2005_2006 saratoga wds executive review
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2005-2006U.S. Human Capital Effectiveness Report
Saratoga
Executive Summary
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Introduction
While many organizations tout that the workforce is its most important asset, few
actually manage this investment as an asset. At best, there may be a lot of energyfocused on the individual employee, or on total levels of rewards, but unfortunately there
is little focus on optimizing the investment and return on the workforce. Organizations
are recognizing that they need to focus more on the return on workforce investments.
In recent years, key intangible assets such as the workforce have increasingly been
linked to an organizations market value. The Accounting for People Initiative (http://
www.accountingforpeople.gov.uk/), Enhanced Analytics Initiative (http://www.
enhancedanalytics.com/) and PricewaterhouseCoopers value reporting initiative (www.
pwc.com/valuereporting) are all examples of looking beyond an organizations quarterly
and annual financial numbers to get better transparency and knowledge of the efficiency
and effectiveness of an organization.
Its a fairly intuitive concept. For example, imagine two competitors with similar P&Ls, cash
flows and balance sheets. However, one of these organizations performs in the top quartile
in retaining leadership, while the other is a bottom performer. In which organization would
you be more inclined to invest? Saratogas 2005/2006 U.S. Human Capital Effectiveness
Report allows us to explore such factors.
Summary Overview
Saratogas 2005/2006 U.S. Human Capital Effectiveness Report provides organizations
with hard data to help them optimize the return on human capital investments. While the
information in this summary provides trend analysis, ultimately each company should
leverage this data to assess its own performance and set its own performance goals.
Benchmarks may play a role in setting some of these goals. Study highlights include:
Employee productivity is on the rise; yet, there remains much room for improvement
The single largest expense for organizations continues to be people costs; yet,one in five companies describe their ability to tie pay to performance as poor
or very poor
Organizations continue to spend more time and resources to make hiring decisions,
yet the overwhelming majority of companies surveyed have no means of assessingthe quality of these decisions
As the economy improves, job mobility is beginning to return. Voluntary turnoverrates increased while offer acceptance rates declined
While the per employee investment in the HR function has been rising steadily for
six years, the size of the HR function has been decreasing
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Saratogas 2005/2006 U.S. Human Capital Effectiveness Report contains 2004 calendar
year data collected from 288 organizations in the United States and represents a wide variety
of industries including banking, financial services, insurance, healthcare, manufacturing,
technology, telecommunications, and utilities. The report contains approximately 350metrics, more than 200 of which are in new areas such as performance based turnover,
quality of hire and employee engagement, and in-depth HR cost and structure analysis of
more than 20 functions. In addition to the all industry results provided in this document,
Saratoga reports results based on industry, size, region, revenue size, revenue growth,
financial structure, and percent of unionized workforce.
In this summary, a discussion of metric results is organized in the following categories:
Organization & Operations: Productivity and structure of the entire organization
Compensation & Benefits: Costs and structure of compensation and benefits
Staffing & Hiring: Costs and efficiencies of the Staffing function
Retention & Separations: Employee retention and separations
HR Staff & Structure: Costs and structure of the Human Resources function
The results described in this Executive Summary represent the All-Industry median. It is
important for organizations to be mindful that demographics such as industry, region or size
can make a big difference when interpreting results. For example, the amount of revenue
generated per employee in the Healthcare industry is $152,139, while in the
Utilities industry, that figure is over $707,366nearly five times as much.
Examples of Metrics in Action
Saratoga clients use metrics for a variety of reasons including:
CFO bringing turnover data to bond rating meetings to demonstrate business
sustainability
Tying leadership bonuses directly to turnover statisticsleadership receives nobonus if targets are not hit
Tracking overtime pay to assess operational efficiencies
Integrating employee opinion survey data and turnover metric data tocommunicate cost of turnover and evaluate the best actions to help stem it
Leveraging human capital metrics to improve effectiveness of assimilatingacquired companies
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Organization & Operations Results
Saratogas results show that since the US recession began in 2001, employee productivity
has steadily risen. Revenue per employee increased 12% in 2004 (a 39% increase since2001). Expense per employee climbed at a slower pace in 2004 (10%) and has increased
14% since 2001. The table below shows the trend of revenue and expenses per employee
during the last four years.
