The New Metrics for Scaling Tech Businesses—Part II
This is part two of a two part article detailing HR considerations for quarterly board reporting. This article is a contribution from Daneal Charney, Executive in Residence for MaRSDD Momentum companies, Top 25 Human Resource Winner and Certified Leadership Coach. VIEW PART I HERE.
Venture capital (VC) and private equity (PE) firms often talk about betting on a management team when choosing to invest in a company. Surprisingly, this bet is mostly based on word-of-mouth and intuition at a pre-deal stage (and even post deal) rather than any formal assessment of the executive teams and other critical talent.
I have had several conversations with VC or PE firms where they ‘feel’ their management teams have exceptional leadership skills, yet this clearly is not the sentiment or experience amongst employees or prospective candidates. They are not aware of some of the warning signals e.g. high turnover numbers, employer reputational issues or above industry time-to-hire numbers. How can they be, this level of detail is not part of their regular conversations with portfolio companies?
Just like other key assets, investors need to have visibility into how their portfolio companies are maximizing the contribution value of key people and creating a strong organizational culture (or not).
Ensuring people metrics are part of their regular board reporting is a great way to support portfolio companies and uncover any blind spots and risks that need appropriate action.
There are 6 driving people metrics that businesses should include in their quarterly board reporting. Here are the final three:
4) Engagement
What is it & what is the benchmark?
Engagement is an indicator of the discretionary effort. The Culture Amp question – “I am motivated to go above and beyond” gets to the heart of this question and should be >70%. As an investor you should expect all your portfolio companies to be doing regular employee pulse checks and following up with corrective action.
Public Glassdoor scores can be a proxy for overall engagement and reading the comments section can be eye opening. The average company review on Glassdoor is 3.4 but best companies receive a 4.6 rating. A Glassdoor score of ~ 4.0 is highly beneficial for a scaling companies as most candidates review this site as part of their decision to join a company. Note: During this Covid period some companies have had to lay off people so recent employee reviews may decrease their scores.
Why is it important?
A 2017 study by three researchers at Norwich Business School at the University of East Anglia used more than 326,000 Glassdoor reviews to quantify the impact of employee satisfaction on the long-run stock performance of companies. The authors found that a portfolio of companies with high employee satisfaction on Glassdoor significantly outperformed the overall stock market, earning 1.35 percent extra returns above the market — what researchers call “four-factor alpha” — over the eight-year period they studied. According to the study, employees’ online reviews are good predictors of a firm’s financial results and, consequently, of value-relevance for investors.
5) Leadership
What is it?
On an annual basis investors should expect their executive team to undergo performance reviews. How the CEO leads his or her team should be part of their review. The companies employee engagement survey will also give you specific feedback on leadership sentiment. Lastly Glassdoor’s public data also provides ratings for both CEO and Senior Leadership.
Why is it important?
Exceptional leadership is often a magnet for talent and also at the heart of why employees leave a business. Supporting your executive team with ongoing feedback and referrals to leadership coaches are two of the way you can help.
What is the benchmark?
The Glassdoor CEO score for best companies is >90% and <80% may be a red flag. The CEO score is a leading factor in long-term employee satisfaction and statistically correlated to strong culture and financial performance.
6) Diversity
What is it?
It’s a commitment to hiring, developing and retaining the best people …which unfortunately is not current state in tech. Take a deep dive into your hiring, development, promotion, compensation, exiting numbers to uncover unequal and bias practices. “Who are Canada’s Tech Workers” (Brookfield Institute study, 2019) shows how people of colour and women are woefully underrepresented at the leadership and BOD levels of tech companies.
Why is it important?
As you scale your organization you need a wider talent pool that is more reflective of Canada’s diversity, while also ensuring that employees experience your organization more equally. Overall a more diverse workforce will enhance your business success and help you build a better product, tap into a wider market and connect with more customers.
What is the benchmark?
Create an aspirational target that is representative of the diversity of the tech population. Measure where you are starting from and create a commitment to how you will progress. You will only progress on diversifying your Executive and Board teams if you are building a pipeline for the future, today.
About the Author: This article is a contribution from Daneal Charney, Executive in Residence for MaRSDD Momentum companies, Top 25 Human Resource Winner and Certified Leadership Coach.
