1. Howell Management Consulting Human Resources Finance Rick Howell, MBA, GPHR, SPHR, CCP NHRMA President, 2011

2. Howell Management Consulting The language of business Why do I have to learn this stuff? Why do I have to learn this stuff? It’s not just HR that struggles It’s not just HR that struggles Finance and other numbers/metrics are how business people communicate Finance and other numbers/metrics are how business people communicate

3. Howell Management Consulting Today’s Agenda Financial Statements Financial Statements Financial Terminology Financial Terminology Ratio Analysis Ratio Analysis HR Metrics HR Metrics Capital Expenses Capital Expenses Merit budgets Merit budgets Creating a variable pay plan Creating a variable pay plan Analyzing Employee Survey Data Analyzing Employee Survey Data Questions Questions

4. Howell Management Consulting Financial Statements Income Statement Income Statement  Records revenues and expenses Balance Sheet Balance Sheet  Assets = Liabilities – Owners Equity Other Other  Statistics, Ratios, Variance Reports, Ranking Reports, Daily Labor and Sales …

5. Howell Management Consulting Income Statement Starts with summary pages Starts with summary pages Current period vs. year to date Current period vs. year to date Dollars vs. percentages Dollars vs. percentages Revenues Revenues Expenses Expenses Profit: Dept Profit, GOP, Net Income, EBITDA Profit: Dept Profit, GOP, Net Income, EBITDA CURRENTYTD LY%CY%Bud% ItemLY%CY%Bud%

6. Howell Management Consulting Financial Terminology Gross Operating Profit – Controllable  Gross Operating Profit – Controllable  Net Income –  after indirect expenses Net Income –  after indirect expenses EBITDA – another controllable  EBITDA – another controllable  Cash Flow – actual cash in and out Cash Flow – actual cash in and out Productivity – amount produced over time Productivity – amount produced over time Mix – the make-up of a given distribution Mix – the make-up of a given distribution COGS – cost of goods sold COGS – cost of goods sold CAGR – Compounded Annual Growth Rate CAGR – Compounded Annual Growth Rate

7. Howell Management Consulting Compound Annual Growth Rate CAGR isn’t the actual rate of return, it’s an imaginary number that describes the rate an investment will grow if it grew at a steady rate. You can think of it as a way to smooth out the returns. In reality, the actual growth will not be so artificially even. CAGR isn’t the actual rate of return, it’s an imaginary number that describes the rate an investment will grow if it grew at a steady rate. You can think of it as a way to smooth out the returns. In reality, the actual growth will not be so artificially even.

8. Howell Management Consulting Key Financial Ratios Current Ratio cash and inv over liabilities Quick Ratio cash over liabilities Net Working Capital net wkg cap over assets NPV (net present value) current value of future cash IRR (internal rate of return) hurdle rates (Op cost capital) ROA (return on assets) net income over average total assets ROE (return on equity) net income over average stockholder equity ROI (return on investment) gains over expenses EPS (earnings per share) Measure of owners’ gains and a measure of dilution PE Ratio (price:earnings) Multiple reflects confidence

9. Howell Management Consulting HR Metrics Safety Safety OSHA Incident Rate OSHA Incident Rate Lost Days Lost Days Near misses Near misses Costs Costs Turnover Turnover Voluntary Voluntary Involuntary Involuntary Mean time in position Mean time in position Employment Employment Time to fill Cost per hire Training Training Return on Investment Compensation Compensation Compa ratios Labor % of Revenue

10. Howell Management Consulting Additional HR Metrics Absenteeism Absenteeism FTE Calculation FTE Calculation Human Capital ROI Human Capital ROI Health care $ per EE Health care $ per EE Vacancy Cost Vacancy Cost HR Expense factor HR Expense factor Training cost per employee Training cost per employee Kirkpatrick Kirkpatrick Employee relations data Employee relations data Payroll error rate Payroll error rate Performance Mgt Performance Mgt Frequency of reviews Distribution of scores

11. Howell Management Consulting Capital Expenses Also known as CapEx Also known as CapEx In terms of accounting In terms of accounting when the asset is a newly purchased capital asset when the asset is a newly purchased capital asset or an investment that improves the useful life of an existing capital asset or an investment that improves the useful life of an existing capital asset it needs to be capitalized it needs to be capitalized this requires the company to spread the cost of the expenditure over the useful life of the asset this requires the company to spread the cost of the expenditure over the useful life of the asset however, if the expense is one that maintains the asset at its current condition, the cost is deducted fully in the year of the expense however, if the expense is one that maintains the asset at its current condition, the cost is deducted fully in the year of the expense

12. Howell Management Consulting Merit Budgeting Merit Matrix Bottom Quartile Second Quartile Third Quartile Top Quartile Tops8%7%6%5% Wow6%5%4%3% Solid5%4%3%2% Almost3%2%0%0% No Way 0%0%0%0%

