In recent years, especially during the global financial crisis, the pay of executives has come under intense scrutiny. “Executives are paid far too much for the value they create in a company, particularly when company performance is poor,” goes one popular perception. While in many cases this is true, how well leaders manage an organization’s most valuable (and expensive!) asset – its workforce – has gone largely ignored.
When the human capital of a company represents anywhere from 20 – 80% of the total cost of running the business, “what the CEO gets paid” is just a drop in the bucket of executives’ impact on the company’s performance. Poorly managing and developing talent leads to lower performance, productivity, and retention. Perhaps even more damaging are the associated drains on competitive advantage drivers: workforce creativity, innovation, commitment and engagement. When these decline, they sap a company’s profitability. While this should be intuitive, it has arguably been a very grey area, a tough measurement to tie back to leaders, until now.
In a 9/22/09 Infohrm members-only webcast, John Boudreau examined leaders’ effectiveness in managing human capital, pointing out how leaders are perceived to be less effective in making human capital-focused decisions than those focused on the business operations, finance, marketing, and technology. Then my colleague, Nick Garbis, talked about a new way to determine leader effectiveness, focusing on Leader-Centric Metrics (LCM). LCM takes the discussion around assessing leadership performance to a new level.
“In essence,” Nick said, “We want to be able to answer the question: Which leaders leave a trail of leaders, and which a trail of tears?”
There are several additional key pointed questions to ask about how leaders manage, develop, and retain their human capital, some of the more important of which are:
…which leaders have high termination rates?
…which leaders have high promotion rates?
…which leaders consistently improve performance among their teams?
The problem is that existing HR systems don’t track data in a way that you can examine the answers to these questions over any period of time. Turnover, development, and performance data follows the employees through their career path, but not their leaders. Infohrm has developed a scalable, repeatable framework for tying those things back to the leaders using existing data, which excites me to no end. On one hand, soon companies can more efficiently monitor the key metrics of leader effectiveness and identify problem areas among management, giving them clear targets for leadership and management development strategies and interventions. This is huge.
But what I drool over even more is the prospect for companies that have a grip on the financial impacts of these areas individually: cost of turnover, revenue impact of employee development and retention, and even the correlations between engagement and innovation to profitability. Theoretically, linking these to the “pyramids of leadership” in a company can clearly draw out the true negative impact of executives that aren’t effective managers, or don’t properly prioritize strong management, of their human capital. And on the flip side, the best human capital-focused leaders should emerge.
Tags: Executive Pay, Leader-Centric Metrics, leadership development