Professor Mitch 600-8

LEARNING OUTCOMES

On completing this chapter you should be able to define these key concepts. You should also understand:

· The nature of human capital management

· The concept of human capital

· Characteristics of human capital

· Constituents of human capital

· Significance of human capital theory

· Importance of human capital measurement

· Reasons for interest in human capital measurement

· Approaches to measurement

· Measurement elements

· Factors affecting choice of measurement

· Criteria for HCM data for managers

As defined by Baron and Armstrong (2007: 20), human capital management (HCM) is concerned with obtaining, analysing and reporting on data that inform the direction of value-adding people management, strategic, investment and operational decisions at corporate level and at the level of front-line management. It is, as emphasized by Kearns (2005), ultimately about value.

The nature of human capital management

The Accounting for People Task Force report (2003) stated that HCM involves the systematic analysis, measurement and evaluation of how people policies and practices create value. The report emphasized that HCM should be regarded as an approach to people management that deals with it as a high-level strategic issue rather than a matter to be left to HR. However, Wright and McMahan (2011: 102) warned that human capital should not be treated as a form of capital owned and controlled by the firm: ‘To do so would miss the complexity of the construct and continue to ignore the “human” in strategic HRM.’

The defining characteristic of HCM is the use of metrics to guide an approach to managing people that regards them as assets and emphasizes that competitive advantage is achieved by strategic investments in those assets through employee engagement and retention, talent management and learning and development programmes. HCM relates HR strategy to business strategy. The concept of HCM is underpinned by the concept of human capital, as explained below.

The concept of human capital

Adam Smith, cited by Schultz (1981: 140), originated the idea of human capital (like so many other economic concepts) when he wrote that: ‘The acquired wealth of nations derives from the acquired abilities of people – their education, experience, skills and health.’ Individuals generate, retain and use knowledge and skill (human capital) and create intellectual capital. Their knowledge is enhanced by the interactions between them (social capital) and generates the institutionalized knowledge possessed by an organization (organizational capital). This concept of human capital is explained below.

Human capital consists of the knowledge, skills and abilities of the people employed in an organization. As Wright and McMahan (2011: 101) explained:

Each individual in the organization has characteristics that comprise human capital. He/she also engages in the processing of information, interpretation and reaction to that information in making choices about how to feel and behave. The aggregation of human capital, we propose, constitutes the organization or unit’s ‘human capital’.

Human capital constitutes a key element of the market worth of a company. A research study conducted in 2003 by CFO Research Services estimated that the value of human capital represented over 36 per cent of total revenue in a typical organization.

The significance of the term was emphasized by Schultz (1961), who defined it as follows.

Source review

Human capital defined – Schultz (1961: 1)

Although it is obvious that people acquire useful skills and knowledge, it is not obvious that these skills and knowledge are a form of capital, that this capital is in substantial part a product of deliberate investment, that it has grown in Western countries at a much faster rate than conventional (non-human) capital, and that its growth may well be the most distinctive feature of the economic system.

He also noted that: ‘Attributes… which are valuable and can be augmented by appropriate investment will be treated as human capital… Consider all human abilities to be either innate or acquired’ (ibid: 21).

A later detailed definition was put forward by Bontis et al (1999).

Source review

Human capital defined – Bontis et al (1999: 393)

Human capital represents the human factor in the organization; the combined intelligence, skills and expertise that gives the organization its distinctive character. The human elements of the organization are those that are capable of learning, changing, innovating and providing the creative thrust which if properly motivated can ensure the long-term survival of the organization.

Scarborough and Elias (2002: ix) commented that: ‘The concept of human capital is most usefully viewed as a bridging concept – that is, it defines the link between HR practices and business performance in terms of assets rather than business processes.’ They pointed out that human capital is to a large extent ‘non-standardized, tacit, dynamic, context dependent and embodied in people’. These characteristics make it difficult to evaluate human capital, bearing in mind that the ‘features of human capital that are so crucial to firm performance are the flexibility and creativity of individuals, their ability to develop skills over time and to respond in a motivated way to different contexts’ (ibid: ix).

It is indeed the knowledge, skills and abilities of individuals that create value, which is why the focus has to be on means of attracting, retaining, developing and maintaining the human capital they represent. Davenport (1999: 7) observed that: ‘People possess innate abilities, behaviours and personal time. These elements make up human capital, the currency people bring to invest in their jobs. Workers, not organizations, own this human capital.’

