How much does a loyal employee add to the bottom line? How about an exceptionally talented one? Is it worthwhile to shower cash on an average performer in the hopes he or she will stay on for another year? Every year corporations spend millions of dollars attracting, training, and retaining their employees, but have few means to identify the return on their investment.
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Lawrence C. Kleinman, chief of human resources at the German software company SAP Americas, and a board member of the Positive Psychology Summit, cosponsored by Gallup, may well have begun to crack the code. Using a new series of metrics designed by Gallup to identify the sources of turnover, Kleinman and Gallup constructed an overall scorecard on talent management that enables him to test the revenue consequences of his human capital investment options. Kleinman calls it a dashboard with dials, and the dials include such individual employee variables as aptitude for the job and length of service within the company. "I can play with the dials and see which produce the most return," he says.
To translate the employee variables into dollars, the dashboard includes revenues generated by high-talent employees and less-talented ones, how much more they generate if they're highly engaged in their jobs, how much more they generate if they stay with the company at least three years, and the turnover costs associated with losing them. The dashboard can then be manipulated to see which of the variables will increase revenues the most. For instance, by increasing the percentage of top talent who stay at least three years on the job, Kleinman could pump up sales from $86.9 million to -- are you ready? -- $271.6 million (see top row in chart).
Such aggressive goals seemed impossible just two years ago. In 1999 attrition at SAP Americas, which encompasses the United States, Canada, and Latin America, had hit 19%, and sales growth was slowing. No one knew for sure why the door at the company's Newtown, Penn., headquarters was revolving so fast, but theories abounded: Pay scales were too low, said some managers; lack of stock options was a problem, said others. About the only thing everyone could agree on was that the brain drain was hurting revenues. Kleinman calculated that every time a business-development employee quit, it cost the company a mind-boggling $678,000 in recruiting, training, and missed sales opportunities.
To solve SAP Americas' people problems, Kleinman needed to tackle two questions: Why, exactly, were people quitting? And how could hiring be improved so that new recruits fit the company's needs better? Finding answers would enable the company to stem escalating turnover. More profoundly, it would enable Kleinman to construct his dashboard with dials -- and map out for the years ahead a talent management strategy capable of having a palpable effect on the company's financial performance.
Early last year, working with Gallup's selection research expertise, SAP Americas identified the traits of the company's top performers. These traits were then used to create profiles of ideal candidates, against which individual applicants could be measured. The object, of course, was for SAP Americas to be able to choose high-performance individuals whose efforts would result in greater revenue for the company. Early returns were promising: Some 60% of the U.S. operation's 250 business-development employees were hired in 2000, and Kleinman estimates that three out of five new hires are "A" players -- that is, they closely fit the profile of SAP Americas' top 25% of salespeople. "We think that just those people will account for $141 million in incremental revenue due to selection techniques alone," he says.
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In the second stage of its efforts, SAP Americas asked all employees to take two surveys created by Gallup: the Q12, a series of 12 questions that measure employee engagement, and the 40-question Employee Value Proposition survey, which delves into employee loyalty by asking employees to agree or disagree with statements such as "My current job makes the best use of my talents" and "I would recommend my company as a great place to work."
"There were so many ideas being thrown around about why people were leaving," says Kleinman. "These studies cut through all that and said, 'Here are the six drivers, in order of importance, of loyalty at your organization at this time.'"
Those drivers, and their relative rankings of importance, surprised everyone. Compensation, as it turned out, wasn't even close to the top of the list. Instead, at the top was what Gallup calls "leadership vision." SAP Americas' employees were confused about the company's direction and concerned that management was not articulating clear goals. And they were frightened by the success of rival software companies that had been quicker to market with e-commerce products. Second on the list was leadership regard, a Gallup term that Kleinman says "is a nice way of saying management told people they were important but didn't treat them that way." Third was management support in areas such as performance reviews, employee development, and consistency of practices. According to the results of the Gallup analysis, SAP Americas was doing a marginal job in the most important areas: leadership vision, leadership regard, and management support.
Pay, meanwhile, ranked only fifth, two years in a row. "The company response to problems like this was always to throw money at them, to compensate people more and more," says Kleinman. "For the first time ever, we were able to say, 'People aren't leaving for money.' It's important, but it's not the be-all and end-all."
That kind of intelligence gave SAP Americas' new CEO, Wolfgang Kemna, who had been appointed in April 2000, a road map for improving the company's return on its investment in talent. He launched a series of town meetings with employees to explain SAP Americas' new direction, which was to focus on increasing revenue from existing accounts by selling new and add-on products. He instituted monthly conference calls and TV broadcasts to communicate with employees. Finally, in January 2001, he brought 2,500 SAP Americas employees together and spent two and a half days clarifying where the company was going.
Compensation was overhauled too. "The most dramatic finding was that tenure was one of the strongest correlates to producing revenue," says Kleinman. "The longer an employee is with the company, the more productive he or she usually is." Even employees of average talent become bigger producers if they stay in their jobs three years, according to the findings. That was a surprise to Kleinman. "If we can keep just average people around three years, we can generate more revenue. If really good people stick around three years, we could blow the lid off our numbers." As a result of these findings, the company increased base salary for select employees in sales roles who've stuck around and hit lifetime sales achievement of $15 million and $20 million.
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$992,948,299 (projected revenue) -- $858,096,945 (current revenue) = $134,851,355 (net gain from all projected changes)
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Indeed, SAP Americas' combined efforts to articulate leadership objectives, improve management practices, increase employee engagement, and encourage tenure have had a dramatic impact on its employee turnover. As of the middle of this year, turnover had dropped to an annualized rate of 10.4% from 19.5% in 2000. During the same period, voluntary resignations dropped to 6.1% in 2001 from 14.9% last year.
But it is with regard to ongoing intelligence for managing human capital that SAP Americas' stunning success is most noteworthy. The dashboard with dials that Kleinman and Gallup collaborated on in the process of reducing turnover is essentially a tool for maximizing the firm's investments in its people, a tool that projects actual revenue figures onto talent-management decisions. As such, it enables CEO Kemna to justify his spending to his management board back in Walldorf, Germany. "It's important for me to be able to go back to headquarters and say, 'Here's the rationale behind why we spend millions on management education, staff training, retaining our people,'" Kemna says. "It's not just the wild idea of CEO Kemna. The numbers show there's payback."