Our people are our greatest asset…but no, we don’t track their performance or attendance. Entry 26 – 2006

A key element in the Health as Human Capital paradigm is a clear employment contract. In this contract, an employer and an employee agree that a day’s pay will be provided in return for a day’s work. In a perfectly efficient employment market, each worker would be paid the value of his work, and would contribute work effort equivalent to his pay. However, in most organizations, employers pay people based generally on time at work—not based on productivity or output—with a set salary or an hourly rate.

The practice of paying people to “be there,” rather than paying people by the amount of work they do, began in the industrial era. Factories needed a steady shift of workers on the assembly line and it became important to fill positions at all times. Also, in this new, complex, team-oriented type of production, it was difficult for employers to tell who actually did what—so a time-based contract made sense. This was different than traditional payment for each product produced or each service completed.

In today’s workforce, there are exempt and non-exempt types of jobs. By definition, non-exempt jobs are paid by the hour and employers almost always track work (or absence) by the hour for workers in these jobs. For exempt jobs, salary is based—at least theoretically—on responsibilities a worker agrees to achieve, rather than the exact time spent achieving them. (The label exempt, which covers numerous regulations, refers to a person not being eligible for over-time. Hence, one does what is necessary to get the job done). Despite this official definition, in many white collar jobs, there is an implicit understanding that a person is expected to spend his work week engaged in work activities. If this was not the case, there would not be designated allotments of holidays, vacation days and sick days. Thus, while some may argue that not ALL salaried workers are actually being paid based on time, in a great majority of white collar jobs, time is probably the best proxy we have as a measurement of “working.”

It is ironic, given that time is the unit exchanged for pay in most settings, that most companies do a poor job of tracking time at work and time away from work for salaried workers. According to a 2004 survey, only one-third of companies track absences formally, and only 20 percent calculate the cost of lost time(1). From 2005 to 2006, the estimated rate of unscheduled absence nationally increased from 2.3 percent to 2.5 percent of all workers on any given day, and two-thirds of those absences were for reasons other than personal illness. In 2005, absence costs were estimated at $660 per employee per year, or $55 per month.(2)

Anecdotally, it seems that we have a cultural distaste for monitoring salaried workers. I spoke with the Human Resources Director of a small company recently who was reluctant to implement an absence and vacation tracking system. “We have been running on the honor system and we’re afraid that employees will think we don’t trust them.” Yet, the same company is quite worried about the cost of health care premiums, travel expenses and overhead. It is not uncommon for companies to track their equipment carefully and require receipts for small travel expenses, yet not know if a highly paid employee is actually working that day.

While we understand the morale (distrust) argument, our experience has been that there is also a morale risk when responsible and dependable workers see a few workers abusing a poorly monitored system. Rather than rewarding positive worker behavior, it creates a culture where good workers are not appreciated and frequent absence (by a few) is tolerated.

Other companies insist that although absenteeism is not tracked in a centralized system, it is monitored at the manager level. In other words, there is no overall knowledge of absence patterns across the workforce, but a belief that if there WERE a problem, individual managers would handle those specific instances. Yet without data, a company has no way to assess whether that assumption is true.

From a human capital perspective, if a company is exchanging a day’s pay for a day’s work, it is important to know if workers are engaged in the tasks for which they are being paid. Far from distrustful, this is simply part of the business arrangement. The vast majority of compensation is pay. Pay (presumably) reflects the (approximate) value a worker brings to the employer. Ideally, one could be paid for work output or achievement of performance goals. Because work performance can be difficult to measure for some jobs, it is understandable that employers may not be able to base pay solely on performance. However, effective engagement in work often requires a worker’s presence and that presence is straightforward to measure.

Another reason to measure absence is its distribution. Similar to medical costs, absences are skewed. As an example, the graph at left shows typical absence days in a population whose annual average is 5 days per employee. (Click on the graph to make it bigger). Four percent of employees are using over 50% of all illness absence days. Conversely, the lowest 77% of employees are generating fewer than 15% of all absence days. Knowing more about what factors are contributing to the high-absence group could be quite valuable. A week of absence is about 2%-3% of annual time which, for moderate- to highly-paid workers can amount to thousands of dollars in salary paid for time where no services could have been rendered. The value of lost time may be even higher if the worker is part of a team or involved in a sequential production process.

The graphic shown below is an illustration of total compensation. In this population, the average salary was about $40,000 and accounted for over three-quarters of compensation. Medical care costs accounted for about 10% of compensation. Even when we examine subsets of low-paid workers (under $20,000), medical care (in terms of actual amount spent for medical services) for employees and families accounts for no more than 25% of all compensation, on average. In either case, salary is the vast majority. If we think of salary and bonuses as the reward tied most directly to work performance, it warrants far greater energy and resources to track people and performance than medical benefits utilization.

Essentially, tracking presence is equivalent to tracking the activities for which 79% of compensation shown below (salary) is intended.

One might assume that employers monitor those issues that are most important to their firm’s viability. Our experience is that many employers invest significantly in tracking medical expenses. This suggests that for corporate America the amount of medical care an employee uses is more important than whether that employee is at work. From a human capital perspective, this is backwards. Applying the adage “you can’t manage what you don’t measure,” we also see that employers have less consistent information about the patterns of performance and absence (which is their core business) than about what medical services employees use.

Our approach to an aligned incentive hierarchy for employers (see our white paper) would suggest tracking (and rewarding) performance first, presence second, health and safe practices third, and then think about other benefits utilization (including medical care). To make tracking more acceptable, consider providing cash-back for unused sick leave, or combining sick leave with vacation in a bank of days. We encourage organizations to think about their implicit and explicit measurement and management priorities.

(1) Hewitt Associates Survey. July 2004. http://www.hroaeurope.com/file/3294/hewitt-study-shows-companies-underestimate-cost-of-leaves-of-absence.html

(2) CCH Absence Survey 2006. http://hr.cch.com/news/hrm/102506a.asp