The choices they make include how much discretionary behaviour they are prepared to exercise in carrying out their role (discretionary behaviour refers to the discretion that people at work can exercise about the way they do their jobs and the amount of effort, care, innovation and productive behaviour they display). They can also choose whether or not to remain with the organization.

The constituents of human capital

Human capital consists of intellectual, social and organizational capital.

The concept of human capital is associated with the overarching notion of intellectual capital, which is defined as the stocks and flows of knowledge available to an organization. These can be regarded as the intangible resources associated with people, which together with tangible resources (money and physical assets) comprise the market or total value of a business.

Social capital is another element of intellectual capital. It consists of the knowledge derived from networks of relationships within and outside the organization. Social capital has been defined by Putnam (1996: 66) as ‘the features of social life – networks, norms and trust – that enable participants to act together more effectively to pursue shared objectives’. It is important to take into account social capital considerations, that is, the ways in which knowledge is developed through interaction between people. Bontis et al (1999) commented that it is flows as well as stocks that matter. Intellectual capital develops and changes over time and a significant part is played in these processes by people acting together.

Organizational capital is the institutionalized knowledge possessed by an organization that is stored in databases, manuals, etc (Youndt, 2000). It is often called ‘structural capital’ (Edvinson and Malone, 1997), but the term ‘organizational capital’ is preferred by Youndt because, he argues, it conveys more clearly that this is the knowledge that the organization actually owns.

Approaches to people management raised by human capital theory

An approach to people management based on human capital theory involves obtaining answers to these questions:

· What are the key performance drivers that create value?

· What skills do we have?

· What skills do we need now and in the future to meet our strategic aims?

· How are we going to attract, develop and retain these skills?

· How can we develop a culture and environment in which organizational and individual learning takes place that meets both our needs and the needs of our employees?

· How can we provide for both the explicit and tacit knowledge created in our organization to be captured, recorded and used effectively?

Human capital theory helps to determine the impact of people on the business and their contribution to shareholder value. It demonstrates that HR practices produce value for money in terms of, for example, return on investment. It also provides guidance on future HR and business strategies and data that will inform strategies and practices designed to improve the effectiveness of people management in the organization.

The role of human capital measurement is to assess the impact of HRM practices and the contribution made by people to organizational performance. Human capital measurement is about finding links, correlations and, ideally, causation, between different sets of (HR) data, using statistical techniques.

Human capital measurement provides a basis for people management decision-making. It means identifying the people management drivers and modelling the effect of varying them. The recognized importance of achieving human capital advantage has led to an interest in the development of methods of measuring the value and impact of that capital for these reasons:

· People in organizations add value and there is a case for assessing this value to provide a basis for HR planning and for monitoring the effectiveness and impact of HR policies and practices.

· The process of identifying measures and collecting and analysing information relating to them will focus the attention of the organization on what needs to be done to find, keep, develop and make the best use of its human capital.

· Measurements can be used to monitor progress in achieving strategic HR goals and generally to evaluate the effectiveness of HR practices.

· You cannot manage unless you measure.

The need is to develop a framework within which reliable information can be collected and analysed such as added value per employee, productivity, and measures of employee behaviour (attrition and absenteeism rates, the frequency/severity rate of accidents, and cost savings resulting from suggestion schemes).

However, the Institute for Employment Studies (Hartley, 2005) emphasized that reporting on human capital is not simply about measurement. Measures on their own such as those resulting from benchmarking are not enough; they must be clearly linked to business performance. It was established by Scarborough and Elias (2002: x), on the basis of their research, that:

Measures are less important than the activity of measuring – of continuously developing and refining our understanding of the productive role of human capital within particular settings, by embedding such activities in management practices, and linking them to the business strategy of the firm.

Three approaches to measurement are described below.

On the basis of a survey of companies that have linked together HR management practices and market value, Watson Wyatt Worldwide (2002) identified four major categories of HR practice that could be linked to increases in shareholder value creation. These are:

· total rewards and accountability: 16.5 per cent;

· collegial, flexible workforce: 9.0 per cent;

· recruiting and retention excellence: 7.9 per cent;

· communication integrity: 7.1 per cent.

As described by Nalbantian et al (2004) the organizational performance model developed by Mercer HR Consulting is based on the following elements: people, work processes, management structure, information and knowledge, decision-making and rewards, each of which plays out differently within the context of the organization, creating a unique DNA.

