Leading High Performance Organizations How HR Can Affect P&L www.jennifermillman.com
“EFFECTIVE” HR SUPPORT LED TO:
IMPACT ON HUMAN CAPITAL PERFORMANCE 21% increase in employee performance. 26% improvement in retention.
IMPACT ON BUSINESS PERFORMANCE 6% increase in revenue. 9% increase is profit.
IN A COMPANY WITH $100M IN REVENUE, MOVING FROM “INEFFECTIVE” TO “EFFECTIVE” TRANSLATES
TO AN ANNUAL PROFIT INCREASE OF $9M.
THE BAD NEWS
• Only 30% of line managers said their HRBP’s were effective. 11% said ineffective. 59% said neutral.
• CPO’s rated their HRBP’s strategic performance poorly: Only 15% said it was effective. 10% said it was ineffective. 75% said it was neutral.
• Line Managers Rate Strategic effectiveness: 40% of HRBP’s are ineffective at the strategic role. 50% of HRBP’s are moderately effective. Only 8% are effective; 2% are “highly effective.”
• Half of HR executives said their HRBP’s aren't sufficiently using "verifiable, quantified data to show contribution to the bottom line."
• HR’s greatest challenge: 61% measuring HR programs in financial terms, and using
metrics and analytics.
• Strategic HR teams outperform average HR teams by at least 25%.
• HR teams that excel in workforce planning drive 400% more value than those who focus on other areas.
• Companies with fewer HR professionals per employee outperform those with larger teams.
• Build a business case for every major initiative.
• Least effective HR teams focus narrowly on efficiency & cost cutting.
THE CHANGING ROLE OF HR IN BUSINESS
• Baruch Lev – NYU Intangibles make up the majority of the value of a business
Discovery, organization, & human resources
• Robert Eccles – Harvard & PwC Only 19% of investors and 27% of analysts find financial reports
useful in determining company value.
• What matters most? Customers: sales and marketing costs, distribution challenges,
brand equity and customer turnover rates.
Employees: intellectual capital, employee retention and revenue per employee.
Innovation: revenue from new products, new product success rate, R&D spend, and product
WHAT IS BOTTOM-LINE?
• P&L (Profit/Loss) Report
• Business vs. Staff functions • Additional $1M in revenue = +1% EBIDTA! • Each $500K in savings = +1% EBIDTA!
Profit (Loss) - Year End 2012
Revenues $100,000,000
Cost of Goods Sold (COGS) ($60,000,000)
Profit Margin $40,000,000
Expenses ($15,000,000)
Earnings (EBIDTA) $25,000,000
EBIDTA % 25%
FACTORS THAT FEED P&L
• Growth-oriented initiatives. Top Talent hiring initiatives
Compensation & Rewards
Assessing Talent & Redeploying B&C players
• Cost-efficient initiatives. Attrition
Technology
Outsourcing
FOUNDATIONS OF PRODUCTIVITY
• High performing and innovative employees are the foundation of productivity.
• Effective managers and leaders are critical.
• Performance metrics.
• What is measured and reported gets done.
• Adding monetary incentive to metrics exponentially reinforces what is important and achieves results.
AFFECT P&L THROUGH HIRING TOP TALENT
• Relentlessly hire the best of the best.
• Practice “Topgrading” – fill every position with an A-player.
Return to shareholders 22% above industry averages.
The top 3% of salespeople produce 250% more than average; the top 20% produce 120% more.
The top 3% of programmers produce 1,200% more lines of code than average; the top 20% produce 320% more.
A-player Investment Bankers are 200% more productive than the average.
TOP TALENT = COMPETITIVE ADVANTAGE
• Only 7% of companies “Topgrade.” Typical companies hire and promote only 25% A-players;
Top Talent companies hire and promote 90% A’s.
Typical companies have only 25%-40% A-players in management; Top Talent companies have 85% to 90%.
• Why are there so few organizations that have been around 100+ years?
• Primary assessment tool is the interview. Least valid.
Most people are bad at it.
• Talent is the driver behind all value.
• HR is the primary driver behind all talent.
• Top talent is a competitive advantage.
NUMBER OF REPLACEMENTS NEEDED TO ACHIEVE 90% A-PLAYERS
Number of Underperformers to Be Replaced
Hiring Success
25%
Hiring Success
50%
Hiring Success
75%
Hiring Success
90%
10 31 17 11 10
20 67 35 24 20
40 141 72 48 40
100 357 179 120 100
COST OF MIS-HIRES
• Average cost of mid-manager mis-hire is $1.5M.
15x their base salary!
• Base salary $100K / 1.6 years tenure.
3 mid-manager mis-hires = $4.5M!
• Average cost of senior sales rep mis-hire is $600K.