$324,523$312,738
$271,803
$264,429
$198,600
$182,585$204,611
$226,046
$0
$50,000
$100,000
$150,000
$200,000
$250,000
$300,000
$350,000
2001 2002 2003 2004
Revenue per Employee
Expense per Employee
Contrast of Revenue
per Employee Versus
Expense per Employee
As a result of revenue growth outpacing expenses, the profitability of employees is
rising. For the fourth year in a row, organizations have seen an increase in their return
on investment in their employee compensation and benefit expenses. In 2001, the
average organization reaped $29 in profit for every hundred dollars invested in employee
compensation and benefits. In 2004, the average organization saw a $52 profit: an increase
of 18%. Despite double digit growth in healthcare expenses and steady increases in
employee compensation, most organizations are experiencing a greater increase in their
income per employee.
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Despite these encouraging financial results, Saratoga research suggests there is still room
for improvement. Results from a 2004 study commissioned by Convergys Employee Care
and conducted by the University of Michigan and Saratoga entitled Workforce Agility: The
Next Frontier for Competitive Advantage reveal that best practice companies estimate theyare overspending by 10% and underperforming by 10% as a result of not having a fully
utilized workforce. For an organization with $1 billion in revenue, this suggest that a more
agile and aligned workforce could result in an additional $130 million dollars in income. In
addition, while 80% of respondents reported that the workforce is more aligned to business
strategy than three years ago, nearly one in three respondents noted that their workforce
was only somewhat aligned or worse.
Furthermore, data suggests that organizations are still struggling to share talent internally,
as only 5% say they are very flexible reallocating human capital to projects in different lines
of business or cross-line business teams. More than half describe themselves as somewhat
rigid or rigid. Saratoga believes that better alignment and flexibility will help companiescapture additional revenue while cutting costs.
Successful organizations will be forced to adapt to a more fluid and dynamic workforce.
On one end of the spectrum, tens of millions of Americans born during the baby boom will
be eligible for retirement within the next decade. Saratogas results show that 17.4% of
their workforce will be eligible for retirement within the next five years. At the same time,
nearly one in five employees in the average organization has less than two years of service.
This tumult requires that organizations actively manage and work to create a culture that is
aligned to business needs
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Compensation & Benefits Results
Labor costs as a percentage of revenue increased 5% in 2004, meaning that organizations
spend $28 on employee compensation and benefit expenses for every $100 in revenuegenerateda 5% increase since 2003. Once again, this strongly suggests the need to
measure and evaluate the impact human capital has on the bottom line. The table below
shows the trend of labor costs as a percentage of operating expenses and revenue during
the last four years.
While companies often outline strong desires to align pay with performance, one in
five companies describe their ability to do so as poor or very poor, and another 13% ofrespondents report not having a pay for performance system in place whatsoever. On
average organizations spend only $94 of every $1,000 on incentive based payand this
number is even smaller when compensation related benefits, such as retirement accounts
and stock, are taken into account.
While employee compensation costs as a percent of operating expenses saw a three
percent decrease to 28.7% in 2004, healthcare costs continue to rise. Nearly 3% of
operating expenses were devoted to healthcare costs in 2004. Healthcare costs per
covered employee increased 6% to $6,393 in 2004 (a 40% increase since 2001). On
average, employers were responsible for 82% of healthcare costs with employees being
responsible for 18%.
Saratoga also tracks other benefits enjoyed by employees. For instance, employees
enjoyed an average of 28.6 paid days off per year. Additionally, when it comes to
planning for retirement through 401(k) plans, Saratogas results show that 72% of eligible
employees enroll in plans. The average organizational contribution to employee 401(k)
plans is $2,258.
Labor Cost as a
Percent of Revenue28.0%26.6%
25.8%
20.8%
0%
5%
10%
15%
20%
25%
30%
2001 2002 2003 2004
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Staffing & Hiring Results
Saratoga 2004 Human Capital Effectiveness Reports results suggest that organizations
continue to spend more time and dollars to make hiring decisions. Time to Fill (averageamount of time it takes to fill a requisition) increased for the fourth year in a row to 48
(a 4% increase since 2003). Meanwhile, the cost per hire increased 11% to $3,270 while the
cost for recruiters to fill each requisition was $691. In addition to the salaries and benefits
of recruiters, adding the cost of hiring managers time to develop requisitions and interview
candidates illustrates the importance of measuring and optimizing recruiting efforts. Given
the retirement statistics mentioned above, and the pent-up demand to change employers
that developed through the recession, Saratoga believes that the pressure on these numbers
will continue to rise. The tables below show the trend of hiring cost and time to fill positions
during the last four years.