The statistical tool ‘Internal Labour Market Analysis’ used by Mercer draws on the running record of employee and labour market data to analyse the actual experience of employees rather than stated HR programmes and policies. Thus gaps can be identified between what is required in the workforce to support business goals and what is actually being delivered.

Andrew Mayo (2001) has developed the ‘human capital monitor’ to identify the human value of the enterprise or ‘human asset worth’, which is equal to ‘employment cost × individual asset multiplier’. The latter is a weighted average assessment of capability, potential to grow, personal performance (contribution) and alignment to the organization’s values set in the context of the workforce environment (ie how leadership, culture, motivation and learning are driving success). The absolute figure is not important. What does matter is that the process of measurement leads you to consider whether human capital is sufficient, increasing, or decreasing, and highlights issues to address. Mayo advises against using too many measures and instead to concentrate on a few organization-wide measures that are critical in creating shareholder value or achieving current and future organizational goals.

He believes that value added per person is a good measure of the effectiveness of human capital, especially for making inter-firm comparisons. But he considers that the most critical indicator for the value of human capital is the level of expertise possessed by an organization. He suggests that this could be analysed under the headings of identified organizational core competencies. The other criteria he mentions are measures of satisfaction derived from employee opinion surveys and levels of attrition and absenteeism.

The main HCM data used for measurement are:

· Basic workforce data – demographic data (numbers by job category, sex, race, age, disability, working arrangements, absence and sickness, turnover and pay).

· People development and performance data – learning and development programmes, performance management/potential assessments, skills and qualifications.

· Perceptual data – attitude/opinion surveys, focus groups, exit interviews.

· Performance data – financial, operational and customer.

A summary of human capital measures and their possible uses is given in Table 5.1.

Human capital reporting

Analysing and reporting human capital data to top management and line managers leads to informed decision-making about what needs to be done to improve business results, the ability to recognize problems and take action to deal with them, and the scope to demonstrate the effectiveness of HR solutions and thus support the business case for greater investment in HR practices. Data must be accompanied by analysis and explanation.

The EC Accounts Modernization Directive requires companies to prepare a business review. This has to disclose information that is necessary for understanding the development, performance or position of the business of the company, including the analysis of key financial and other performance indicators, and information relating to environmental and employee matters, social and community issues, and any policies of the company in relation to these matters and their effectiveness.

Introducing HCM

As Baron and Armstrong (2007) observed, the development of HCM should be regarded as a journey. It is not an all-or-nothing affair. It does not have to depend on a state-of-the-art HR database or the possession of advanced expertise in statistical analysis. It is not difficult to record and report on basic data and, although analytical ability is necessary, the level required should be possessed by any HR professional.

At the beginning of the journey an organization may do no more than collect basic HR data on, for instance, employee turnover and absence. But anyone who goes a little bit further and analyses that data to draw conclusions on trends and causation – leading to proposals on the action required supported by that analysis – is into HCM. Not in a big way perhaps, but it is a beginning. At the other end of the scale there are the highly sophisticated approaches to HCM operated by such organizations as Nationwide and Standard Chartered Bank.

Nationwide Building Society

Nationwide feeds its human capital information into an intranet-based information system that gives users an assessment of how they are doing against a number of indicators. It uses a dashboard of red, amber and green indicators to give each business unit an idea of how they are faring on a number of key drivers of employee commitment. This is backed up with advice on how improvements might be made.

Standard Chartered Bank

Standard Chartered Bank uses a human capital scorecard to analyse its data. This is produced on a quarterly and annual basis with various cuts of the same data produced for different business segments and countries, in addition to a global report. This comprises a series of slides with commentary to enable managers to understand the data.

The data is also included in twice-yearly board reviews on people strategy and forms part of the annual strategy planning process. The scorecard data is reviewed within each global business by a top team ‘People Forum’. At country level, each local chief executive and his or her management committee reviews key trends in order to specify areas they need to focus on.

In addition, the bank uses qualitative analysis to examine trends and this has led it to identify the role of the manager as mediating the relationship between engagement and performance. In turn, this has led to a focus on qualitative research to identify what raises the bank’s best managers above the rest. A further example is a qualitative analysis of high performance in selected customer-facing roles to determine the key behaviours that continue to drive customer loyalty.

