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

jen@jennifermillman.com www.linkedin.com/in/jennifermillman/

www.jennifermillman.com