Human. Rısk. By Matt Shadrick and Seymour Adler, Ph.D., Aon Consulting Worldwide

Transcription

1 10 08 The Magazine of WorldatWork WHY YOU SHOULD BE A Capıtal Human Rısk Manager QUICK LOOK When asked about your HR department s strength today, only 5 percent said strategic HR differentiation. Evaluating retirement benefits is an important element in managing cost. The departure of a senior leader, without a suitable successor in place, causes an average loss of 2.5 percent of market cap for publicly traded firms. By Matt Shadrick and Seymour Adler, Ph.D., Aon Consulting Worldwide Y ou are the HR leader for a global growth company. In that role, you manage your firm s global benefits offerings compliance and cost. Staffing a new plant in the Western United States is a priority. Another is improving the skills of customer service staff in order to prevent customer attrition. A key to sustaining your company s competitiveness is retaining the key leaders, relationship managers and service innovators that have helped build your great firm. And, against the possibility that a mission-critical leader will leave, you need a qualified successor in place to take over. Contents WorldatWork WorldatWork members and educational institutions may print 1 to 24 copies of any WorldatWork-published article for personal, non-commercial, one-time use only. To order 25 or more print presentation-ready copies, or an electronic copy for distribution to colleagues, clients or customers, contact Gail Hallman, ghallman@tsp.sheridan.com at Sheridan Press, , ext To order full copies of WorldatWork publications, contact WorldatWork Customer Relationship Services, customerrelations@worldatwork.org,

2 Now, the board has asked your CEO for a comprehensive report on how the organization is managing its human capital risk in the current struggling economy. In turn, your CEO has asked you to prepare the report, complete with clear risk mitigation strategies. Are you prepared to respond? The map provides you with sound, evidence-based approaches to managing risk in each function. To focus on the areas of greatest risk, consider the findings from Aon Consulting s 2008 Benefits and Talent Survey. More than 1,100 organizations participated, of which 43 percent are the two most pressing areas identified in the survey, and talk about some actionable risk mitigation strategies. Employee Benefits In the survey, 32 percent believe the largest human capital risk facing their business is the increasing cost of BY APPLYING DISCIPLINED THINKING TO IDENTIFYING AND EVALUATING HUMAN CAPITAL RISK, you can bring meaningful short- and long-term risk mitigation strategies to your organization. Whether you have articulated your role that way or not, as an HR leader you are constantly managing risk. The good news is that by applying disciplined thinking to identifying and evaluating human capital risk, you can bring meaningful short- and longterm risk mitigation strategies to your organization strategies with proven effectiveness. Increasingly, thoughtful, businessoriented HR leaders are actively taking on the role of human capital risk managers. They understand the risk management element of people-related decisions and are taking a systematic approach to managing risk across major HR functions. The Web Extra, Human Capital Risk Map, at workspan, identifies a number of these risks and how human capital risk managers can impact them. multinationals. Respondents identified two areas as representing the greatest human capital risk to their business: the increasing cost of employee benefits and the shortage of qualified workers and leaders. (See Figure 1 on page 36.) It is clear that HR leaders need the strategic vision and skill to effectively address these and other human capital risks on behalf of their organizations. When asked about your HR department s strength today, only 5 percent of survey respondents said strategic HR differentiation, although 22 percent saw this as human resources area of greatest near-term value-add to the employer. Building your skills as a human capital risk manager is the strategic differentiation you and your firm so critically need. Coverage of all areas of human capital risk is beyond the scope of this article, but we would like to explore benefits. Moreover, as multiple generations move through the 21 st century workforce, and benefits offerings grow in complexity and cost, this risk is likely to increase. To manage the risk of increased benefits cost, we suggest beginning with a benchmarking study. For multinational firms, current Web-based technology allows HR professionals to aggregate and track this information right from a desktop. If an organization s HR philosophy is decentralized delivery with centralized oversight, one can evaluate program cost and offerings to make sure global plans are aligned with the organization s goals. Corporate compliance is a major part of these goals. A country-bycountry regulatory compliance review would assist in mitigating financial risks associated with benefits and HR regulatory noncompliance. 32