Key learning points: Human capital management

Knowledge management is concerned with storing and sharing the wisdom, understanding and expertise accumulated in an enterprise about its processes, techniques and operations. It treats knowledge as a key resource. It was defined by Tan (2000: 10) as: ‘The process of systematically and actively managing and leveraging the stores of knowledge in an organization.’ As Ulrich (1998: 126) remarked: ‘Knowledge has become a direct competitive advantage for companies selling ideas and relationships.’

There is nothing new about knowledge management. Hansen et al (1999: 106) observed that: ‘For hundreds of years, owners of family businesses have passed on their commercial wisdom to children, master craftsmen have painstakingly taught their trades to apprentices, and workers have exchanged ideas and know-how on the job.’ But they also commented that: ‘As the foundation of industrialized economies has shifted from natural resources to intellectual assets, executives have been compelled to examine the knowledge underlying their business and how that knowledge is used’ (ibid: 106).

Nonaka (1991) and Nonaka and Takeuchi (1995) stated that knowledge is either explicit or tacit. Explicit knowledge can be codified – it is recorded and available and is held in databases, in corporate intranets and intellectual property portfolios. Tacit knowledge exists in people’s minds. It is difficult to articulate in writing and is acquired through personal experience. As suggested by Hansen et al (1999), it includes scientific or technological expertise, operational know-how, insights about an industry and business judgement. The main challenge in knowledge management is how to turn tacit knowledge into explicit knowledge.

A distinction can be made between data, information and knowledge:

· Data consists of the basic facts – the building blocks – for information and knowledge.

· Information is data that have been processed in a way that is meaningful to individuals; it is available to anyone entitled to gain access to it. As Drucker (1988: 46) put it, ‘information is data endowed with meaning and purpose’.

· Knowledge is information used productively; it is personal and often intangible and it can be elusive – the task of tying it down, encoding it and distributing it is tricky.

Knowledge management defined

Knowledge management is about getting knowledge from those who have it to those who need it in order to improve organizational effectiveness. It was defined by Scarborough et al (1999: 1) as ‘any process or practice of creating, acquiring, capturing, sharing and using knowledge, wherever it resides, to enhance learning and performance in organizations’. They suggested that it focuses on the development of firm-specific knowledge and skills that are the result of organizational learning processes. Knowledge management deals with both stocks and flows of knowledge. Stocks include expertise and encoded knowledge in computer systems. Flows represent the ways in which knowledge is transferred from people to people or from people to a knowledge database.

Knowledge management identifies relevant information and then disseminates it so that learning can take place. It promotes the sharing of knowledge by linking people with people and by linking them to information so that they learn from recorded experiences. As explained by Blake (1988), the purpose of knowledge management is to capture a company’s collective expertise and distribute it to wherever it can achieve the biggest payoff. This is in accordance with the resource-based view of the firm, which suggests that the source of competitive advantage lies within the firm (ie in its people and their knowledge), not in how it positions itself in the market. A successful company is a knowledge-creating company.

Knowledge is possessed by organizations and people in organizations. Organizational operational, technical and procedural knowledge can be stored in databanks and found in reports, libraries, policy documents, manuals and presentations. It can also be moved around the organization through information systems and by meetings, workshops, courses, ‘master classes’, written publications and ‘communities of practice’, defined by Wenger and Snyder (2000: 139) as ‘groups of people informally bound together by shared expertise and a passion for joint enterprise’. The intranet provides an additional and very effective medium.

People possess knowledge that has been acquired through their own experiences at work. But it will not necessarily be shared formally or even informally with their colleagues and crucial knowledge could be lost if it remains locked up in the minds of employees, or taken elsewhere by them if they leave the organization. An important issue in knowledge management is how knowledge can be identified and distributed.

In the information age, knowledge rather than physical assets or financial resources is the key to competitiveness. Knowledge management allows companies to make the best use of their employees’ creativity and expertise (Mecklenburg et al, 1999). As Boxall and Purcell (2000: 197) noted: ‘Managing knowledge inevitably means managing both the company’s proprietary technologies and systems (which don’t walk out of the door at the end of the day) and the people (who do)’.

Knowledge management strategies

Two approaches to knowledge management strategy have been identified by Hansen et al (1999): the codification strategy and the personalization strategy.

Knowledge is carefully codified and stored in databases where it can be accessed and used easily by anyone in the organization. Knowledge is explicit and is codified using a ‘people-to-document’ approach. The strategy is therefore document-driven. Knowledge is extracted from the person who developed it, made independent of that person and reused for various purposes. It is stored in an electronic repository for people to use, and allows people to search for and retrieve codified knowledge without having to contact the person who originally developed it. This strategy relies largely on information technology to manage databases and also on the use of the intranet.

