HR Terms

Litigation: the process of taking legal action.

"The company wishes to avoid litigation"
synonyms: legal proceeding(s), legal action, lawsuit, legal dispute, legal case, case, legal
contest, action, cause, judicial proceeding(s), suit, suit at law, legal
process, prosecution, bringing of charges, indictment, trial
"he objected to some passages in the book, but did not resort to litigation"

Balance Sheet Approach

An accounting term that describes a situation where debits and credits
must match. The balance sheet approach is used to set expatriate
compensation. There the goal is to protect or equalize an expatriate's
purchasing power while on assignment abroad. Its primary objective is
to ensure equity among expatriates and their home or base country
peers.

Productivity

Productivity describes various measures of the efficiency of production. A productivity measure is

expressed as the ratio of output to inputs used in a production process, i.e. output per unit of input.

A measure of the efficiency of a person, machine, factory, system, etc., in converting inputs into
useful outputs.
Productivity is computed by dividing average output per period by the total costs incurred or
resources (capital, energy, material, personnel) consumed in that period. Productivity is a critical
determinant of cost efficiency.

Read more: http://www.businessdictionary.com/definition/productivity.html

Revenue, also called sales (or turnover, in the UK), refers to the value of the products and
services a company sells.

HOW IT WORKS (EXAMPLE):

Let's assume grocery store XYZ sold $100,000 worth of food for the year. It would
record these salesas revenue on the very top of its income statement (as shown below).
Operating Profit
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WHAT IT IS:

Operating profit is a measure of income that tells investors how much

of revenue will eventually become profit for a company.

HOW IT WORKS (EXAMPLE):

The formula is for calculating operating profit is:

Operating Profit = Revenue - cost of goods sold, labor, and other day-to-day
expenses incurred in the normal course of business

It is important to understand what expenses are included and excluded when calculating
operating profit. It typically excludes interest expense, nonrecurring items (such
as accounting adjustments, legal judgments, or one-time transactions), and other income
statement items not directly related to a company's core business operations.
To see how operating profit works, consider Company XYZ's income statement:

Using this information and the formula above, we can calculate that Company XYZ's
operating profit is:

Operating Profit = $1,000,000 - $500,000 - $300,000 - $50,000 = $150,000

Operating profit as a percentage of revenue is called operating margin. In this example,

Company XYZ makes $0.15 in operating profit ($150,000 / $1,000,000) for every $1
in sales.

Net Operating Profit After Tax (NOPAT)

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WHAT IT IS:

Net operating profit after tax (NOPAT) is a measure of profit that excludes the costs
and tax benefits of debt financing. Put another way, NOPAT is earnings before interest
and taxes (EBIT) adjusted for the impact of taxes.

HOW IT WORKS (EXAMPLE):

Net operating profit after tax (NOPAT) is also referred to as net operating profit less
adjusted taxes (NOPLAT):

NOPAT = Operating Income x (1- Tax Rate)

To see how NOPAT works, consider Company XYZ's income statement:

Using this information and the formula above, we can calculate that Company XYZ's
NOPAT is:

NOPAT = $150,000 x (1 - 0.36) = $96,000

Analysts often adjust operating income to convert accrual accounting to cash

accounting or willcapitalize some expenses (i.e., removed them from the income
statement and pretend they were recorded on the balance sheet instead).

Cost of capital refers to the opportunity cost of making a

specific investment. It is the rate of return that could have been earned by
putting the same money into a different investment with equal risk. Thus,
the cost of capital is the rate of return required to persuade the investor to
make a given investment.

HOW IT WORKS (EXAMPLE):

Cost of capital is determined by the market and represents the degree of

perceived risk by investors. When given the choice between
two investments of equal risk, investorswill generally choose the one
providing the higher return.

Let's assume Company XYZ is considering whether to renovate its

warehouse systems. The renovation will cost $50 million and is expected to
save $10 million per year over the next 5 years. There is some risk that the
renovation will not save Company XYZ a full $10 million per year.
Alternatively, Company XYZ could use the $50 million to buy equally risky 5-
year bonds in ABC Co., which return 12% per year.
Because the renovation is expected to return 20% per year ($10,000,000 /
$50,000,000), the renovation is a good use of capital, because the 20%
return exceeds the 12% required return XYZ could have gotten by taking the
same risk elsewhere.

The return an investor receives on a company security is the cost of that

security to the company that issued it. A company's overall cost of capital is
a mixture of returns needed to compensate all creditors and stockholders.
This is often called the weighted average cost of capital and refers to the
weighted average costs of the company's debt and equity.

Economic value added (EVA) is an internal management performance measure that

compares net operating profit to total cost of capital. Stern Stewart & Co. is credited with
devising this trademarked concept.

HOW IT WORKS (EXAMPLE):

Economic value added (EVA) is also referred to as economic profit.

The formula for EVA is:

EVA = Net Operating Profit After Tax - (Capital Invested x WACC)

As shown in the formula, there are three components necessary to solve EVA: net
operating profit after tax (NOPAT), invested capital, and the weighted average cost of
capital (WACC) operating profit after taxes (NOPAT) can be calculated, but can usually
be easily found on the corporation's income statement.

