Human Resources
CFO Central

Conserving Human Capital: 3 Warning Signs That Foreshadow a Skills Exodus (and How CFOs Can Help)

By Matt Jeffers, Industry Principal

In short:

  • CFOs have data and analytical skills that can be invaluable for HR colleagues struggling to cope with a talent shortage
  • Developing a proactive retention plan will save money in the long term
  • Here’s how the workplace is evolving toward a more agile “network of teams” future

Historically low U.S. unemployment — just 3.7% in August — is taking a toll on most sectors. As of December, there were 7 million open jobs chasing 6.3 million unemployed people looking for work, says the Society of Human Resources in its report, The Skills Gap 2019. But that isn’t the whole story. Among SHRM’s more than 1,000 HR professional respondents, 75% see a shortage of skilled applicants for their positions.

You don’t just need a person, you need the right one.

The talent crunch has many causes, most well beyond our control. What companies can manage, however, is the wellbeing of the current workforce. It’s much less expensive to keep good employees than to find replacements, and CFOs are equipped to apply an analytical lens to leading indicators of potential problems.

Note that while turnover is an important metric to track, it’s a lagging dissatisfaction indicator. When an employee has left, it’s too late to be proactive. Rather, finance leaders looking to help reduce turnover and its associated costs should provide HR and executive colleagues with information on absenteeism, overtime and departmental anomalies. You can also help develop a proactive retention plan that will transition your company to a more resilient “network of teams” model.

Metric: Hours Worked, Or Not

A 2018 report from the Integrated Benefits Institute, a nonprofit health research organization, says illness-related absences cost employers $530 billion per year in lost productivity. At minimum, absenteeism rates should be tracked and segmented by division, department, shift, location, type of employee, union/nonunion status, job category and/or the factors that make sense for your organization.

It’s also important to track absenteeism by type: planned and approved, such as vacation or personal days; involuntary but approved, for example, taking care of a sick child or attending a funeral; and unplanned and unapproved. This last bucket includes employees being chronically late or not showing up for shifts and is an indicator of disengagement, overwork or personal struggles. SHRM offers a spreadsheet with formulas to calculate annual and monthly absenteeism rates.

Because absence levels can fluctuate from month to month, a large data set will provide a better benchmark from which to identify unusual increases.

Top Reasons Struggle to Hire

What’s a normal rate? The Bureau of Labor Statistics provides a detailed breakdown by occupation. The average U.S. involuntary (non-planned-vacation) absenteeism rate is 2.8%.

Upticks in absenteeism may reflect an increase in employee stress or a worsening work climate, possibly the result of rapid growth, a changing corporate culture or an acquisition. A study from workforce performance and safety solutions provider Circadian says unscheduled absenteeism costs roughly $3,600 per year for each hourly worker and $2,650 annually per salaried employee.

The more impact a person has on a team or department, the greater the multiplier.

Another metric to watch is unused PTO sitting on your books. In 2018, U.S. workers left 768 million days on the table; 55% of workers failed to take all their earned vacation time. When employees feel they can’t take the time off they’re entitled to, that’s a red flag.

On the flip side, overtime is another important metric to track. People don’t mind putting in some extra hours; however, a dramatic increase in OT expenses may be a leading indicator of employee burnout.

While it’s easier to track OT in hourly workers, CFOs should also keep track of employees who tabulate billable hours, like lawyers and management consultants, particularly when assignments and projects take place over a long period of time.

Take advantage of your time-entry and time-off management systems, which typically track both total hours of absence by absence type as well as scheduled hours versus actual hours worked. By pulling these reports and flagging blips, you provide HR the opportunity to see if the problem is an anomaly, like a flu outbreak, or a chronic issue within a department.

Consistently high levels of overtime and unused PTO can be addressed by hiring additional employees — remember, losing a good worker is expensive. Employee Benefit News says you should expect to spend one-third of a departing employee’s salary to hire a replacement.

Yes, hiring must be budgeted for, while the costs of losing an employee are more diffuse. But CFOs need an answer for when HR says an employee is a flight risk if you don’t hire to spread out the workload, but there is no requisition in place.

Metric: Divisional Disfunction

As you begin to track employee metrics, you may notice that one division or team has lower- or higher-than-average rates of absenteeism and attrition.

The Predictive Index People Management Study concluded that 77% of employees with poor managers hoped to voluntarily leave their employers, while only 18% of employees with great managers planned to leave — affirming the adage that “if your company has a turnover problem, that means your company has a people management problem,” also stated as “people quit managers, not companies.”

Traditionally, management effectiveness was measured through annual employee engagement surveys. Now, “pulse” surveys are becoming the norm as HR leaders aim to collect data more frequently. Regardless of when these surveys happen, the data collected is retrospective, and results are subjective by nature.

Instead, look at high-performer turnover and promotion rates.

High-performing employees are critical to company success. But it’s not easy for HR to collect and segment overall company employee turnover data to isolate the rate for high performers. This is a worthwhile area for CFOs to focus on when seeking to quantify management competence, because top employees can easily find new positions. Lose the stars and you’re left with average and low performers who have fewer options. Whenever the high-performer turnover rate is greater than the overall employee turnover rate, productivity and the quality of your product or service are at risk.