Knowledge is closely tied to the person who has developed it and is shared mainly through direct person-to-person contacts. This ‘person-to-person’ approach means providing for tacit knowledge to be passed on. The exchange is achieved by creating networks and encouraging face-to-face communication between people by informal conferences, workshops, communities of practice, brainstorming and one-to-one sessions.

Hansen et al (1999) proposed that the choice of strategy should be contingent on the organization: what it does and how it does it. Thus consultancies such as Ernst & Young, using knowledge to deal with recurring problems, may rely on codification so that recorded solutions to similar problems are easily retrievable. Strategy consultancy firms such as McKinsey or Bains, however, rely on a personalization strategy to help them to tackle the high-level strategic problems they are presented with that demand the provision of creative, analytically rigorous advice. They need to channel individual expertise and they find and develop people who are able to use a person-to-person knowledge-sharing approach. Experts can be identified who can be approached by e-mail, telephone or personal contact.

The research conducted by Hansen et al (1999) established that companies that use knowledge well adopt either the codification or the personalization strategy predominantly and use the other strategy to support their first choice. They pointed out that those who try to excel at both strategies risk failing at both.

Knowledge management issues

The strategies referred to above do not provide easy answers. The issues that need to be addressed in developing knowledge management practices are discussed below.

One of the main issues in knowledge management is how to keep up with the pace of change and identify what knowledge needs to be captured and shared.

As Hansen et al (1999) showed, it is not knowledge per se but the way it is applied to strategic objectives that is the critical ingredient in competitiveness. They suggested that ‘competitive strategy must drive knowledge management strategy’ and that management have to answer the question: ‘How does knowledge that resides in the company add value for customers?’ (ibid: 114).

Technology may be central to companies adopting a codification strategy, but for those following a personalization strategy IT is best used in a supportive role. Hansen et al (1999: 113) commented that:

In the codification model, managers need to implement a system that is much like a traditional library – it must contain a large cache of documents and include search engines that allow people to find and use the documents they need. In the personalization model, it’s more important to have a system that allows people to find other people.

Scarborough et al (1999) suggested that technology should be viewed as a means of communication rather than as a means of storing knowledge. Knowledge management is more about people than technology. Research by Davenport (1996) established that managers get two-thirds of their information from face-to-face or telephone conversations.

There is a limit to how much tacit knowledge can be codified. In organizations relying more on tacit than explicit knowledge, a person-to-person approach works best, and IT can only support this process; it cannot replace it.

Blackler (1995) emphasized that a preoccupation with technology may mean that too little attention is paid to the processes (social, technological and organizational) through which knowledge combines and interacts in different ways. The key processes are the interactions between people. This is the social capital of an organization – ‘the network of relationships [that] constitute a valuable resource for the conduct of social affairs’ (Nahpiet and Ghoshal, 1998: 243). Social networks can be particularly important in ensuring that knowledge is shared. Trust is also required – people are not willing to share knowledge with those they do not trust.

The culture of the company may inhibit knowledge sharing. The norm may be for people to keep knowledge to themselves as much as they can because ‘knowledge is power’. An open culture will encourage people to share their ideas and knowledge.

Knowledge workers, as defined by Drucker (1993), are individuals who have high levels of education and specialist skills combined with the ability to apply these skills to identify and solve problems. As Argyris (1991: 100) commented, they are: ‘The nuts and bolts of management… increasingly consist of guiding and integrating the autonomous but interconnected work of highly skilled people.’ Knowledge management is about the management and motivation of knowledge workers who create knowledge and will be the key players in sharing it.

The contribution of HR to knowledge management

HR can make an important contribution to knowledge management simply because knowledge is shared between people; it is not just a matter of capturing explicit knowledge through the use of IT. The role of HR is to see that the organization has the intellectual capital it needs. The resource-based view of the firm emphasizes, in the words of Cappelli and Crocker-Hefter (1996: 7), that ‘distinctive human resource practices help to create unique competences that differentiate products and services and, in turn, drive competitiveness’.

HR can contribute by providing advice on culture management, organization design and development, and by establishing learning and communication programmes and systems. There are 10 ways of doing this:

1. Help to develop an open culture in which the values and norms emphasize the importance of sharing knowledge.

2. Promote a climate of commitment and trust.

3. Advise on the design and development of organizations that facilitate knowledge sharing through networks, teamwork and communities of practice.