3 Reducing the cost of benefits requires data analytics and review. Whether you are evaluating the investment performance of a pension and 401(k) or predicting future health costs with claim data warehousing, data analysis supports decisions and helps organizations manage costs in challenging economic times. One approach with financial risks volatility, cost and fiduciary liability. Of the U.S. survey respondents with a pension plan, 22 percent expect to freeze the benefit, not provide a pension to new employees and/or decrease benefits levels. Since employers are requiring more employee responsibility, they are now taking an active less than 20 percent communicate total rewards consistently. Of the employers who do communicate, only 13 percent outline the value of the employment deal in their overall communication strategy. It is extremely important to make sure that the company goals and missions are embedded in whatever communication strategy you choose. IT IS EXTREMELY IMPORTANT TO MAKE SURE THAT the company goals and missions are embedded in whatever communication strategy you choose. proven effectiveness to managing this financial risk is implementing wellness programs. More than ever, employers are implementing, or plan to implement, some type of wellness benefits. These include health screenings and coaching, smoking cessation programs and 100-percent coverage for preventive services, among others. In order to increase participation, employers offer a number of different incentives for employees to participate in these programs. Evaluating retirement benefits is also an important element in managing cost, especially as defined benefit pension plans continue to decline and the number of defined contribution plans increases. The survey indicates that employers believe employees are still not adequately preparing for retirement. Human capital risk managers need to balance this savings concern with mitigation of the role to help their employees save for retirement. Nearly all have introduced tools to help employees save, 40 percent offer target date funds and 30 percent offer automatic enrollment. Additionally, when considering cost management tactics, employers should consider outsourcing various employee benefits functions. More than half of participants in this survey indicated they use outside experts for administrative functions, mostly in the flex spending, COBRA, defined contribution and payroll arenas. In the next section we will talk about talent shortage risks, but note that the effective management of benefits has been shown to directly mitigate the risks associated with attracting and retaining talent. One effective way to manage the risk of turnover is communicating the total reward offering. Few employers actually do this; in the Aon Consulting survey, Many organizations take a shortsighted view of communication spending as an expense and not as an investment to mitigate the risk of turnover. Human capital risk managers can position the return on this communication investment through reduced turnover cost. Recruitment and Selection The second major human capital risk factor identified in this survey is the shortage of qualified and skilled workers, expressed by 26 percent of the respondents. To mitigate this risk, human capital risk managers need first to conduct systematic workforce planning, looking out at the labor market and at the competitive landscape for those desired skills. In the Aon Consulting survey, 51 percent of the employers recognized their need for better workforce planning in light of demographic shifts and workforce shortages. HR leaders need to evaluate 34

4 FIGURE 1: HEAD OFF RISK FACTORS AND KNOW THE IMPACT HR Function Risk factors that concern the organization How HR can mitigate these risks Potential Impact Recruitment and Selection of Talent We need to hire better candidates with better skills for the future. Our turnover is too high. The cost and burden of recruiting is tough to manage. We need to ramp up hiring for a new product/plant. We have to ramp up hiring in international/global markets. Selection and assessment using job-related assessments that identify better performers who stay Improved turnover rate/ indirect cost reduction (est. 10%-20%). Better, consistent customer service. Overarching workforce plan to identify and address present and future staffing gaps/needs Outsourcing the full process of recruiting sourcing, assessing, selecting Reduction in cost burden along with reduction in administration burden. Depending on what processes are outsourced, savings vary. Better candidates hired. Leadership Succession Our pipeline of future leaders is thin. We need to grow our leadership talent. We need succession plans for missioncritical positions. Leadership assessment and readiness; fact-based talent reviews; development programs; executive coaching; accelerated onboarding Improve retention of leaders with organizationally aligned competencies. Client retention; market confidence. Earnings consistency. Benefits We need a better technology platform to administer benefits. The cost of health care is overwhelming us. Employee benefits outsourcing Benefits redesign, data analytics, elective benefits, wellness Reduced cost and administrative burden. Technology to help showcase benefits as investment. Key colleague satisfaction. Self-service. Trend reduction of 3% over three years using benefits as an investment. Global Benefits We need to get our arms around our global benefits offerings. Benchmark eyes and ears back to HQ; global philosophy Web-based global benefits platforms. Benefits pooling or cost savings. Local delivery still desired. Benefits and Compensation Our employees do not understand our total compensation offering. Our domestic benefits and rewards are aligned with neither our organization s goals nor the market. Customized communication, total comp statements Benefits benchmarking and delivery; compensation benchmarking Improved retention/attraction, company mission buy-in. Can be cost neutral if use elective benefits products or consultant/broker partner. Align the organization to reduce cost trend and still be competitive. Retirement Benefits Market volatility is making it difficult to manage pension assets. We need options. Does our company s defined contribution plan have the right mix of options, and does it serve the needs of a multigenerational workforce? The cost of retiree medical is overwhelming us. What are our options? Review pension risk, ID volatility, review current services and administration 401(k) (403b) vendor search, and third party investment advice Actuarial and health review of delivery, Medicare D product offerings/options, outsourcing alternatives Better handle on managing volatility. Reduced fiduciary liability. Better managed administration, with data cleanup of multiple sources. Funds to attract and retain key client-facing colleagues. Reduced fiduciary liability. Reduced costs. Better benefits for retirees. Reduced administrative burden. Compliance Are our HR policies and practices compliant? Have we reviewed domestic and global benefits/hr compliance? Do we have legal and financial risk? Audit HR policies and practices; assure fair employment practices; HR/benefits function and geographic (i.e., local country) compliance audits Reduce legal/regulatory scrutiny. Mitigate financial risk of non-compliance 36

