Measuring human capital

How companies in the race for growth can better manage their human capital.

Organisations in India that focus on maximising employee contribution to business growth are better positioned for growth, according to PwC Saratoga India survey 2010 on human capital effectiveness. The survey conducted amongst 37 Indian companies across different industries provides detailed performance metrics and benchmark data to help companies understand their employees’ contributions to business performance. It also allows companies to compare themselves with peers by industry, revenue size and employee size.

The survey findings reveal that organisations in India are making a profit of Rs 15 per employee on every Rs 100 of revenue earned from them. In return, organisations are making investments of Rs 7,000 on learning and development per employee and delivering 14.6 L&D hours per full time employee, covering 68 per cent of the population. With an average remuneration of Rs 4.8 lakh & Rs 6 lakh of profit per employee, the Human Capital Return on Investment is therefore 1.79 for organisations in India.

Commenting on the survey, Sankar Ramamurthy, Leader People & Change practice, PwC India said in the press release: “With India being the fastest growing economy, organisations that would maximise their human capital contribution to business performance, would be the ones to best leverage the positive economic environment. This report therefore provides deep insights on how companies in the race for growth can better manage their human capital.”

Other key findings of the PwC Saratoga India Survey 2010
Small vs large organisations: Organisations with larger revenue base enjoy 2.2 times higher productivity compared to smaller organisations. However, smaller organisations have 50 per cent more L&D resources per employees, 2.6 to 2.9 times higher L&D investments and higher average remuneration per employee, and yet witness almost 1.4 to 1.8 times higher resignation rate than larger organisations. Smaller organisations however deliver 10 to 15 per cent fewer L&D hours per employee than larger organisations. The survey also reveals that smaller organisations recruit more number of graduates but struggle to retain them while large organisations are hiring 25 per cent more talent from external market. Another finding was that the smaller companies focus more on compensation than on benefits unlike large organisations.

Cause of concern — Turnover and gender diversity: With 18 per cent termination and 15 per cent resignation rates, turnover is slated to be a cause of significant concern for the country's workplace effectiveness. Another area of concern was the poor representation of women in the Indian workforce, being as low as 9 per cent compared to approximately 50 per cent in Europe.

Industry-wise highlights: The engineering and manufacturing sector have the highest proportion of performance related pay relative to total compensation. Rationally so, these companies also earn the most revenue and profit per employee. Pharmaceutical companies however, spend the highest amount (Rs 10,000) on L&D per employee and delivered the highest number of L&D hours per employee. It also pays the high average remuneration and generates high return on its investment on its people. Contrary to general perception, IT/ITeS have the lowest spend on L&D per employee. This sector also witnesses the highest termination and resignation rate.

India Human Capital Effectiveness Survey 2010
PwC Saratoga India team conducted human capital effectiveness survey 2010 for Indian companies. The intent of the survey was to help Indian companies to develop an understanding of their human capital contributions to business performance. 37 companies participated in the survey from across sectors. Saratoga human capital effectiveness report provides detailed human capital performance metrics and benchmarks to allow companies to compare themselves with peers by industry, revenue size and employee size.

Structure of the HCE report: The 2010 Indian human capital effectiveness report comprises of the following sections, each dealing with a separate area of measurement:

Key findings
Financial impact

• Eng/Mfg sector generates the most revenues and profits per employee, followed by FMCG and Pharma sector. All participant organisations within IT/ITeS and Pharma sectors have similar profit margins per employee.
• Organisations with higher revenue base incur higher cost per employee (1.3x) but also earn higher profit per employee (1.4x) compared to organisations with lower revenue base.
• Though organisations across different workforce size have similar productivity levels (with remuneration levels constituting 12 to 14 per cent of revenue), those with larger revenue base enjoy 2.2 times higher productivity, compared to smaller organisations.

Resourcing

• Larger organisations hire 25 per cent more talent from external markets.
• On average, Indian organisations spend approx. Rs 25,500 per hire. However, FMCG and other unclassified sectors spend more than double the amount towards their recruitments. This could be because of the high cost of their recruitment teams.
• Looking at the cost per hire and external recruitment rate together for organisations with workforce size of FTE 1000-5000 & revenue size of > Rs 500 crore, organisations with the maximum external recruitment rate have the least cost per hire, as they spread the fixed costs of hiring over a larger number of hires.
• IT/ITeS sector recruits the most number of graduates with 15 per cent graduate recruitment rate, however when it comes to retaining entry level talent, Eng/Mfg sector leads the Indian industry.

Learning and development

• Smaller organisations have more L&D resources for every employee (approx. 50 per cent more) and invest more in L&D investment per FTE (2.6x to 2.9x) than larger organisations.
• Pharma spends the highest amount /employee for L&D (Rs 10,000) and delivers the highest number of L&D hours per employee.
• Average salary / employee is the highest in the FMCG sector, followed by Pharma.
• Of the participating companies, those in the Eng/Mfg sector have the highest proportion of performance related pay relative to total compensation. This correlates strongly with the high profits/FTE generated by companies in this sector.

Compensation and benefits

• Smaller organisations focus more on compensation than on benefits.

Turnover

• IT/ITeS sector has the highest termination and resignation rates.
• Among employees resigning, nearly 75 per cent have less than 3 years experience. There is hardly any difference between small & large organisations.
• With more than 33 per cent of the employees resigning within 1 year of their service, Pharma sector has the highest attrition among employees with less than a year’s tenure.
• The resignation rate in smaller organizations is higher than larger organisation by factor of 1.4 to 1.8 times.
• The average tenure in the FMCG sector (78 months) is significantly higher than in all the other sectors (approx. 32 months).

HR function

• In Pharma, the size of the HR team relative to the total work force is smaller than in other sectors.
• FMCG companies are at the other end of the spectrum, employing larger HR teams relative to their workforce. Consequently, HR function costs / per employee also tends to be high in that sector relative to other sectors.
• IT/ITes companies employs fewer HR resources, and have lower HR function costs/ employee than other sectors.
• Larger organisations (both in terms of revenue and workforce size) service on average 40 per cent more employees and incur 75 per cent to 50 per cent less HR department costs per FTE, when compared with smaller organisations.
• HR Departments costs as a percentage of total cost are significantly higher in the IT/ITeS (1.4 per cent) sectors and organisations with less than Rs 100 crore revenue (2.3 per cent).

Workforce structure

• FMCG sector uses the most number of managers for every employee (1 manager for every 3.8 employees) than other sectors.
• Small organisations have 1.6 to 3.6 times more managers per employee as compared to large organisations.
• Smaller organisations (in revenue and workforce size) tend to employ a larger proportion of professional and managerial staff than larger ones.
• IT/ITeS sector employs significantly higher proportion of women in its workforce than other sectors.

Excerpted from a PwC report, “Measuring Human Capital — Driving Business Results 2011”. Reprinted with permission