Cost per Hire$3,270$2,936
$3,092$2,477
$0
$500
$1,000
$1,500
$2,000
$2,500
$3,000
$3,500
2001 2002 2003 2004
Time to Fill
48
46
4544
42
43
44
45
46
47
48
49
2001 2002 2003 2004
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Despite the greater time and financial investment in recruiting efforts, results reveal that
nearly seven out of ten organizations do not measure new hire quality after the hire. Quality
of hire is an especially subjective measurevarying dramatically company by company,
both in definition and in ability to track.
Nevertheless, Saratoga has developed a number of metrics to help organizations understand
the quality of their new hires, and compare these results externally. Results revealed that
six percent of new hires left the organization within three months and 55% of them left
voluntarily. First year employees in organizations received a performance ranking eight
percent below the overall workforce, suggesting that newly hired employees are able to
adapt well to the demands of the organization.
Measuring Quality of HireTraditionally, organizations have measured the staffing function with metrics such as
Cost Per Hire and Time To Fill. While helpful in assessing staffing efficiency, they do not
provide insight into hiring effectiveness. Saratoga offers additional metrics for evaluation
of new hire success.
Poor Quality Hire Ratemeasures the percent of total hires that voluntarily or
involuntarily left the organization within their first 3 months of service during the
survey period.
New Hire Voluntary Separation Ratemeasures the percent of total hires that voluntarily
left the organization within their first 3 months of service during the survey period.
New Hire Performance Ratecompares the average performance ranking of new hires
compared to the performance ranking of the overall organization. A result under 1
suggests that new hires are performing below levels of the overall workforce while a
result over 1 suggests new hires are rated as performing above the overall workforce.
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Retention & Separations Results
As the economy improves, so do job prospects for employees. For the first time since2001, Saratoga results showed a decrease in the Involuntary Separation Rate to 4.3%
(the percentage of employee headcount leaving the organization involuntarily), a 14%
decrease since 2003. On the contrary, voluntary turnover rates rose. The 2004 Voluntary
Separation Rate was 9.3%: a 6% increase. The table below shows the trend of voluntary
and involuntary separations during the last four years.
For the first time in five years there was a slight decrease in the percentage of offersaccepted by employees from 94.8% in 2003 to 93.9% in 2004. Taken together, these
results suggest an increased level of mobility for employees as the job market opens up.
To provide organizations with a better understanding of their vulnerability to turnover,
Saratoga measures turnover rates by length of service. For the sixth year in a row, more
than half of all turnover occurred within the first three years of service, and nearly a quarter
(22.4%) in the first year of service. Nevertheless, since the recession began in 2001,
organizations have seen a decreasing percentage of employees leave during their first
three years. In 2001, 58.7% of employees left the organization during the first three years
of service, while 51.5% left in 2004a decrease of more than 12%.
Contrast of Percentage of
Employees Leaving
Voluntary and Involuntary
Voluntary
Involuntary
9.3%
4.3%
8.8%
8.8%
10.5%
5.0%5.0%4.7%
0%
2%
4%
6%
8%
10%
12%
2001 2002 2003 2004
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Given the complexity of many organizations, seasoned employees can often be some
of the top performers. High Performer Voluntary Separation Rate measures the percent
of headcount within the top 20% of an organizations performance ranking system that
voluntarily left the organization. Results for this years study indicate that 5.6% of highperformers voluntarily left the organization. This metric will be closely tracked to monitor
the loss of top talent within organizations. On the opposite end of the spectrum, Saratoga
provides results on the percentage of low performing employees managed out of the
organization. Results revealed nearly two out of five employees in the bottom 20% of
an organizations performance ranking system left the organization in 2004.
Finally, given the cost impact of turnover (estimates range from half an employees annual
salary to three times the annual salary), it is interesting to note that for more than half
the respondents less than 5% of Non HR Executive time is devoted to turnover issues.
Additional responses provided a clue as to why this is the case.
Measuring the Cost of Turnover
Quantifying the cost of turnover has long been an elusive goal of HR professionals. In
2004 Saratoga began collecting cost of turnover for the first time. A search on Google
will provide a number of options and formulas for calculating turnover. All of these
formulas rely on hard costs (hiring, orienting, training, technology, etc.) and soft costs
(estimates of lost productivity due to employee who left and amount of time needed for
new hire to reach optimal productivity levels).
All of these formulas require a degree of estimation for the user (e.g., time required for a
hire to be a successful manager). To minimize the use of estimation, Saratogas formula
for calculating turnover is one half the projected salaries of Nonexempt employees andone and a half times the projected salary of Exempt employees.
