Coaching Emotional Intelligence – The Business Case for Human Capital

December 10, 2012 | By

The Value Proposition: a Winning Strategy

Enter the Talent Age. McKinsey & Company coined the term ‘War for Talent’, describing how employers would begin competing for the best and the brightest. ‘Talent’ as a construct presupposes a way of integrating people as a key component of business strategy, not as an expense but as an investment in an intrinsic asset. According to Bruce Sommerfeld, CTO of Dallas-based Capital Analytics, L.P., human capital represents the differential between the book value (hard assets) and the market value (share price) of a company — intangible assets. In 2006, more than 80% of the value of the S&P 500 came from intangibles: good will, intellectual property, branding, structures, processes, etc. This elevates the importance of the quality and quantity of effort people contribute to profit. The implications are huge. The profit motive hasn’t changed, but the means for getting there has.

The greatest cost for most businesses is salary expense. Yet, compensation as a variable contributes no more than 2% to securing retention and long term loyalty (Towers Perrin, 2006). Money is fiat ‘ a symbol for measuring, exchanging and accounting for wealth. It is fungible and fickle, and there are numerous outlets from which to acquire the script. Something more is needed to galvanize the unique, qualitative exchange of loyal effort for remuneration received. ‘Employer of Choice’ is this new standard. It represents the collective value an organization creates for people through training and development; decisions that invoke pride in their employer, a peer group of like-qualified colleagues, and leadership that acts fairly and is trustworthy in alignment with its claims.

Companies that want the best talent need to develop leaders that create value through meaningful growth and development experiences for employees at their organization (Towers Perrin, 2006). In a highly mobile work environment where employees remain at will, the only security they may have is the skill and knowledge gained through work experience. Development has become the new compensation.

The cost of attrition magnifies the already high cost of salaries to a company. The replacement cost of an employee is between 1.75-2.5 times one’s salary ‘ higher for technical workers — and doesn’t include the cost of lost productivity or customers (Smallwood & Ulrich, 2003). A typical manufacturing company has turnover to the tune of $20 million, nearly 10% of its $235 million annual payroll. The replacement cost of 2.5 times salary applied to this $20 million attrition expense will cost the company between $35 and $50 million to replace these human assets (again, not considering lost productivity and clients) (Foreman, 2006). ASTD’s 2006 State of the Industry Report indicates that the average training and development investment hovers around 2.25-3% of payroll (Sugrue & Riviera, 2005). It seems that investing to keep employees in the first place is worthwhile if only to avoid the cost of finding new ones. So, we can’t continue to simply manage costs. There is no program to cut, no cost variable to manipulate, nothing to take away that will eradicate these costs. Leaders are being forced not to take something away, but to put something back.

Without new thinking, language and metrics to trump the traditional argument, senior leaders cannot forge new trails. The role of the Chief Financial Officer (CFO) has evolved as did the Chief People Officer (CPO) or Chief Human Resources Officer (CHRO). To bridge the chasm between HR and Talent Management functions, we might consider a Human Capital Resource Officer (HCRO) that effectively blends the two. Collectively, we need to merge these into a new culture and language to further a Winning Strategy in the Talent Age. Deloitte Touche Tomatsu and The Economist Intelligence Unit published Aligned at the Top (Aijala, Walsh, & Schwartz, 2007), a study on how HR can be elevated to business strategy, in which CEOs identified leadership as the top priority, followed by talent management, and high performing cultures. We argue that they are all touched by leadership. The study revealed that, ‘The most effective results come from having Senior Executives involved in the training effort. There is no substitute for direct contact with Senior Executives who have personal experience leading the company.’ This does not mean that leaders deliver training, but embody personally what is being taught formally. For maximum impact, training, coaching and mentoring have to be delivered in a top down manner in which leaders model what is taught, and what is desired for others to learn.

The Winning Strategy: Differentiated Service for Profit

Since 1944, corporations have been inspired by the Service-Profit Chain which holds satisfied employees as the wellspring for future profit. An organization creates value by playing to employee strengths, allowing them to make a valuable contribution; strong leadership breeds collaboration and Affiliation to drive profit and reduce cost. This in turn creates value that travels through the chain. Employees are satisfied and they are empowered to make things right for the customers. Employees become loyal and so do customers. Loyal employees are more productive and drive value; value drives customer satisfaction, and customer loyalty. Richard Branson recognized this long ago with Virgin Atlantic as he imbued employees with growth, support and autonomy to drive client satisfaction which in turn drove shareholder returns. Research underscores Branson’s strategy demonstrating that a 5% increase in customer loyalty can boost profits as much as 25%. This contribution lies in the hands of the employee (Heskett, Jones, Loveman, Sasser, & Schlesinger, 1994).

Jack Welch, the classic economic leader, stated that the three most important things in business are cash flow, doing the right thing for customers, and then doing right by your employees. He later changed the order, putting employees before customers, saying, ‘The only way to generate enduring profits is to begin by building the kind of work environment that attracts, focuses and keeps talented employees’ (Foreman, 2006). The positive correlation of engaged employees and satisfied clients is high; the shift today is to manage the human capital value chain at the beginning ‘ starting with employee investment to drive customer loyalty and ultimately, shareholder value.