6x their base salary!
• Base salary $100K / 1 year tenure.
• Average cost of entry-level sales rep mis-hire is $55K.
1.5x their base salary!
• Base salary $35K / 9-month tenure.
Costs
No Agency, No Severance, Low
Maintenance Cost of Hiring $31,643 $10,000 Compensation (whole tenure) $255,452 $255,452 Maintenance $67,653 $15,000 Severance $33,962 $0 Cost of mistakes, failures, wasted and missed business opportunities $1,232,092 $1,000,000 Cost of disruption $242,356 $200,000 Sum of Costs $1,863,158 $1,480,452 Value of Contribution $360,721 $360,721 Total Cost of Mis-hire $1,502,437 $1,119,731
• Mid-Manager Avg base salary: $102,692. • Average Tenure 1.6 years • Sample size 52 cases.
Costs
No Agency, No Severance, Low
Maintenance Cost of Hiring $23,000 $7,000 Compensation (plus commission) $151,000 $100,000 Maintenance $14,000 $10,000 Severance $25,000 $0 Cost of mistakes, failures, missed opportunities, missed quota $250,000 $250,000 Cost of disruption $100,000 $100,000 Total Cost of Mis-hire $563,000 $467,000
• Senior Sales Rep average base salary $100K. • Average Tenure 1 year.
Cost of Recruiting, Sourcing, Screening, Hiring $7,000 Salary & Benefits (9 months base @$40K plus 30% benefits load) $39,000 Training (Trainer salary, trainee salary, time, tools, resources) $8,000 Facilities, disruption time, mistakes $1,000 Opportunity cost of lost sales (quota - actual) ?? Lost customers ?? Management coaching time on mishires ?? Opportunity cost of time spent making A players better ??
TOTAL COST of MISHIRE $55,000
• Entry-level Sales Rep. • Average base salary $40K. • Average Tenure 9 months.
CURRENT STATE Year 1 Year 2 Year 3 Year 4 Year 5
Total Sales People 45 50 55 60 65 Annual Turnover Rate 75% 75% 75% 75% 75% Total Hires 33.75 37.5 41.25 45 48.75 Mis-Hire Percentage 75% 75% 75% 75% 75% Total Mis-Hires 25.3 28.1 30.9 33.8 36.6
Annual Cost $1,392,188 $1,546,875 $1,701,563 $1,856,250 $2,010,938 Total Cost of Mis-hires over 5 Years $8,507,813
REDUCE SALES ATTRITION BY 10% PER YEAR Year 1 Year 2 Year 3 Year 4 Year 5
Total Sales People 45 50 55 60 65 Annual Turnover Rate 75% 68% 61% 55% 50% Total Hires 33.75 33.75 33.55 33 32.5 Mis-Hire Percentage 75% 68% 61% 55% 50% Total Mis-Hires 25.3 22.8 20.5 18.2 16.3 Annual Cost $1,392,188 $1,252,969 $1,125,603 $998,250 $893,750 Total Cost of Mis-hires over 5 Years $5,662,759
TOPGRADING
Year 1 Year 2 Year 3 Year 4 Year 5
Total Sales People 45 50 55 60 65
Annual Turnover Rate 20% 20% 20% 20% 20%
Total Hires 9 10 11 12 13
Mis-Hire Percentage 20% 20% 20% 20% 20%
Total Mis-Hires 1.8 2.0 2.2 2.4 2.6
Annual Cost $99,000 $110,000 $121,000 $132,000 $143,000
Total Cost of Mis-hires over 5 Years $605,000
• A savings of $8M over 5 years. • Average $1.6M in savings each year. • Additional 3.2% in EBITDA!!!
1. $525,901.19
2. $410.694.25
3. $358,315.26
4. $290,064.83
5. $265,793.66
6. $148,507.34
7. $142,461.55
8. $108,762.69
9. $106,733.61
10. $91,189.46
• Top 25% of sales reps. • Average GP among 40 sales reps is $161K. • Is it true that the top 3% (1.2) earn 250% more than
average? Yes, 290% more!
• Is it true that the top 20% (8) earn 120% more than average? Yes, 173% more!
• What would happen if we Topgraded our sales force? Our revenues would increase by 173%.
• For a $100M company, each $1M = 1% increase in EBIDTA. $73M = 73% increase in EBITDA!
• Even ONE A-player hire will move the needle.
TOP TALENT SUCCESS STORIES
• Lincoln Financial – 50% A’s to 92% A’s among officers and from 30% A’s to 94% A’s among Senior Mgt in 3 years.
Beat market by 270% in one year, 140% in three years (stock performance compared to peers’).
Beat S&P by 50% over same timeframe.