The next component, capital invested, is the amount of money used to fund a particular
project. We will also need to calculate the weighted-average cost of capital(WACC) if
the information is not provided.

The idea behind multiplying WACC and capital investment is to assess a charge for
using the invested capital. This charge is the amount that investors as a group need to
make their investment worthwhile.

Let's take a look at an example.

Assume that Company XYZ has the following components to use in the EVA formula:

NOPAT = $3,380,000
Capital Investment = $1,300,000
WACC = .056 or 5.60%

EVA = $3,380,000 - ($1,300,000 x .056) = $3,307,200

The positive number tells us that Company XYZ more than covered its cost of capital. A
negative number indicates that the project did not make enough profit to cover the cost
of doing business.

An intranet is a private network accessible only to an organization's staff. Generally a

wide range of information and services from the organization's internal IT systems are available
that would not be available to the public from the Internet.

An extranet is a controlled private network that allows access to partners, vendors and
suppliers or an authorized set of customers – normally to a subset of the information accessible
from an organization's intranet.

An intranet is a network where employees can create content, communicate,

collaborate, get stuff done, and develop the company culture.

An extranet is like an intranet, but also provides controlled access to authorized

customers, vendors, partners, or others outside the company.

An extranet is a private network that uses Internet technology and the public telecommunication
system to securely share part of a business's information or operations with suppliers, vendors,
partners, customers, or other businesses.

Herzberg’s Two-Factor Theory of

Motivation
In 1959, Frederick Herzberg, a behavioural scientist proposed a two-factor theory or the motivator-
hygiene theory. According to Herzberg, there are some job factors that result in satisfaction while there
are other job factors that prevent dissatisfaction. According to Herzberg, the opposite of “Satisfaction” is
“No satisfaction” and the opposite of “Dissatisfaction” is “No Dissatisfaction”.

a. Hygiene factors- Hygiene factors are those job factors which are essential for existence of
motivation at workplace. These do not lead to positive satisfaction for long-term. But if these
factors are absent / if these factors are non-existant at workplace, then they lead to
dissatisfaction. In other words, hygiene factors are those factors which when
adequate/reasonable in a job, pacify the employees and do not make them dissatisfied. These
factors are extrinsic to work. Hygiene factors are also called as dissatisfiers or maintenance
factors as they are required to avoid dissatisfaction. These factors describe the job
environment/scenario. The hygiene factors symbolized the physiological needs which the
individuals wanted and expected to be fulfilled. Hygiene factors include:

 Pay - The pay or salary structure should be

 appropriate and reasonable. It must be equal and
competitive to those in the same industry in the
same domain.
 Company Policies and administrative policies -
The company policies should not be too rigid.
They should be fair and clear. It should include
flexible working hours, dress code, breaks,
vacation, etc.
 Fringe benefits - The employees should be
offered health care plans (mediclaim), benefits
for the family members, employee help
programmes, etc.
 Physical Working conditions - The working
conditions should be safe, clean and hygienic.
The work equipments should be updated and
well-maintained.
 Status - The employees’ status within the
organization should be familiar and retained.
 Interpersonal relations - The relationship of the
employees with his peers, superiors and
subordinates should be appropriate and
acceptable. There should be no conflict or
humiliation element present.
 Job Security - The organization must provide job
security to the employees.

b. Motivational factors- According to Herzberg, the hygiene factors cannot be regarded as

motivators. The motivational factors yield positive satisfaction. These factors are inherent to work.
These factors motivate the employees for a superior performance. These factors are called
satisfiers. These are factors involved in performing the job. Employees find these factors
intrinsically rewarding. The motivators symbolized the psychological needs that were perceived
as an additional benefit. Motivational factors include:
 Recognition - The employees should be praised and recognized for their
accomplishments by the managers.
 Sense of achievement - The employees must have a sense of achievement. This
depends on the job. There must be a fruit of some sort in the job.
 Growth and promotional opportunities - There must be growth and advancement
opportunities in an organization to motivate the employees to perform well.
 Responsibility - The employees must hold themselves responsible for the work. The
managers should give them ownership of the work. They should minimize control but
retain accountability.
 Meaningfulness of the work - The work itself should be meaningful, interesting and
challenging for the employee to perform and to get motivated.

Limitations of Two-Factor Theory

The two factor theory is not free from limitations:

1. The two-factor theory overlooks situational variables.

 2. Herzberg assumed a correlation between satisfaction and productivity. But the research
conducted by Herzberg stressed upon satisfaction and ignored productivity.
3. The theory’s reliability is uncertain. Analysis has to be made by the raters. The raters may spoil
the findings by analyzing same response in different manner.
4. No comprehensive measure of satisfaction was used. An employee may find his job acceptable
despite the fact that he may hate/object part of his job.
5. The two factor theory is not free from bias as it is based on the natural reaction of employees
when they are enquired the sources of satisfaction and dissatisfaction at work. They will blame
dissatisfaction on the external factors such as salary structure, company policies and peer
relationship. Also, the employees will give credit to themselves for the satisfaction factor at work.
6. The theory ignores blue-collar workers. Despite these limitations, Herzberg’s Two-Factor theory is
acceptable broadly.

