In a recent landmark Harvard Business Review article, Peter Cappelli and Ranya Nehmeh advocate for HR returning to its roots as the advocates for employees and their career development. The current business focus on relentless cost-cutting and restructuring during a time of low unemployment and long-term labor shortage isn’t working, they say.
But for this shift, HR must persuade executives to replace outdated strategies on compensation, training and development, layoffs, outsourcing and restructuring. HR must first show executives the true cost of these outdated practices by creating dashboards with metrics on the true costs of turnover, absenteeism, reasons for quitting, illness rates, and employee engagement. Equally important is for HR to highlight the chief causes of employee stress: fears about AI replacing jobs and restructuring.
This article is a must read for anyone in HR, Finance (who also should advocate for these metrics), and the C-suite.
The authors highlight major issues that need to be addressed. I summarize five of them below. More CEO talk than action.
Cappelli and Nehmeh point out that in a slew of C-suite surveys, executives say that talent, especially acquiring it, is the most critical factor affecting their business. But executives have not yet supported changing HR strategies to do anything about it.. Promotions are rare, the authors point out, with only 4.5 percent of employees receiving one within two years of being hired, according to the ADP Research Institute’s analysis of the careers of 51 million US workers. A 2022 McKinsey survey found that a lack of career development and advancement was the most common reason people gave for quitting a job.
Then there are the repeated restructurings that have become a way of life in large companies, Cappelli and Nehmeh point out. The constant changes raise employees’ stress levels and take a big toll on their mental health. That not only pushes up health-care costs, but also increases turnover and undermines employee engagement, performance, and productivity, as well as firms’ ability to recruit.
2-Make True Costs Clear
HR must take the critical step to show executives the true cost of their current practices and illustrate the value of human capital. They recommend HR keep a dashboard that includes metrics on the following:
- Turnover and what it costs the company.
- Information on why employees are quitting, and figures on vacancies filled from within.
- Employee well-being, as shown by absenteeism rates, incidents of new illnesses and disabilities, use of employee assistance programs, and levels of commitment and engagement.
Cappelli and Nehmeh point out that CEOs have little understanding as to how the above factors have a significant impact on an organization’s success because they don’t show up in any single financial accounting category reviewed regularly with the C-suite.
Corporate leaders often are unaware of the reality in their workplaces, they write. A long-running MetLife survey, for example, has found that while 83 percent of top managers say that their employees are “financially healthy,” only 55 percent of employees feel that way. And in their research Joseph Fuller and Manjari Raman of Harvard Business School have found that C-suite executives believe they routinely implement career advancement practices that their employees say never happen.
If leaders realized that the true cost of turnover is often a multiple of an employee’s annual salary, they would immediately demand changes.
Perhaps the single most important piece of information that most leaders lack is what turnover actually costs. Cappelli and Nehmeh report that when they tested groups of CEOs about this, they found that they have no idea. Unfortunately they assert, HR leaders often don’t know either, or the figure they use is completely off: Most cite the cost as $4,000 an employee, which is simply an estimate of the marginal administrative costs of hiring a new person. It ignores costs like training expenses, new hires’ lower initial performance, and the time coworkers have to spend interviewing candidates.
For more on the true cost of turnover, see my blog: How to calculate and strategically use the cost of employee turnover.
The authors highlight the work by Neiman Marcus and Walmart human resources who persuaded their C-suites to reverse their current practices and invest more in their workers, with programs that increased pay, benefits, and training. It reversed their costly turnover and raised employee engagement.
3-Address Employee Stress
One huge cost of employee stress, the authors assert in their HBR article, is uncertainty. That is why HR executives should encourage leaders to communicate their strategic plans more proactively with employees. If employees don’t know what’s being planned, they’ll make up their own stories, which are practically guaranteed to be worse than the reality.
Two of the things they’re most anxious about these days are technological change and restructuring.
Fear of AI
Perhaps the biggest worry across workplaces is whether new forms of AI will eliminate jobs. HR needs to calm the furor by communicating to the organization, “We’re just figuring out how these tools can be used. In the past it has taken decades for new technologies to be fully embraced, and virtually none has lived up to the hype.”
In fact, the evidence so far suggests that generative AI, which has produced widespread worker fear, will be more likely to enhance jobs in the near term than eliminate them.
The restructuring threat
Company efforts to reorganize to adapt to the changing business environment are another major source of workplace stress. Throughout the business world, companies see the ability to restructure quickly as the key to long-term success. Wall Street loves restructuring and often rewards the restructuring company by buying its stock. Yet without employee support, change efforts fail. The authors believe that if leaders fully understood the effects of reorganizations on mental health, turnover, and job performance, they would limit them or go about them in different ways. While many new organizational structures are unlikely to last, all too often they involve changes that cannot be easily reversed, such as laying off employees and hiring new ones.
4-Rebuild the Internal Labor Market
One effective way for companies to increase flexibility and reduce employee anxiety is to retrain workers and give them opportunities to transfer into promising areas of the organization. HR can play a central role in making the case for those practices.
Even though training is required to grow talent from within, companies invest remarkably little in it. A survey conducted in 2020 by MIT’s Paul Osterman suggests that the average U.S. employee gets only a half day of training per year—and that includes training of any kind, from compliance with new administrative practices to safety training.
The dearth of training translates into fewer opportunities to move up. Indeed, one of the most astonishing characteristics of the contemporary workplace is how little career advancement there is. The authors highlight research that suggests that only 10 percent to 20 percent of job vacancies are filled by current employees. And a McKinsey study and Pew Foundation survey found lack of advancement to be a substantial cause of turnover: Sixty-three percent of people who’d left their jobs in 2021 cited it as a reason for quitting. Lateral moves are even rarer than upward ones: Only 1% of U.S. employees move laterally to different businesses and operations each year, according to data from the Society for Human Resource Management.
Internal job markets not only cost very little also save enormous amounts of money by reducing turnover and the need to hire from the outside.
5-Strengthen Diversity, Equity, and Inclusion (DEI) Efforts
A work environment in which employees feel safe being who they are encourages people to speak up and inspires a sense of pride and belonging. The authors assert that those positive feelings translate into hard work and increased employee loyalty. Employers who get DEI right are far more able to attract talent because it widens the pool they can gain access to, particularly among younger people.
DE&I is controversial these days because of high profile lawsuits against DE&I company programs. It doesn’t have to be when companies stay within the confines of diversity laws, which is to affirmatively recruit, train, and promote underutilized groups, and work to assure they are not underpaid. The law is to hire the best candidate without regard to age, race, age and other categories. In addition, I will add that McKinsey has published numerous studies which show that organizations with more diverse boards, management and workforces have higher financial results. There is strong economic evidence that shows how improving DE&I will act like a $5 trillion US economic stimulus.
The authors conclude by saying that the current HR model is no longer working, yet companies continue with it out of inertia and because costs like turnover, unstaffed positions, and disengaged employees have no line item in the financial accounting systems of enterprises in the United States and many other countries. To change harmful, outdated practices, HR will have to provide business leaders with that vital information.
About Victor
Victor Assad is the CEO of Victor Assad Strategic Human Resources Consulting and Managing Partner of InnovationOne, LLC. He works with organizations to transform HR and recruiting, implement remote work, and develop extraordinary leaders, teams, and innovation cultures. He is the author of the highly acclaimed book, Hack Recruiting: The Best of Empirical Research, Method and Process, and Digitization. He is quoted in business journals such as The Wall Street Journal, Workforce Management, and CEO Magazine. Victor has partnered with The Conference Board and the US Department of Energy on innovation research. Subscribe to his weekly blogs at http://www.VictorHRConsultant.com