Terrible Managers

Slicing data to identify the managers leading business units that are more likely to lose top people provides an opportunity to investigate whether poor management is the source of the problem. Conversely, the same logic can be used to identify your best supervisors. Grooming these natural leaders to move into management roles in your most critical business units can be a game changer.

As a CFO, you might logically expect that toxic bosses will be spotted by their immediate managers. We don’t necessarily agree, because incompetent management tends to start at the top. For example, if the director of a department is a poor leader who has low expectations for quality of work or an undue focus on cost versus growth, that influences lower management tiers. As a result, high-performing individual contributors leave, yet the director may not flag a manager with a similar style as the problem.

Conversely, monitoring promotion rate by department or business unit provides a window into management effectiveness. Traits of a good manager include ongoing actionable employee feedback, career development discussions, coaching to strengths, providing challenging work and encouraging the pursuit of learning and development opportunities, among others. Employees of managers who have these traits are likely to be more engaged and invested in their continual development in pursuit of the company’s objectives — determinative factors in developing a staff able to adapt to the future of work.

The Workplace of the Future: Organizational Network Analysis

Forward-looking workplaces are evolving toward a more agile “network of teams,” characterized by shared values and culture, transparency, free exchange of information and rewards based on skill rather than title. Deloitte’s organization of the future analysis digs into how to design these workplaces.

It will take time for most companies to evolve, though those that do will have an edge hiring Gen Z employees, who have little patience for hierarchical structure. It will also make the aforementioned analytics less relevant as companies begin to monitor team collaboration, sharing and helping others as opposed to manager effectiveness or how many sick days someone takes.

Deloitte’s 2019 Global Human Capital Trends study provides hints on how to promote teaming and networking. In these environments, employees work on multiple cross-functional initiatives where they can start and stop projects due to unforeseen circumstances. This requires a reprioritization of work to quickly address rapidly changing business challenges. It also hastens the shift to performance evaluations that emphasize ongoing feedback as opposed to point-in-time reviews that may happen at the end of the year and require managers to wait to share observations.

If that sounds like a model that requires employees who are self-starters and who understand and buy into the company mission, you’re right. Getting there requires planning, hiring to goal and continual assessment.

One method of measuring the effectiveness of this new team-oriented workplace is Organizational Network Analysis (ONA). ONA is a method for studying communication and socio-technical networks within a formal organization. This technique creates statistical and graphical models of the people, tasks, groups, knowledge and resources of organizational systems.

ONA example

ONA can be a very effective leading indicator to examine team behavior and effectiveness by embedding network algorithms into email systems. This enables organizations to use employees’ “digital exhaust” to understand how their networks operate and where the hierarchy might be helping or hindering their ability to get work done.

Softer Skills Checklist

When it comes to metrics, HR is used to providing insight into “soft” costs, such as the slightly fuzzy “employee engagement,” defined as a combination of the motivation, focus and direction employees need to make the organization successful. However, even in less-analytical areas, CFOs can help HR be more proactive about retention:

  • Scrutinize and update your leave policy, formalizing the company’s expectations of employees. The concept of unlimited vacation is gaining popularity and removes the liability of accrued, unused PTO; it warrants a cost/benefit analysis.
  • If you don’t have one, create a policy around remote and flexible work so that employees may adjust their schedules to accommodate appointments or other events, rather than calling in sick for a full day to accommodate a doctor’s visit.
  • Train managers on how to handle employees who regularly use excessive unapproved leave in a consistent way.
  • Implement a wellness program to alleviate stress. According to Optum’s tenth annual Wellness in the Workplace Study, 79% of employers say they offer programs to improve absenteeism. The cost is typically reasonable.

If your company is contemplating expanding the HR team, we recommend making sure these two specialties are represented. Both require data analysis, and CFOs will likely have insights into how effective a given applicant will be.

Compensation practitioners evaluate and make changes to an organization’s pay structure by researching compensation trends, with the aim of providing employees with industry-acceptable pay. They are also involved in shaping new-hire requisitions to make sure departments are budgeting properly for their desired qualifications.

Benefits practitioners research and analyze information to obtain the best employee benefit packages. The goal is to provide adequate and industry-acceptable coverage while minimizing costs for the employer.

Both functional areas can help ensure the company stays in line with state and federal regulations — and avoids fines for non-compliance. While HR generalists might feel they are able to keep on top of changing regs, the new worker classification and privacy laws recently enacted by California, and likely to be replicated across the country, show just how complicated this landscape will soon become.

Moreover, companies seeking private equity or VC funding need to be able to demonstrate a proactive plan for hiring and retaining high-performing employees. As we discuss in a rundown of what operating partners want CFOs to know, PEs want data, not gut feelings.

More analytics, more laws, changing workplace norms and higher competitive stakes make it imperative that CFOs get, and stay, involved.

Matt Jeffers has 14 years of experience as a compensation practitioner in the human resources discipline and knows first-hand how impactful the HR functional area is in an organization.


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