Definition: Validity
Validity is the difference between what a selection test actually measures and what it aims to measure. Validity is
defined as 'the agreement between a test score or measure and the quality it is believed to measure' (Kaplan and
Saccuzzo, 2001). The validity of a particular test used for assessment is really important since it has a huge impact
on the results. These tests can be both for selection or appraisal and the continued use of tests - which are not valid
for the organisation - reflects poorly on the talent management of the organisation. Test validity helps the manager
to understand the market that he is looking at that in turn helps him design the employer branding. Test validity also
helps him to objectively quantify the results.
Each test has certain tools that try to predict the performance of a potential employee at the time of selection.
Predictors are information points that an employer gets from a potential employee about himself or herself. These
information points can come in from application forms, online assessment tests, psychometric tests and various other
methods.
These predictors try to verify the criterion measures stated below:
a. Will the core competencies of the potential employee map to the job description?
b. Will he be able to adjust himself to the work culture
c. Job products
d. Job outcomes.
The test validity is the degree to which there predictors will actually be accurate. This process to verify this degree is
known as validation. The process shows a significant statistical relationship between the predictor that the employer
is using and the criterion measure the employer wants to use as yard stick. It is important to note here that criterion
measures for job success have different meanings for different employer and it is really important that these are in
sync with the talent management philosophy of the organisation.

Types of Validation:
a. Criterion Related Validity
A significant relationship should exist between the information at hand and some measure of work behaviour or
performance. For example there can be significant statistical relationship between one year of educational gap and
the turnover rate.

b. Construct Validity
A construct is a psychological trait such as - leadership, resilience, intelligence, verbal ability etc. Here in, instead of
using information points that are provided by the potential employee the tests somehow aims to assess the
constructs. They are a part of the job description and specification. For example there can be significant statistical
relationship between the ability to solve a comprehension passage and the ability to understand a set of instructions
at work.

c. Content Validity
A test will have content validity if it actually tests certain skills that form a significant part of the job. For example -
there can be a preliminary excel test for a receptionist or clerk.

Validity of Selection Method

If selection methods are invalid, employee selection decisions are no more accurate than
decisions based on a toss of a coin. Validity is the degree to which a measure accurately
predicts job performance. Selection methods are valid to the extent that predictors measure
or are significantly related to work behavior, job products, or outcomes. The process of
demonstrating that a predictor is significantly related to a measure of work behavior, job
products, or outcomes is validation.

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The validation process demonstrates that a significant statistical relationship exists between
a predictor and a criterion measure of successful performance on a job. A predictor is any
piece of information that can be used to screen applicants. Predictors include information
from application blanks (education level, experience, and so on) and reference checks;
scores on tests of skill, ability, or aptitude; data from interest and personality inventories; and
interviewer ratings of an applicant. Criterion measures are any measures of work behavior,
job products, or outcomes that have value to an employer. Job success is an abstract
concept that means different things to different employers.

Major Types of Validation

There are three major types of validation used to validate predictors. They are (1) criterion-
related validity; (2) construct validity; and (3) content validity.

Criterion-related validity. A predictor has criterion-related validity if a statistically significant

relationship can be demonstrated between the predictor and some measure of work behavior
or performance. Examples of performance measures are production rates, error rates,
tardiness, absences, length of service, and supervisor's ratings. Suppose a department store
uses as a predictor for its sales personnel one year of sales experience. To validate this
predictor, the employer would have to demonstrate that a statistically significant relationship
exists between one year of sales experience and some measure or measures of work
behavior or job products, perhaps number of sales and/or low percentage of errors in ringing
up purchases.

Construct validity. Instead of directly testing or using other information to predict job success,
some selection methods seek to measure the degree to which an applicant possesses
psychological traits called constructs. Constructs include intelligence, leadership ability,
verbal ability, mechanical ability, manual dexterity, etc.

Constructs deemed necessary for successful performance of jobs are inferred from job
behaviors and activities as summarized in job descriptions. They are the job specifications
part of job descriptions. Construct validity requires demonstrating that a statistically
significant relationship exists between a selection procedure or test and the job construct it
seeks to measure. For example, does a reading comprehension test reliably measure how
well people can read and understand what they read?

Content validity. A selection procedure has content validity if it representatively samples

significant parts of a job, such as a filing test for a file clerk or a test of cash register operation
for a grocery checker. Selection tests that approximate significant aspects of a job are called
job sample tests. Job sample tests require applicants to perform certain aspects of a job's
major activities, thus demonstrating competence at tasks which are an actual and important
part of the job. Significant aspects of a job are determined through job analysis and set forth
in job descriptions of jobs. Job sample tests should approximate aspects of the job as closely
as possible, since this increases content validity.