5 Myths About Human Capital Management
One of the more popular features in the Washington Post is its “5 Myths” opinions column, where commonly held misapprehensions about politics, society, and even science are weighed against evidence. Often, the evidence is obtained from top-tier academic journals, large-scale government studies, or national databases, and addresses topics characterized by vigorous, though misinformed debate.
HR is one of those fields where numerous myths endure. Part of the reason is HR tends to be more professional practice than rigorous academic discipline, so there is no foundation of basic science that informs both practitioners and researchers. Indeed many have lamented about the chasm between the two, and have called for a closer partnership. Nevertheless, several myths pervade human capital management (HCM). We’ll explore five of them.
- All training is beneficial
A multibillion dollar business in its own right, training is universally recognized as a necessary component for remaining competitive. Ample, high quality training is no longer considered a perk, but rather a fundamental component of high performance work systems, and a key differentiator in developing an employer brand. It is so highly regarded by employees that it can be seen as a substitute for wage increases, particularly in the public sector.
But sometimes you can have too much of a good thing. Research has demonstrated there are optimal levels of spend and hours beyond which there is a decreasing rate of return on investment[i]. Furthermore, not all types of training content yields a positive return. For example, hours of sales training are just as likely to be associated with decreased sales revenue in the following year as increased sales revenue, or not associated at all.
Nor do all employees benefit equally. Effective onboarding training may help early career stage employees achieve quicker time to proficiency, thereby increasing business performance. But it may be of little effect to a mid-career manager, who would more likely achieve business benefits with executive development or interpersonal skills, and only after a few years of tenure.
For analytics, training represents a huge opportunity to increase both its effectiveness and efficiency. Return on training investment can be maximized by gaining precise understanding of which employees (or groups of employees) should be offered training, along with how much, when, what content, and at what stage of their tenure.
- GPA is a good predictor of high performance
If HR leaders in a lot of knowledge industry companies were to be frank, they would admit they have no idea if candidates for hire have the potential to become high performers. This is no big surprise, particularly since little of what would indicate superior talent is observable either during interviews or in most job situations. So we assume that past success predicts future success, and one of the most ready metrics is GPA.
And why not? Many of the skills needed to achieve a high GPA are also those needed to succeed at work: diligence, intellectual insight, ability to learn abstract concepts and apply them to real situations, and the discipline to complete tasks.
The fact is GPA may occasionally predict short-term performance for some roles requiring little or no prior experience. What little validity GPA might have applies to persons straight out of school, in roles requiring mastery of classroom training content before becoming fully proficient. In other words, success in school situations predicts success in future school situations, not on the job.
Analytics can help us discover invalid predictors so that we can eliminate them from employee selection procedures. Conversely, analytics can help us locate accurate predictors of workforce performance from across larger data sets, and develop competency models and job descriptions that better capture true requirements. Better information leads to better matches, in contrast to the fishing expeditions that characterize most companies’ employee selection.
- Financial incentives are the best way to drive performance
One of the worst ideas to come out of academia in the last 50 years is the so-called principal-agent problem. It states that executives cannot be trusted to act in anyone’s interest but their own, and need to be threatened or bribed by shareholders in order to behave. Over the past few decades, this cynical notion has infected the entire job hierarchy. As a result, managers and HR professionals often believe the most effective way to get employees and reports to perform is to offer fast money. This is at best a half-truth.
Money does indeed motivate, but not always in the way we want. Because most organizations have only a partial understanding of what behaviors drive performance, they cannot always be sure what they are paying for. Dysfunctional incentive systems will get dysfunctional and sometimes prosecutable results, whether by employees gaming the system or by perverse controls that unwittingly incentivize the wrong behaviors.
In most cases, financial incentives intended to drive performance are effective only in roles where the performance criteria are completely unambiguous and easily measurable, individual performance does not depend on the contributions of coworkers, and necessary job tasks have a clear beginning and end. Those ever popular short-term performance incentives such as spot bonuses tend to be just that, short-term, and do little to increase engagement or long-term performance.
Compensation and performance management represent major opportunities for analytics, by crafting highly specific programs that provide just the right kind and amount of incentives, monetary and non-monetary, short-term and long term, private and public. Analytics can also provide guidelines for developing control systems that reward legal, ethical, and prudent risk taking among managers.
- Consulting experience predicts manager talent
Few myths are dearer to “War for Talent” combatants than the idea that experience as a strategy consultant, particularly at a Big Three firm, is a signal of exceptional senior management talent. Even Google, whose founders used to proclaim sophomorically on their job board that, “We are not a conventional company. Nor do we intend to become one.”, demands significant consulting or investment banking experience in most roles involving strategy. Like a lot of organizations, Google thinks it can differentiate itself by hiring people from the same talent pool who have been trained and reinforced by practice to think alike.
So why do we see a lot of successful managers who are former management consultants? The answer is selection bias. It is the same reason a lot of successful naval officers are Naval Academy graduates. It also distorts the view of what experiences actually predict success in senior management.
The fact is there is very little scientific evidence to support consulting experience as being a sure bet for adding to senior management bench strength. Consulting talent may in fact be the opposite of what is needed to be a senior manager, as consultants tend to be more entrepreneurial and autonomous workers, less inclined to socialize into the organization. Frequently, they have little patience in dealing with numerous administrative tasks, particularly those detailed and recurrent ones necessary for successful implementation of would-be brilliant consulting advice. Former consultants often falter in people management skills, and accepting constructive feedback.
Analytics can help organizations determine precisely what work experiences, prior knowledge, and activities truly indicate superior management talent, instead of relying on a process whose only justification is that companies with a reputation for being smart are also doing it.
- HCM is the same thing as HRM
HCM and human resource management (HRM) concern two different parts of the business: the former, processes and communication; the latter, assets and investments.
HRM oversees a critical administrative function that has evolved from a time when the personnel department was the steward of the labor/management relationship. Its duties are centered on extensive recordkeeping, compliance verification, and payroll management.
HRM involves significant hands-on care of a delicate balance of power, keeping channels of communication working between the layers of the organization. HRM’s development from the 1940’s to the present has been driven almost entirely by changes in government regulations and policies, and therefore tends to react to changes rather than being a change agent. HRM is highly labor intensive, and automation can drive HRM effectiveness only partially.
Human capital is an economic force that drives the accumulation of national wealth. Humancapital can appreciate and depreciate, and is both a private and public good. Yet human capital does not have property rights, and therefore remains absent from most financial statements unless a transaction takes place under narrowly defined conditions.
How human capital becomes transformed into business value is still a black box, as human capital asset dynamics are only partially understood. HCM analytics seeks to turn the black box of human capital investment into a glass box, using both deep subject matter expertise, and skillful manipulation of data. Yet learning one thing often requires unlearning another. Extinguishing other HR myths may be a necessary first step in bringing transparency to the black box.
[i]See for example, Sugrue, B., & Rivera, R. J. (2005). State of the industry: ASTD’s annual review of trends in workplace learning and performance. Alexandria, VA: American Society for Training & Development.