13. Howell Management Consulting Merit Budgeting Merit Matrix Bottom Quartile Second Quartile Third Quartile Top Quartile Tops8%7%6%5% Wow6%5%4%3% Solid5%4%3%2% Almost3%2%0%0% No Way 0%0%0%0% (4% + 3%) / 2 = 3.5%

14. Howell Management Consulting Merit Budgeting Merit Matrix Bottom Quartile Second Quartile Third Quartile Top Quartile Tops8%7%6%5% Wow6%5%4%3% Solid5%4%3%2% Almost3%2%0%0% No Way 0%0%0%0% 3% 5% 2% 14% 11% 2% 13% 6% 7% 12% 6% 2% 3% 2% 1% 0% 8% 10% 50% 25% 7%

15. Howell Management Consulting Budgeting the merit increase 8% x 3% =.24% 8% x 3% =.24% 7% x 3% =.21% 7% x 3% =.21% 6% x 2% =.12% 6% x 2% =.12% 5% x 2% =.10% 5% x 2% =.10% 6% x 6% =.36% 6% x 6% =.36% 5% x 7% =.35% 5% x 7% =.35% 4% x 6% =.24% 4% x 6% =.24% 3% x 6% =.18% 3% x 6% =.18% 5% x 13% =.65% 5% x 13% =.65% 4% x 11% =.44% 4% x 11% =.44% 3% x 14% =.42% 3% x 14% =.42% 2% x 12% =.24% 2% x 12% =.24% 3% x 2% =.06% 3% x 2% =.06% 2% x 2% =.04% 2% x 2% =.04% 0% x 2% =.00% 0% x 2% =.00% 0% x 5% =.00% 0% x 5% =.00% 0% x 1% =.00% 0% x 1% =.00% 0% x 0% =.00% 0% x 0% =.00% 3.65% wage increase

16. Howell Management Consulting Other merit pay factors Timing of the increase Timing of the increase Focal point? When? Focal point? When? Randomly throughout the year? Randomly throughout the year? Rule of 54 Rule of 54 1/12 + 2/12 + 3/12 …12/12 = 78/144 = 54.2% 1/12 + 2/12 + 3/12 …12/12 = 78/144 = 54.2% Frequency of the increase Frequency of the increase Orientation period, first year increases? Orientation period, first year increases? Promotions? Promotions?

17. Howell Management Consulting Variable Pay 1. Must relate to company philosophy 2. Understand what the market does 3. What are the goals of this incentive Goal setting (attainable vs. stretch, forecast) Goal setting (attainable vs. stretch, forecast) 4. What data is available to measure results 5. Keep it simple, especially for lower levels 6. Funding – will this be self-funding? 7. Communication plan – clear and often

18. Howell Management Consulting Correlation Coefficient  X i  Y i  X i Y i - n  X i Y i - n r = ___________________________________________ r = ___________________________________________ (  X i ) 2 (  Y i ) 2 ½ (  X i ) 2 (  Y i ) 2 ½  X i 2 - n  Y i 2 - n  X i 2 - n  Y i 2 - n How is the data related?

19. Howell Management Consulting Perfect Correlation

20. Howell Management Consulting No Correlation

21. Howell Management Consulting High correlation?

22. Howell Management Consulting Employee Survey Data SAANDSDr I would recommend this company as a great place to work4534678 I rarely think about looking for a new job 43214428 Prompt decisions are made at top level of the organization 162334252.76 -.12

23. Howell Management Consulting Employee Survey Data SAANDSDr Expect to be working at this company a year from now 38 1563 This company appreciates its employees 41371741 Sr. mgt does very good job of communicating strategy 2311242913.99 -.29

24. Howell Management Consulting Employee Survey Data SAANDSDr I am satisfied with work/life balance my job affords me 39291679 I have the resources necessary to do my job well 222025212 Collaboration between departments is effective 101650195.41 -.19

25. Howell Management Consulting The Loyalty Threshold Just What I Expected Slightly Better Moderately Better Much Better Moderately Worse Slightly Worse Much Worse Customer Loyalty (Retention) 20% 40% 60% 80% 100% Zone of Indifference Zone of Defection Zone of Loyalty Satisfaction Scale Disadvantaged Competitive Franchise Apostle Terrorist

26. Howell Management Consulting The Service-Profit Chain Customer Retention Service Experience Employee Ownership Customer Satisfaction Profit Growth

27. Howell Management Consulting Critical Links in the Service-Profit Chain

28. Howell Management Consulting Employee Ownership leads to Employee Satisfaction

29. Howell Management Consulting Employee Satisfaction leads to Employee Retention

30. Howell Management Consulting Employee Retention leads to Quality Customer Service

31. Howell Management Consulting Quality Customer Service leads to Customer Satisfaction

32. Howell Management Consulting Customer Satisfaction leads to Customer Retention

33. Howell Management Consulting Customer Retention leads to Higher Profits

34. Howell Management Consulting Any Questions?