4. Advise on resourcing policies and provide resourcing services that ensure that valued employees who can contribute to knowledge creation and sharing are attracted and retained.

5. Advise on methods of motivating people to share knowledge and rewarding those who do so.

6. Help in the development of performance management processes that focus on the development and sharing of knowledge.

7. Develop processes of organizational and individual learning that will generate and assist in disseminating knowledge.

8. Set up and organize workshops, conferences, seminars, communities of practice and symposia that enable knowledge to be shared on a person-to-person basis.

9. In conjunction with IT, develop systems for capturing and, as far as possible, codifying explicit and tacit knowledge.

10. Generally, promote the cause of knowledge management with senior managers to encourage them to exert leadership and support knowledge management initiatives.

Key learning points: Knowledge management

The purpose and significance of knowledge management

Knowledge management is about getting knowledge from those who have it to those who need it in order to improve organizational effectiveness.

Competency-based HRM is about using the notion of competency and the results of competency analysis to inform and improve HR processes, especially those concerned with recruitment and selection, learning and development, and performance and reward management. It has an important part to play in a number of HR activities.

Competency defined

The term ‘competency’ refers to an underlying characteristic of a person that results in effective or superior performance. The leading figure in defining and popularizing the concept of competency was Boyatzis (1982). He conducted research that established that there was no single factor but a range of factors that differentiated successful from less successful performance. These factors included personal qualities, motives, experience and behavioural characteristics. Since his contribution, three types of competencies have been identified: behavioural competencies, technical competencies and NVQs/SNVQs.

Technical competencies define what people have to know and be able to do (knowledge and skills) in order to carry out and meet performance expectations and are sometimes known as ‘hard skills’. They are related to either generic roles (groups of similar roles), or to individual roles (‘role-specific competencies’). They are not usually part of a behavioural-based competency framework, although the two are linked when considering and assessing role demands and requirements.

The concept of competence was conceived in the UK as a fundamental part of the process of developing standards for NVQs/SNVQs. These specify minimum standards for the achievement of set tasks and activities expressed in ways that can be observed and assessed with a view to certification. An element of competence in NVQ language is a description of something that people in a work area should be able to do. They are assessed on being competent or not yet competent. No attempt is made to assess the level of competence.

The most common competencies included in competency in frameworks are people skills, although outcome-based skills, such as focusing on results and solving problems, are also popular. The more common competency headings included in the frameworks of organizations responding to a Competency and Emotional Intelligence survey in 2006/7 are shown in Table 7.1.

The first seven of these were used in over 50 per cent of the respondent organizations. The 49 frameworks included 553 competency headings. No doubt, many of these overlapped. The typical number of competencies was seven, rising to eight where the frameworks applied solely to managers.

Competency frameworks

Competency frameworks provide the basis for the use of competencies in areas such as recruitment and selection, learning and development, and performance management. They may simply contain definitions of each competency heading as in the example given in Table 7.2.

Some frameworks illustrate these definitions with descriptions of acceptable or unacceptable behaviour, which may be expressed as positive or negative indicators as shown in Table 7.3.

Using competencies

A number of approaches to using competencies are adopted, as described below.

A ‘menu’ approach selects competencies that are relevant to generic or individual roles. Some organizations provide guidelines on the number of competencies to be selected (eg four to eight) and others combine their core framework with a menu so that users are required to select the organization-wide core competencies but can add a number of optional ones.

Role-specific competencies are also used by some organizations for generic or individual roles. These may be incorporated in a role profile in addition to a statement of key result areas. This approach is adopted in performance management processes, in recruitment person specifications and in the preparation of individual learning programmes.

A further, although less common, application of competencies is in graded career or job family structures (career or job families consist of jobs in a function or occupation such as marketing, operations, finance, IT, HR, administration or support services that are related through the activities carried out and the basic knowledge and skills required, but in which the levels of responsibility, knowledge, skill or competence needed differ). In such families, the successive levels in each family are defined in terms of competencies as well as the key activities carried out.

Applications of competency-based HRM

The Competency and Emotional Intelligence 2006/7 survey found that 95 per cent of respondents used behavioural competencies and 66 per cent used technical competencies. It was noted that because the latter deal with specific activities and tasks they inevitably result in different sets of competencies for groups of related roles, functions or activities. The three top areas where competencies were applied are:

· Recruitment and selection: 85 per cent.

