Human Resources (Edexcel A Level Business): Revision Note

An introduction to human resources

• In common with all resources, a business's employees - its human resources - need to be managed

• Staff costs can make up a large proportion of a business's costs, so objective monitoring of employee performance is a key element of effective financial and operational control

• Businesses commonly monitor the following human resources metrics:

  • Labour productivity

  • Labour turnover

  • Labour retention

  • Absenteeism

Labour productivity

• Labour productivity is a measure of output per employee

• It is calculated using the formula

$\mathrm{Labour}\mathrm{productivity}=\frac{\mathrm{Total}\mathrm{output}}{\mathrm{Average}\mathrm{number}\mathrm{of}\mathrm{employees}}$

• Figures used in this formula are for a specific time period such as week, month or year

• Businesses aim to increase the level of labour productivity to improve competitiveness

Labour productivity and competitiveness

Labour turnover and retention

Labour turnover

• Labour turnover measures the proportion of employees leaving a business during a specific time period

• It is expressed as a percentage and is calculated using the formula

$\mathrm{Labour}\mathrm{turnover}=\frac{\mathrm{Number}\mathrm{of}\mathrm{staff}\mathrm{leaving}}{\mathrm{Average}\mathrm{number}\mathrm{of}\mathrm{staff}}\times 100$

• A rising rate of labour turnover can signal internal human resource management problems, such as:

  • Poor management, leading to workers losing commitment

  • A poor recruitment and selection approach, leading to staff leaving soon after starting their job

  • Low wage levels compared to those that could be earned elsewhere

• External factors can also increase labour turnover in a business

  • A buoyant local economy in which workers are attracted to employment opportunities elsewhere 

  • Improved transport links that provide an opportunity for workers to seek work across a wider geographical area

Problems of high labour turnover

• Increased recruitment and selection costs

• Increased induction and training costs

• Lower productivity levels as workers settle into new roles

Opportunities of high labour turnover

• Workers with existing skills can be recruited to reduce the need for training

• New ideas and creativity introduced to the business

• New perspectives and approaches to problem-solving can improve business performance

Labour retention

• Labour retention measures the proportion of employees remaining with a business during a specific time period

• It is expressed as a percentage and is calculated using the formula

$\mathrm{Labour}\mathrm{retention}=\frac{\mathrm{Number}\mathrm{of}\mathrm{staff}\mathrm{remaining}}{\mathrm{Average}\mathrm{number}\mathrm{of}\mathrm{staff}}\times 100$

• A high level of labour retention means that few staff are leaving the business during a given period

Absenteeism

• The absenteeism rate is a measure of the proportion of staff who were absent from work during a specific period of time (e.g. a day, week or month)

• It is expressed as a percentage and is calculated using the formula

$\mathrm{Absenteeism}\mathrm{rate}=\frac{\mathrm{Number}\mathrm{of}\mathrm{staff}\mathrm{absent}}{\mathrm{Number}\mathrm{of}\mathrm{staff}\mathrm{employed}}\times 100$

• High levels of absenteeism can cause several problems for a business, including:

  • Absence due to illness requires sick pay to be paid

  • Hiring temporary staff to cover for those absent increases costs

  • Output is likely to be temporarily reduced if staff are key to the production process

  • Other staff may become demotivated if they have to constantly cover for absent workers

  • A wider culture of absenteeism may develop

Human resources strategies to improve employee performance

• Raising the labour productivity rate, as well as reducing staff turnover and absenteeism rates, are key human resource management objectives

  • Increased labour productivity lowers the labour cost per unit and contribute to improved competitiveness

  • More output is produced, so there is more output to sell - potentially increasing revenue

  • Money is saved on recruitment, selection and training costs, and a positive group spirit may emerge

Strategies to improve employee performance

Offering financial rewards

• Examples of financial rewards include:

  • Increased pay rates

  • Profit-sharing schemes

  • Bonuses and commission

  • Performance-related pay

  • Attendance rewards

  • Loyalty bonuses

• Paying workers more or sharing profits may increase commitment and effort, leading to higher output and productivity

• If financial rewards are greater than those of other employers, staff are less likely to want to leave

• Bonuses and commissions are only paid when they have been earned or if targets have been met

• Attendance and loyalty rewards may improve the intrinsic motivation of workers as they feel valued

Offering employees shares in the company

• Rewarding senior executives and managers with shares may increase their commitment to achieving objectives

• Employees who own shares in the business may work harder and take less time off as they have a financial stake in the success of the business

• Share ownership is often structured through formal schemes

  • Save As You Earn (SAYE) is where employees save monthly towards buying shares at a fixed price

  • Share Incentive Plans (SIPs) are where employees are given or can buy shares directly

Example

The John Lewis Partnership is jointly owned by its employees, who receive an annual share of profits as a bonus, often cited as contributing to strong staff engagement

Consultation

• Consultation involves managers obtaining the views of employees when making decisions

• Workers are likely to feel more involved within the business and may be less likely to take days off work or leave the business

• Consultation can take place through works councils, regular team briefings, suggestion schemes or elected employee representatives who feed staff views back to management

• Involving employees, particularly in decisions that directly affect their own roles, can improve the quality of decision-making

  • Employees often have first-hand knowledge of problems managers may not see

  • E.g. A business planning to change shift patterns might consult staff representatives first, helping to identify practical problems before the change is implemented

Empowerment

• Empowerment means employees are encouraged to make use of their own knowledge and experience and develop their own solutions

• Workers must be properly trained and equipped with the necessary resources to be properly empowered

• Leaders need to be prepared to hand over authority and focus on providing encouragement, praise and feedback