5 the effectiveness of their attraction, recruitment and selection strategies in an effort to address this issue. Employers without an overarching plan to select the right candidates for the right positions should find a partner or consultant who has industry knowledge and an understanding of the business goals to help map a sound staffing plan. Be sure you understand the available prehire assessment tools/ services, and be sure they are founded on solid evidence of their effectiveness, usability and mitigation of legal risk associated with employment law. For example, if an employer has a five-year plan to grow the logistics and distribution function, a company must ensure that the implemented prehire assessments can achieve reduced turnover, increased productivity and reduced worker s compensation claims by profiling the candidate s fit to the job, the culture and the safety climate of the warehouse environment. Outsourcing the recruitment and selection function can also help mitigate the financial risk of attracting, recruiting and selecting talent for your organization. As you develop your recruitment and selection plan, decide how much of the process chain you want to outsource. Depending on the functions you choose, the cost burden could be reduced by 10 percent to 20 percent. Also consider the risks associated with building an internal recruitment function and then carrying or dismantling that function during employment activity downturns. Leadership Succession We have found that the departure of a senior leader without a suitable successor in place causes an average loss of 2.5 percent of market cap for publicly traded firms. Additionally, there is a 50 percent risk that new leaders will be fired or leave within three years, and that risk goes up if as is increasingly common that new leader is brought in from the outside. The direct costs of each departure in recruitment, hiring, relocation and salary costs alone can approach $1 million per executive. The risk to the organization, its reputation, and its client and external partner relationships is, of course, much greater. And 56 percent say they currently are suffering from leadership shortages, which is seriously impacting their organization s performance. Another 31 percent of respondents don t have a severe leadership shortage now but expect one within the next four years. To manage these significant risks, human capital risk managers should consider these mitigation strategies: Assure that fact-based succession plans are in place for all critical leadership positions. Conduct a fact-based assessment of the leadership readiness of your high-potential pool. Roll out an experience-based leadership development program. Offer executive coaching. Accelerate executive onboarding through systematic support of new leaders. Encourage open, productive talent conversations at all levels. By using these and similar strategies, a human capital risk manager can build his/her organization s pipeline of leadership talent and reduce talent related risk. In Summary Human capital risk management is the future of human resources. To see how well you are managing risk, take the Human Capital Risk Management Readiness survey at Aligning the goals of your organization with risk management strategies is a sound business approach through all HR functions. It is clear that human resources plays a key role in mitigating organizational risk, just like your counterparts in risk management, treasury and finance. For organizations where people their vision, innovation, operational skill and relationships are the enterprise, human capital risk managers are entitled to a seat at the table when key enterprise decisions are made. WEB EXTRA Take the Human Capital Risk Quiz and find out the level of risk at your company. Go to ABOUT THE AUTHORS Matt Shadrick is senior vice president and the Northeast region sales director of Aon Consulting Worldwide. He can be reached at matthew_shadrick@aon.com. Seymour Adler, Ph.D., is senior vice president and co-leader of the Talent Solutions Consulting Practice, and chair of the Human Capital Global Practice Council, Aon Consulting Worldwide. He can be reached at seymour_adler@aon.com. RESOURCES PLUS For more information related to this article: Type in any or all of the following keywords or phrases on the search line: Succession planning Benefits costs Strategic HR. Guide to Qualified Retirement Plans: How-to Series for the HR Professional Employee Engagement Fundamentals: A Guide for Managers and Supervisors Battling to Be the Best: Why Companies Compete for Best-Place-to-Work Lists. Retirement Plans Design and Management Certification Course: B2 Strategic Communication in Total Rewards Certification Course: T4 Managing Flexible Benefits Certification Course: B5. 37