Investing in Human Capital: Five Tips for Measuring What Matters Most
In November 2020, the SEC announced that it would require publicly traded firms to disclose in their 10-K filings descriptions of their human capital resources and risks. However, when the SEC created these regulations, they provided little guidance on what to report, though public firms scrambled to comply. In 2020, no firms had a section in the 10-K specifically about human capital; by 2021, 85% did and that has remained true in 2022 (Harvard Law, 2022). What is reported? Information widely varies as organizations have developed their philosophies and methodologies about what they can and will report. The 10-K filings included more qualitative narratives than quantitative metrics with four major categories receiving the most attention: a) Diversity, equity and inclusion training and development b)the COVID-19 impact and response; and c) employee benefits, including health and wellness (Financial Executive 2022). Now, new scrutiny of Environment, Social and Governance (ESG) investments have come hard on the heels of these SEC requirements. This elevated scrutiny of human capital investments has created a new imperative for Human Resources: They must be able to clarify how investments in human capital create both economic and social value.
It's a tricky story to tell because of its many parts. Organizations need metrics to be established in relevant human capital categories because they tell the story of outcomes—what organizations hope to achieve with their human capital investments. At the same time, outcome metrics are primarily lag indicators. They tell the story of what has already happened—not what could happen and how to change it. The drivers of those outcomes are also a critical part of the story because indicate where to invest precious time, money and resources to improve human capital outcomes. Some investments may not be worth it—others might have extraordinary and unexpected impact. Finally, stories about outcomes will have both short and long time frames. How do investments being made in diversity, equity and inclusion affect the overall demographics for the company as well as senior team leadership? For the organization’s innovation capacity and revenue from new products? For retention?
The story is well worth telling public and private companies will both be on the hook to justify their investments in humans and demonstrate the value it creates for investors employees, and customers. Human resource executives can take five steps to begin putting comprehensive systems and process in place for telling their human capital investment story:
- Determine the top 3 to 4 categories that matter most for your human capital investments. Draw from established categories, like the ISO Guidelines for Internal and External Human Capital Reporting. These eleven categories include compliance and ethic; costs; diversity; leadership; organizational culture; organizational health, safety and well-being; productivity; recruitment, mobility and turnover; skills and capabilities; succession planning; and workforce availability.
- Within the three to four categories, identify the outcome metrics that you want to report. The ISO standards suggest specific metrics, new guidelines are being established through the publication of 10-K reports, and consortiums are working together to define ESG reporting metrics. What’s most important is that you have the data—so work first with what you have with an eye toward what the industry standards are or will become.
- Identify the potential drivers of those outcome metrics—and whether you have right data to tell your story. Suppose that retention is an outcome you want to report. What drives retention? Creating an equitable, diverse and inclusive culture? Investment in training and leadership development? Focusing on health and well-being? Any of these investments could have a potential impact—either short term or long term. But first, you need to make sure you have the right data to measure the impact. For example, how exactly do you measure an equitable, diverse, and inclusive culture? If you do not have that information, you will need to fill the data gaps.
- Use predictive or prescriptive modeling to create your investment roadmap. Work with your data scientists to create a predictive model showing which investments have the most impact on the outcome metric. The model then becomes your investment roadmap that establishes what you should invest in—and how much. What you learn may surprise you. For example, research has shown that perceptions and experiences related to the organization’s equitable, diverse and inclusive environment predict stress and burnout—and is the biggest lever for change.
- Tell your story with confidence and credibility. Use both the data and your qualitative narrative to tell your investors, employees, and customers why you are focused on specific outcomes and how you plan to achieve them. The data-driven story will create confidence in your recommendations and budget requests and establishes credibility with stakeholders.
In sum, organizations can take a thoughtful, forward-thinking approach to determining what human capital investments they should make in order to achieve the outcomes that matter most. A purposeful measurement system of outcomes, drivers, and investments can catalyze financial growth and demonstrate the value placed on employees. That provides a credible story for stakeholders who want to know how your organization creates both economic and social value.