6.2 Analysing human resource performance

Question 1

What is labour productivity?

Answer 1

It measures the output per employee per time period.

Question 2

What are unit labour costs?

Answer 2

They measure the labour cost per unit of output produced.

Question 3

How do you work out labour productivity?

Answer 3

LP = total output per time period / number of employees at work

Question 4

What affects labour productivity?

Answer 4

• Amount of equipment (capital).
• Quality of equipment (capital).
• Workforces degree of motivation.

Question 5

What is perhaps the most fundamental indicator of performance?

Answer 5

Labour productivity.

Question 6

What does labour productivity have implications for?

Answer 6

Implications for a businesses costs and hence the prices it can then charge.

Question 7

What do improvements in labour productivity result in for a business?

Answer 7

Allows business to enjoy increased profit margins or to reduce prices (while maintaining profit margins), hopefully leading to increased sales.

Question 8

Interpreting labour productivity data.

What does an increase in labour productivity figures for a business represent?

Answer 8

• Represents improvement in efficiency of its workforce - which can reduce labour costs involved in producing a typical unit of output.
• As labour costs account for around 2/3rds of the cost of production of UK economic output, this can offer major benefits to businesses.

Question 9

What does labour productivity ignore?

Answer 9

Wage rates.

Question 10

What are unit labour costs based on?

Answer 10

Total labour costs, including non-wage employment costs such as a business’s national insurance and pension contributions.

Question 11

What two elements are unit labour costs determined by?

Answer 11

• The cost of employing the workers.
• The speed at which they make the products - so their productivity.

Question 12

What relationship do unit labour costs have with labour productivity?

Answer 12

Inverse relationship!

(If labour productivity rises, then unit labour costs will fall, unless labour costs increase by a greater percentage.)

Question 13

What would happen to unit labour costs if labour costs rise by 5% and labour productivity grows by 2% for a given amount of output?

Answer 13

Unit labour costs will rise by approximately 3%.

Question 14

When will unit labour costs rise?

Answer 14

When total labour costs rise faster than output.

Question 15

Unit Labour costs

Work out the unit labour costs.

Business manufactures 12,000 televisions in a month.

Total labour cost of producing the televisions is £900,000.

Answer 15

Unit labour cost = £900,000 / 12,000 units = £75 (per unit)

Question 16

• What can a rise in labour productivity help control?
• Why is this?
• Therefore what may managers response to this be?

Answer 16

• Control unit labour costs.
• The producer is achieving a higher output from each unit of labour employed assuming a given wage cost.
• Willing to pay increased wages & salaries when productivity is rising- especially if the % increase in pay is below the rate at which productivity is increasing. In these circumstances- likely that unit labour costs will fall.

Question 17

Why is it useful to look at unit labour costs over a period of time?

Answer 17

Heavy investment in training may increase short-term labour costs - before rising productivity reduces them more.

Question 18

What will reducing labour costs not improve?

Answer 18

• Not improve price competitiveness if other costs, e.g. overheads- are rising quickly.
• Labour costs are only one type of costs- if other costs are high, they will not be price competitive.

Question 19

Employee costs as a % of revenue

It is an important measure of employee performance for what types of businesses and why?

Answer 19

Businesses that supply services such as health care, where labour costs are a high proportion of total costs.

Question 20

Employee costs in relation to revenue are influenced by what factors?

Answer 20

• The productivity rates of the workforce.
• Wage rates.
• Non-wage employment costs.
• The management capacity.

Question 21

Employee costs in relation to revenue

How is this influenced by the productivity rates of the workforce?

Answer 21

• Higher levels of productivity can lead to increased sales and revenue without greater labour input.
• Equally- production and revenue can be maintained with fewer employees reducing labour costs.

Question 22

Employee costs in relation to revenue

How is this influences by wage rates?

Answer 22

Increase in wages & salaries without corresponding increase in sales and revenue will worsen this indicator & may represent an unwise decision by managers.

Question 23

Employee costs in relation to revenue

How is this influenced by Non-wage employment costs?

Answer 23

Offering generous pension schemes or similar benefits can drive up a business’s employment costs without necessarily increasing revenue.

Question 24

Employee costs in relation to revenue

How is it influenced by the management of capacity?

Answer 24

• If business doesn’t utilise its human resources efficiently - it may be paying employees who are not contributing to sales & revenue.
• Incurring labour costs without compensation of generating revenue will weaken this measure of workforce performance.

Question 25

How do you calculate labour turnover?

Answer 25

Labour turnover = (number of staff leaving during the year)

/ (average number of staff) x100

Question 26

What is labour turnover?

Answer 26

The % of a business’s employees who leave the business over some period of time (normally a year).

Question 27

What is labour retention?

Answer 27

The extent to which a business holds onto its employees.

Question 28

How do you calculate employee retention?

Answer 28

ER = (number of employees employed for one year or more) / (average number of staff) x100

Question 29

What factors cause high levels of labour turnover?

Answer 29

• Low wages.
• Inadequate training.
• Low morale/ motivation.
• Ineffective recruitment leading to unsuitable staff.
• Redundancies.
• Retirement.

Question 30

Why is low labour turnover necessary?

Answer 30

To bring new ideas, skills and expertise into a business - but not so high as to impose excessive recruitment costs.

Question 31

A managers attempt to manage labour turnover will achieve what?

Answer 31

Achieve a balance between bringing in new employees with enthusiasm and ideas into the business against the cost of recruitment.

Question 32

What are the consequences of high rates of labour turnover for businesses?

Answer 32

• Significant recruitment & training costs.
• Unsettling for employees- teams&working groups disrupted.
• Dissatisfied customers (dealing with different employees).
• Time lag.

Question 33

What types of businesses might be less concerned with labour turnover & retention?

What could an example of this be?

Answer 33

• Lower skilled.
• Easier to replace.
• Part time.
• Seasonal.
• Lower wages.
• Low cost of training & recruitment.

Example- supermarkets & theme parks.

Question 34

What types of businesses will wish to have a low labour turnover rate?

Answer 34

A business that employs highly skilled and scarce employees.

Question 35

What does a human resource plan do?

Answer 35

Assesses the current & future capacity of a business’s workforce and sets out the actions necessary to meet the business’s future human resource needs.

Question 36

What is in a Human Resource Plan?

Answer 36

1) Consider the overall/ corporate objectives. HR plan must contribute to this.
2) Take strategic view of employees- consider how HR can be managed to assist in maintaining corporate objectives. May consider factors e.g. technology & how this may complement/ replace human input into production process.
3) Consider size & type of workforce organisation will require over future years.
4) Desired future workforce- compared to available workforce at time of planning.
5) Once comparison = complete, firms can decide upon policies to convert existing workforce into desired workforce.

Question 37

What data might be used for HR decision making

Internal?

Answer 37

• Corporate objectives.
• Unit labour costs.
• Labour productivity.
• Skills.
• Labour turnover.
• Size of workforce.
• Age profile of workforce.

Question 38

What data might be used for HR decision making-

External?

Answer 38

• Unemployment rates.
• Wage rates.
• Employment costs e.g. tax, national insurance.
• Tastes & fashions.
• Sales forecasts.
• Competitor’s actions.
• Prices.
• Forecast migration.