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HR Staff & Structure Results
Developing a workforce that delivers strategic results requires a properly structured HR
department. Saratogas Human Capital Effectiveness Report 2005/2006 report revealed thattalent diversity and succession planning, improving service delivery models, and developing
data for decision making were all key issues in structuring HR.
Results also show that, consistent with the past three years, approximately 65% of senior-
most HR executives directly report to the CEO.
For the sixth consecutive year, HR Spend per Employee (previously called HR Investment
Factor), which measures the investment in HR per employee, has increased to $1,554
(a 5% increase since 2003). When viewed in conjunction with the financial results outlined
previously, the investment in HR seems to be paying dividends. The table below shows the
trend of HR Spend Per Employee during the last four years.
HR Spend per
Employee$1,554
$1,472
$1,432
$1,342
$1,200
$1,250
$1,300
$1,350
$1,400
$1,450
$1,500
$1,550
$1,600
2001 2002 2003 2004
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HR Headcount Ratio
87
84
84
86
82
83
84
85
86
87
88
2001 2002 2003 2004
Additional results provide greater understanding of the standard HR function. The
Recruiting and Staffing function is the largest in terms of size (nearly one in five HRemployees is classified in this function) and labor costs ($120 per employee served).
The Benefits function seems to require the greatest amount of outside expertise to
manage effectively. The outsourcing and program strategy/design cost for the Benefits
function per employee served was $87.
Saratoga provided results for a number of HR related areaswhich it does not roll up
into total HR statistics. To begin, Training Headcount Investment Factor (investment
in training per employee) jumped 35% in 2003 to $676, the first increase since 2000.
Since 2003, Training Cost Factor (average dollars spent on training per training session
attended) dropped precipitously to $121, a 30% decrease. This years results show that
organizations are investing in their leadership. Over 53% of responding organizations
reported that the leadership had taken one or more leadership development course.
Finally, Saratoga also began evaluating Payroll cost and efficiency. Payroll Cost Per
Employee was $93 while the average cost per processed payment was $3.
The number of employees supported by each HR employee continues to grow. HR
Headcount Ratio (number of employees each HR employee supports) increased slightly
from 84 to 87 in 2004. The impact of HR outsourcing, whether selective or comprehensive,
shows up in these numbers. Therefore, companies decide that all tasks delivered by HRdo not need to be produced by internal resources. The table below shows the trend of HR
support levels during the last four years.
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Conclusion
With a flattening global economy, companies must find new ways to sustain competitive
advantage. Improving processes has been a tactic since the mid-70s through initiativeslike TQM, business process reengineering, ISO 9000, and Six Sigma. Since the mid 90s,
companies have looked to maximize the relationships with customers and to expand the
impact of their brands. Saratoga believes that the next great area of sustained competitive
advantage comes from optimizing the workforce.
The dual-edge sword of workforce improvementdriving revenue up and costs down
represents the next trajectory in corporate value. Companies that foster HR departments
that can deliver the tools, information and expertise to optimize manage workforce
investments will be at an advantage.
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Summary of Results
The tables on the following pages summarize 2005/2006 Human Capital Index report for
the metrics reference in this document. Please note that:
HR results exclude training, safety, payroll, and security
Contingent employees are excluded from all calculations
Organization and Operations
Metric Formula Result
Revenue Factor Revenue/Regular FTE $324,523
Expense Factor Operating Expenses/Regular FTE $226,046
Human Capital ROI
(Revenue - (Operating Expenses- (Regular Compensation Cost +Benefit Costs EPTNW)/(RegularCompensation Cost + BenefitCost EPTNW)
1.52
Rookie RatioRegular Headcount with 0 to 2 Yearsof Service/Regular Headcount
20.4%
Percent of EmployeesEligible for Retirement InNext Five Years
Employees Eligible for Retirement inNext 5 Years/Regular Headcount
17.4%
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Compensation and Benefits
Metric Formula Result
Labor Cost Revenue Percent(Regular Compensation Cost + BenefitCosts EPTNW)/Revenue
28.0%
Performance Pay PercentPerformance Based Compensation/Regular Compensation Cost
9.4%
CompensationExpense Percent
Regular Compensation Cost/Operating Expense
28.7%
