SEC Human Capital Reporting: What are Your Company’s Measures?
By Brett Wells, Ph.D. & Sarah Johnson, Ph.D. - December 10, 2020
Following on the heels of the Great Depression, the U.S. Securities and Exchange Commission (SEC) was formed to protect investors and restore public confidence in the stock market. Today, SEC regulations require public companies to disclose financial information on an ongoing basis (e.g., Form 10-Q, Form 10-K). Traditionally a task completed by a company’s finance team, reporting will increasingly require the involvement of human resources thanks to recent SEC amendments to modernize disclosures. Perhaps the largest paradigm shift in these amendments is with relation to human capital.
The move toward human capital reporting means companies now must disclose:
“A description of the registrant’s human capital resources, including the number of persons employed by the registrant, and any human capital measures or objectives that the registrant focuses on in managing the business (such as, depending on the nature of the registrant’s business and workforce, measures or objectives that address the development, attraction and retention of personnel).”
From Jay Clayton, the SEC Chairman, “I am particularly supportive of the increased focus on human capital disclosures, which for various industries and companies can be an important driver of long-term value.”
Ambiguous Human Capital Reporting “Requirements”
There is a great deal to celebrate in these amendments; the fact that personnel-related measures and objectives are leading indicators of financial performance underscores the importance of human capital in business success. However, the exact measures required for disclosure remain unclear.
Unfortunately (or fortunately, depending on your perspective) the SEC does not provide an explicit list of required human capital metrics. It instead adopts a principles-based approach, leaving room for substantial variance in reporting of human capital measures and objectives across industries and companies. As of yet, there is no third-party auditing function, as there is with financial metrics, to verify the accuracy of human capital data reported or enforce rule-following. Without standardizing how companies define and calculate human capital measures, metrics are largely not comparable across companies, and so provide little utility to investors when deciding to invest in company A instead of company B.
For example, both company A and company B may report an “Engagement Index” of 72%, yet they define and calculate engagement differently. Engagement scores for company A and company B may be significantly different if the companies operate in different industries, or have a global employee footprint versus a U.S.-only footprint. Benchmarking only partially solves this issue, as company A might be benchmarking against their industry competitors, and company B to the broader Fortune 100. Even “hard metrics” like turnover rate may be calculated differently (e.g., company A may rationalize to exclude involuntary terminations and layoffs) as well as be difficult to interpret. Retail organizations will always have higher turnover than a financial service firm, for example, but would consumers of these data recognize that?
Caught in a Goldilocks predicament, what’s the “just right” information to disclose? One clue may lie in the SEC’s use of the phrase “human capital measures or objectives that the registrant focuses on in managing the business.” This hints at human capital topics that have strategic value to leaders and support achieving the objectives of the organization. These can and will vary from industry to industry, and from company to company. A technology company may focus on creating and supporting an innovative culture; a manufacturing company may choose to report employee perceptions of adherence to a culture of safety, accidents reported, or the number of employees that have completed training. Other companies may decide to focus their efforts on creating an inclusive and equitable work environment. Metrics could include investment in different types of training, or the number of minority employees hired or promoted into leadership positions. Conceivably, human capital metrics could change from year to year, based on which employee issues are most important to the organization within a particular time frame.
Truthfully, given the SEC’s guidance, actual metrics may not be required. Best case, these reports will speak to the investments that organizations make in human capital, and reflect leaders’ commitment to their employees.
How Perceptyx Would Report
Our clients are beginning to ask our consultants for their expert advice about what to disclose to the SEC in regards to their employee listening and people analytics strategies. To serve as an example, here’s what Perceptyx might report about our human capital; although we are not required to file a 10-K. In particular, we highlight the “why” and “how” of our employee experience framework, with far less attention paid to specific metrics.
We take great pride in our culture and values, where employees are family. As of December 31, 2020, Perceptyx had 300 employees across our offices in California, Nebraska, U.K., Poland, Canada, Netherlands, and Germany, and we continued to hire in critical roles in the midst of the COVID-19 pandemic.
To support the health and well-being of our employees during the pandemic, more than 90% are working remotely, and employees are encouraged to tailor their return-to-work plans with individualized support and flexibility from their direct managers. As a service business, our employees are essential to our continued success. We invest in training and development for new hires. We strive to hire exceptional employees, with backgrounds and perspectives as diverse as those of our global clients. We work diligently to provide an inclusive environment where these talented people can have fulfilling careers helping organizations and people thrive.
Despite our rapid growth, transparency and open dialogue remain central to how we work well as a family to be trusted advisors to our clients, equipping them to be the heroes within their organization. We go above and beyond to help our clients be amazing. Our employee listening program helps us accurately evaluate our employees’ experience at Perceptyx, understand the connections to job performance, and identify actions that will support individual performance and strengthen each employee’s anticipation of their success. Continuously listening, analyzing, and acting on employee feedback is our most strategic human capital practice.
In 2020, our employee experience framework utilized three listening opportunities to hear and learn from employees:
- An annual, company-wide census survey
- Lifecycle surveys (new hire and exit surveys)
- Two topical pulse surveys, one specific to our COVID-19 response, measuring confidence in leadership, perceived care for individuals, consistency in how policies are applied, and effectiveness of communication efforts; another specific to the issues of diversity, equity, and inclusion
After our CEO reviewed overall company results with all employees, leaders met with their teams to review and discuss the results and implement action plans to remove barriers to engagement. Based on employee feedback, we increased the frequency of our quarterly all-hands meeting to weekly during the pandemic. We implemented a series of employee-run activities and support groups to enable everyone to remain connected socially as they worked from home. We created the All-In Committee and selected two co-chairs to help make sustainable strides in diversity, equity, and inclusion at Perceptyx.
In summary, our strategy of gathering employee experience and sentiment data and, more importantly, continuously acting on those data have helped Perceptyx respond effectively and navigate through turbulent times. It is largely for these reasons that we find more than 95% of employees intend to stay at Perceptyx for at least the next 12 months.
We hope this sparks conversations and ideas around how your organization might report its human capital measures and objectives. Of course, our consultants are eager to help you strike that “just right” reporting strategy—reach out and let’s talk.