· Learning and development: 82 per cent.

· Performance management: 76 per cent.

Only 30 per cent of organizations linked competencies to reward. The ways in which these competencies are used are described below.

Competencies are used in many organizations as a basis for person specifications set out under competency headings developed through role analysis. The competencies defined for a role are used as the framework for recruitment and selection, and competency-based interviews are structured around the competencies listed in the specification.

Role profiles, which are either generic (covering a range of similar jobs) or individual (role-specific), can include statements of the competencies required. These are used to assess the levels of competency achieved by individuals and so identify their learning and development needs. Learning events can be based on competency analysis related to an organization’s competency framework.

Competencies are also used in development centres, which help participants build up their understanding of the competencies they require now and in the future so that they can plan their own self-directed learning programmes.

Competencies in performance management are used to ensure that performance reviews do not simply focus on outcomes but also consider the behavioural aspects of how the work is carried out that determine those outcomes. Performance reviews conducted on this basis are used to inform personal improvement and development plans and learning programmes.

Competency-related pay relates additional awards to assessments of competency but it has never become popular. However, more frequent use is made of contribution-related pay, which provides for people to be rewarded according to both the results they achieve and their level of competence.

Decide on the purpose of the framework and the HR processes for which it will be used. Make out a business case for its development, setting out the benefits to the organization in such areas as improved performance, better selection outcomes, more focused performance management, employee development and reward processes. Prepare a project plan that includes an assessment of the resources required and the costs.

Involve line managers and employees in the design of the framework (Steps 3 and 4) by setting up a task force. Communicate the objectives of the exercise to staff.

Care needs to be exercised to ensure that definitions are clear and unambiguous and that they will serve their intended purpose. If, for example, one of the purposes is to provide criteria for conducting performance reviews, then it is necessary to be certain that the way the competency is defined, together with supporting examples, will enable fair assessments to be made. The following four questions have been produced by Mirabile (1998) to test the extent to which a competency is valid and can be used:

1. Can you describe the competency in terms that others understand and agree with?

2. Can you observe it being demonstrated or failing to be demonstrated?

3. Can you measure it?

4. Can you influence it in some way, eg by training, coaching or some other method of development?

It is also important at this stage to ensure that definitions are not biased.

Define exactly how it is intended that the competency framework should be used, covering such applications as recruitment and selection, learning and development, performance management and reward.

Test the framework by gauging the reactions of a balanced selection of line managers and other employees to ensure that they understand it and believe that it is relevant to their roles. Also pilot-test the framework in live situations for each of its proposed applications.

Amend the framework as necessary following the tests and prepare notes for guidance on how it should be used.

Let everyone know the outcome of the project – what the framework is, how it will be used and how people will benefit. Group briefings and any other suitable means should be used.

Give line managers and HR staff training in how to use the framework.

Monitor and evaluate the use of the framework and amend it as required.

Developing a competency framework

A competency framework should be as simple to understand and use as possible. The language should be clear and jargon-free. Without clear language and examples it can be difficult to assess the level of competency achieved. When defining competencies, especially if they are used for performance management or competency-related pay, it is essential to ensure that they can be assessed. They must not be vague or overlap with other competencies and they must specify clearly the sort of behaviour that is expected and the level of technical or functional skills (competencies) required to meet acceptable standards. It is helpful to address the user directly (‘you will…’) and to give clear and brief examples of how the competency needs to be performed.

Developing a behavioural competency framework that fits the culture and purpose of the organization and provides a sound basis for a number of key HR processes is not to be undertaken lightly. It requires a lot of hard work, much of it concerned with involving staff and communicating with them to achieve understanding and buy-in. The steps required are described below.

· The competencies should reflect the organization’s values and its needs, as established by analysis, to determine the behaviours that will lead to high performance.

· Frameworks should not be overcomplex.

· There should not be too many headings in a framework – seven or eight will often suffice.

· The language used should be clear and jargon-free.

· Competencies must be selected and defined in ways that ensure that they can be assessed by managers – the use of ‘behavioural indicators’ is helpful.

· Frameworks should be regularly updated.

Competencies and emotional intelligence

Key learning points: Competency-based HRM

Competency-based HRM is about using the notion of competency and the results of competency analysis to inform and improve HR processes, especially those concerned with recruitment and selection, learning and development, and performance and reward management.