The Winning Strategy: Engagement and Affiliation

The Winning Strategy will be hard-won. Because old habits die hard, we must have practices and interventions that create leaders of people, not only managers of process. Research from Gallup, Watson Wyatt and Towers Perrin has confirmed that the single most important variable in managing human capital is engagement ‘ an impassioned relationship between worker and work. Engagement represents an employee’s willingness and ability to contribute to company success by delivering discretionary effort toward organizational goals on a sustained basis. Engagement drives increased productivity (50%), profitability (44%) and contributes to retention (50%). Add to this the fact that engaged employees directly impact client retention, and there’s even more reason to keep employees happy (Buckingham & Coffman, 1999). Perhaps not surprisingly, engagement levels hover at about 16% in the United States and lower overseas (Towers Perrin, 2006). There is quite a bit of money left on the table if employees are electing to invest less than 100% of their discretionary effort at work. Research shows that engagement drives productivity and profit, which is what is needed. We need to understand how this is accomplished.

Affiliation drives the emotional component. Affiliation is a complementary variable that we introduce here, one that creates an emotional bond to the leader and reduces expense. Marcus Buckingham of the Gallup Organization states that ‘people join companies and leave managers.’ As such, the bonds of loyalty, passion and effort are a direct result of the experience created by direct supervisors, leaders in the chain of command. Affiliation counters attrition and lost productivity. The experience of being cared about,

supported in learning and development, having close relationships at work, making a meaningful contribution, or doing what we do best (all identified variables in the Gallup Organization’s Q12 survey), are today’s non-cash compensation that come from a leader’s emotional and social intelligence.

Leaders must serve constituents. Gary Hamel, global thought leader on management issues, and professor at the London Business School, speaking at a conference in Johannesburg, South Africa, said, ‘Every company should ask: ‘How do we increase our return on Human Capital?’ Hamel went on to explain his theory that every employee brings six qualities to work: obedience, diligence, intellect, initiative, creativity and passion. The first three are global commodities. The last three are what differentiate businesses. Only by evoking all six of these qualities will a company prosper in a knowledge economy and a seller’s market for labour.

Managers and leaders are being asked to compensate people in a new way. They must give of themselves ‘ their time, their energy, their attention and knowledge, even their compassion, which is the kind of value that creates loyalty and is not an economic substitute easily replaced by another employer. This kind of value is hard to quantify in terms of currency, but it has tremendous impact on engagement, productivity and profitability of the organization. It has cost savings in retaining people. Leaders become the opportunity capital ‘ the catalyst ‘ to transform human capital to fiscal results in this organizational alchemy. In order to inspire discretionary effort within human capital, leaders must ignite the subjective experience of the individual. To do this, leaders must be adept at both rational/analytical and emotional skills if an individual is to invest his or her human capital that becomes financial capital.

The Winning Strategy: Coaching for Sustainable Leadership

Leaders tacitly convey more than 70% of what is learned in organizations (Foreman, 2006). That means, leaders can either dilute or enhance formal training programs, by the manner in which they live and demonstrate the values of the organization. As such, leaders are the opportunity capital that can evoke performance from people, thereby creating the intangible assets and intellectual capital that drives financial results. An investment in a leader ‘ not just for his or her individual competence, but for organizational competencies, is an investment in leveraging human capital. As Jeff Akin, Principal of the Strategic Human Capital Practice at Booz Allen Hamilton tells us, ‘The hard work that brings the new culture to life begins with the development of behavioral competency models with progressive degrees of proficiency ‘ when those are tied to the global performance evaluation and career progression models, learning and actions become more consistent across the organization and the company itself becomes a more efficient talent market as the way work gets done becomes a common language. As such, leverage is introduced into the fabric of the company and the overall talent equation is shifted from a centralized model at the top to one of widespread, mutual accountability.’

It takes a relatively small capital commitment to coach leaders in behaviors that reverse the high costs of attrition. Coaching has become a $1.5 billion industry in less than a decade (PricewaterhouseCoopers, 2006). With good reason. Coaching is deliberate about achieving business results. As a dynamic intervention, it builds accountability for purposeful learning and a bias for action toward results. Training by itself is not development. Alone, it is not sustainable. Typically, it’s a one-time event that focuses on learning as an end in itself. Once the training is over and the book is placed upon the shelf, there is no accountability for behavior change.

Perhaps this is why the Human Capital Institute suggests that 10% of the development mix be dedicated to training and augmented by 20% invested in coaching and mentoring. When coupled with training, coaching has been shown to add four times the impact of training alone (Olivero, Bane, & Kopelman, 1997). Mentoring adds connectivity to the organization, furthers a transfer of knowledge and allows leadership behavior to be modeled and emulated. Yet, investment in developing leaders who can enhance or dilute the impact of training and coaching offers the greatest return. Through coaching, leaders learn to coach others, model desired behaviors for organizational constituents, create a leadership brand, and reinforce the effects of training and mentoring.
Thus, leaders understand how to develop an engaged and affiliated workforce. They learn to develop others as a core competence of strategic leadership. The value proposition for coaching strategically for Affiliation and engagement can be found in coaching leaders in emotional intelligence. Not just as a means for becoming the ‘Employer of Choice,’ but also in transforming human capital into financial capital.

Coaches are trained in the process of coaching; content varies. As organizations are looking to consistently build competence in their talent pool, strategic application of coaching can build leadership brand.

Leaders essentially become part of training delivery, albeit tacitly. Jeff Akin, Principal of the Strategic Human Capital Practice at Booz Allen Hamilton, qualifies this, indicating it must be:
those behaviors demonstrated by leadership (many of which were formed in an older, different paradigm than that which will be required consistently going forward). The hard work that brings the new culture to life begins with the development of behavioral competency models with progressive degrees of proficiency. When those are tied to the global performance evaluation and career progression models, learning and actions become more consistent across the organization and the company itself becomes a more efficient talent market as the way work gets done becomes a common language (an expression of the culture). As such, leverage is introduced into the fabric of the company and the overall talent equation is shifted from a centralized model at the top to one of widespread, mutual accountability.

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Filed in: Coaching, Leadership, Personal Development

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