allows your organization to stockpile your talent, making it easier when there is a rush on talent, as well as when you prune under-performing (where productivity is below salary) assets from your organization. This enables an ample supply of talent for a growing organization, especially when combined with strong career and leadership development as well as succession planning.
Risk vs. Reward. This is very common in finance, the level of reward should compensate for the risk. The best part about talent management is that careful investments in our organizations talent can improve the reward while also lowering risk! Depending on your organizations needs, there may be times when you want a more risky hire if the potential reward is equally high, and the employee (asset) isn’t going to adversely impact your teams (balance, diversification). In finance, they use a tool called the efficient frontier to evaluate various mixes of assets. This is also a useful tool for identifying under-performing employees. I’ve attached an HR version of the efficient frontier. Ideally you want employees with a higher reward than their risk, and the last thing you want is an employee who is low return but high risk (I leave it to others to determine what constitutes a high risk employee).
So
that’s it. Remember of course, that with talent we can directly
impact their performance through our actions, meaning we can raise a
whole number of employees into the ideal range (something I’m sure many
financial investors wish they could do).
Let me know your thoughts on this (especially if you think I’m out to lunch), or any talent management practices your organization uses.
twitter: @FAPhoenix