Healthcare Costs as a Percentof Operating Expense
Healthcare Benefit Payments/Operating Expense
2.7%
Healthcare FactorHealthcare Benefit Payments/Employees and Retirees Participatingin Healthcare Plans
$6,393
Employer Contribution toHealthcare Coverage forActive Employees
Employer Contribution TowardsHealthcare Coverage for ActiveEmployees/Employer ContributionTowards Healthcare Coverage forActive Employees + EmployeeContribution Towards HealthcareCoverage
81.8%
Employee Contribution toHealthcare Coverage forActive Employees
Employee Contribution TowardsHealthcare Coverage for ActiveEmployees/Employee ContributionTowards Healthcare Coveragefor Active Employees + EmployerContribution Towards HealthcareCoverage
18.3%
Paid Time Off RatePaid Time Off Days/Regular Headcount
28.6
401(k) Plan UtilizationEmployees Participating in 401(k) Plan/Employees Eligible for 401(k) Plan
72.0%
401 (k) Costs PerParticipating Employee
Employer Contribution to 401(k) Plan /Employees Participating in 401(k) Plan
$2,258
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Staffing and Hiring
Metric Formula Result
Time to Fill Total Days to Fill/Total Hires 48
Cost Per Hire (Total Hiring Costs * 1.1)/Total Hires $3,270
Poor Quality Hire RateTotal Separations with 0 to 3 Months ofService/Total Hires
6.0%
New Hire VoluntarySeparation Rate
Total Voluntary Separations with 0 to 3Months of Service/Total Hires
3.3%
Retention and Separations
Metric Formula Result
Involuntary Separation RateTotal Involuntary Separations/Regular Headcount
4.3%
Voluntary Separation RateTotal Voluntary Separations/Regular Headcount
9.3%
Percent of Total VoluntaryTurnover Occurring in FirstYear of Service
Total Voluntary Separation Rate With0 to 1 Years of Service/Total VoluntarySeparations
22.4%
Voluntary Separation Rate with1 to 3 years of service
Total Voluntary Separation Rate With1 to 3 Years of Service/Total VoluntarySeparations
29.1%
High Performer VoluntarySeparation Rate
Total High PerformerVoluntary Separations/HighPerformer Headcount
5.6%
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HR Staff and Structure
Metric Formula Result
HR Spend Per Employee Direct HR Costs/Regular Headcount $1,554
HR Headcount RatioRegular Headcount/Regular HRHeadcount
87
Recruiting & StaffingFTE Percent
Recruiting & Staffing FTE Percent/DirectHR FTE
18.0%
Benefits Non Labor Costsper Employee
Benefits Non Labor Costs/RegularHeadcount
$87
Training Headcount InvestmentFactor Total Training Costs/Regular Headcount $676
Training Cost FactorTotal Training Cost/Total Number ofTraining Sessions Attended
$121
Payroll Cost Per Employee(Payroll Labor Costs + Payroll Non LaborCosts)/Regular Headcount
$93
Cost Per Payment(Payroll Labor Costs + Payroll Non LaborCosts)/Number of Payments Processed
$3
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About Saratoga
Saratoga teams with HR Departments that wish to maximize the intangible value of their
people and make a significant impact to their corporate value. We help clients apply amore rigorous scientific and evidence-based approach to workforce and HR department
decision making.
The purpose of our Human Capital Effectiveness Reports is to provide a set of
comprehensive organizational measures that serve as the standard for organizational
effectiveness and efficiency. These reports provide an objective means of monitoring,
evaluating, and reporting organizational efficiency and effectiveness, allowing Human
Resource departments and leaders of organizations to view trends, identify problems,
recognize performance milestones and benchmark with similar organizations.
This document is provided by PricewaterhouseCoopers LLP for general guidance only,
and does not constitute the provision of legal advice, accounting services, investmentadvice, or professional consulting of any kind. The information provided herein should not
be used as a substitute for consultation with professional tax, accounting, legal, or other
competent advisers. Before making any decision or taking any action, you should consult
a professional adviser who has been provided with all pertinent facts relevant to your
particular situation.
The information is provided as is, with no assurance or guarantee of completeness,
accuracy or timeliness of the information, and without warranty of any kind, expressed or
implied, including but not limited to warranties of performance, merchantability, and fitness
for a particular purpose.
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2005 PricewaterhouseCoopers LLP. All rights reserved.
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(a Delaware limited liability partnership) or, as the context requires, othe
member firms of PricewaterhouseCoopers International Limited, each o
which is a separate and independent legal entity. *connectedthinking is
trademark of PricewaterhouseCoopers LLP (US). SJ_06_0048
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