• Marinemax – 25% A’s to 90% A’s in 4 years. Over same time, beat S&P by 240% during a recession!
• Hayes Lemmerz – went from Chapter 11 to world leader in automotive supplies in 2 years.
Increased financial performance by 150% in one year.
• Greg Alexander – Topgraded his sales region at EMC. Went from #13 of 15 to #1 in nation.
Named Sales Manager of the Year by SMM.
REVENUE – Average Employee Sales $1,000,000
Employee Earnings $150,000
Revenue from Employee $850,000
PROFIT – Average (35% PM)
Employee Profit $350,000 Employee Earnings $150,000
Profit from Employee $200,000
REVENUE - A-Player (= Avg X 120%)
Employee Sales $1,200,000 Employee Earnings $150,000
Revenue from Employee $1,050,000
PROFIT - A-Player (35% PM) Employee Profit $420,000
Employee Earnings $150,000 Profit from Employee $270,000
REVENUE - Top-Gun (= Avg X 250%)
Employee Sales $2,500,000
Employee Earnings $150,000
Revenue from Employee $2,350,000
PROFIT - Top-Gun (35% PM)
Employee Profit $875,000 Employee Earnings $150,000
Profit from Employee $725,000
• A-Player generates 135% more bottom-line profit than average.
• Top-Gun generates 363% more bottom-line profit than average! +1.5% EBITDA for ONE Top-Gun!
COMPENSATION & COMMISSION
• Pay for Performance. • Internal Compensation Policies. • Commission Structure.
Enormous impact on bottom-line and future growth. Plan will be source of high or low morale for A’s. Build reputation to attract top sales talent. Mix of Base/Commission is most common. • 80/20, 70/30, 60/40, 50/50 • More aggressive for new sales than account mgt. • Length of Sales Cycle.
Accelerators & Decelerators. Back-end Loaded.
• Creative Options.
ASSESS EXISTING TALENT
• Interviews
Utilize the same Top Talent style used for new hires.
• 360-degree feedback
Include people outside the department, at levels above, below, and peers. The more data points the better.
Don’t rely on existing or past reviews; look at performance results with fresh eyes.
• Identify A-players.
“A-player”: One who qualifies as among the top 10% of talent available for a position.
• Identify chronic B/C-players.
“Chronic B/C-player”: One who is not trying to become an A-player, OR is not able to become an A-player.
Stack Ranking
1.Bob 2.Sally 3.Sue 4.Jane 5.Leroy 6.Joe 7.Cathy 8.John 9.Suzie 10.Bill
• Forces leadership to think critically. • Impossible to claim everyone is above average. • Encourages inquiry into performance and utilization
of metrics. • Leads to objective, comparative evaluation. • Drives better decision making. • Reduces spread of performance between high and
low over time. i.e., Olympic teams
• Clear, consistent communication of criteria. • Short-term (3-5 years). • A-players will enjoy this.
WHY PERFORMANCE MANAGEMENT PLANS FAIL
• Leaders aren’t involved/don’t take seriously.
• No follow-up; plan soon forgotten.
• If there is follow-up, it’s only once and it’s a formality.
• The assessment criteria are too vague.
• 360-degree feedback comments are personal rather than constructive.
• Trust about confidentiality & integrity of 360 and assessments.
• Only focus on weaknesses.
• They succeed when it’s from the top, focused on strengths, and ingrained in culture.
WHAT CAN HR DO?
• Analyze Organization Vision and Strategy.
• Understand the business.
• How does HR add value to customers and end-users?
• HR Systems.
• HR Scorecard.
• Create the Business Case: ROI & C/B Analysis.
Regression Analysis.
Old school: How HR can help cut costs.
New school: How HR can help drive revenue.
• Market Wins.
WHAT TO MEASURE
OLD SCHOOL HR NEW SCHOOL HR Time to Fill Quality of Hire
Percentage of Employees Trained Effectiveness of Training
Turnover Unwanted Turnover
HR Headcount / HR:EE Ratio HR Utilization
Employee Referral Bonus Payout Effectiveness of Referral Bonus Dollars
Cost Per Hire Cost/Benefit & ROI of Hire
Tenure Regression Analysis of Tenure and Performance
IMPLEMENTING CHANGE
• Culture of excellence & performance. • Communication.
From the top, in person. Engage in continuous, consistent dialogue. Enroll stakeholders in the change effort. Repeat, repeat, repeat.
• Action Quickly follow communication with visible action. Short-term wins. Enable Action.
• Humanely redeploy B/C players – don’t get stuck here!
• Don’t let up. • Make it stick.
Questions? Jennifer Millman
[email protected] www.linkedin.com/in/jennifermillman/
www.jennifermillman.com