Leveraging HR to Boost the Bottom Line
Companies that are good at leveraging their human capital have a significant financial advantage in today's marketplace, suggests a new study from consulting firm Watson Wyatt Worldwide.
The Human Capital Index (HCI) study measured the relationship between specific people-management strategies and total returns for shareholders. It looked at hundreds of companies in the U.S., Canada and Europe with at least three years of shareholder returns and $100 million in market value. In essence, it found that companies with high HCI scores enjoyed much higher returns on shareholder investment than those with low HCI scores.
The study also tried to answer the chicken-or-egg question that has long haunted HR: do good HR practices lead to good shareholder returns, or does a higher market value simply cause companies to invest more in HR practices? By studying the correlations over time, Watson Wyatt found evidence that excellent HR practices do more to enhance financial performance than vice versa.
The HCI study looked at HR practices that Watson Wyatt has identified as playing the greatest role in increasing shareholder value. According to IOMA's Pay for Performance Report, they were divided into six categories: total rewards and accountability; collegial, flexible workplace; recruiting and retention excellence; communications integrity; focused HR service technologies; and prudent use of resources.
HR practices in the "total rewards and accountability" category seem to have the biggest impact on the bottom line. Companies that significantly improve in this area tend to see their market value grow by 16.5%. The most influential practices in this category include "health benefits are important for recruiting and retention" (accounting for a 2.8% increase in shareholder value), "high percentage of company stock owned by employees" (1.3%), and "defined contribution and defined benefit plans, combined, important for recruiting and retention" (1.3%). When added up, the various practices that link compensation to employee performance are associated with a 6.3% increase.
"Establishing a collegial and flexible workplace" is the category with the second largest impact on market value, at 9%. It includes practices such as establishing flexible work arrangements, engendering employee satisfaction and trust in leadership, and having managers who demonstrate organizational values.
Among other primary categories, "recruiting and retention excellence" is associated with a 7.9% increase in market value, "communications integrity" with 7.1%, and "focused HR service technologies" with 6.5%.
Some uses of HR service technologies are, however, associated with a negative impact on market value. HRfocus magazine reports, "The respondents who said their key goals for implementing HR technology included enhancing employee communication and promoting corporate culture reported an average dip in market value of 7.7% and 6.6%, respectively." The study suggests that technology that's implemented without the benefit of relatively clear and quantifiable HR goals (such as improved accuracy, service and cost-effectiveness) will not pay off for shareholders. Among the other practices that don't tend to add market value are 360-degree performance reviews and training that is geared toward career advancement rather than employees' current jobs.
The Watson Wyatt is one of a number of studies establishing links between HR practices and financial performance. Such studies can be seen as part of a larger trend: the development of metrics that help HR practitioners recognize which strategies enable their companies to get the best return out of their investments in human capital.
For more on the HCI study, including ordering information, go to
http://www.i4cp.com/UZGYq0
The articles read in the composition of this TrendWatcher include the following:
Britt, Julie. "Focused HR Technology Can Add Value." HR Magazine, March 2002, p. 24.
Brown, David. "Profit Driven by Good HR, Study Finds." Canadian HR Reporter, November 19, 2001, p. 3.
"HR and Corporate Financial Performance Truly Are Related." HRfocus, March 2002, p. 8.
Southwell, Mary. "Data Reveals HR Link with Performance." Irish Times, April 5, 2002, p. 55.
Terez, Tom. "Build a Case for HR's Bottom-Line Impact." Workforce, March 2002, pp. 22-24.
"Which HR/Comp. Practices Have the Biggest Impact on the Bottomline?" IOMA's Pay for Performance Report, April 2002.
The Human Capital Index (HCI) study measured the relationship between specific people-management strategies and total returns for shareholders. It looked at hundreds of companies in the U.S., Canada and Europe with at least three years of shareholder returns and $100 million in market value. In essence, it found that companies with high HCI scores enjoyed much higher returns on shareholder investment than those with low HCI scores.
The study also tried to answer the chicken-or-egg question that has long haunted HR: do good HR practices lead to good shareholder returns, or does a higher market value simply cause companies to invest more in HR practices? By studying the correlations over time, Watson Wyatt found evidence that excellent HR practices do more to enhance financial performance than vice versa.
The HCI study looked at HR practices that Watson Wyatt has identified as playing the greatest role in increasing shareholder value. According to IOMA's Pay for Performance Report, they were divided into six categories: total rewards and accountability; collegial, flexible workplace; recruiting and retention excellence; communications integrity; focused HR service technologies; and prudent use of resources.
HR practices in the "total rewards and accountability" category seem to have the biggest impact on the bottom line. Companies that significantly improve in this area tend to see their market value grow by 16.5%. The most influential practices in this category include "health benefits are important for recruiting and retention" (accounting for a 2.8% increase in shareholder value), "high percentage of company stock owned by employees" (1.3%), and "defined contribution and defined benefit plans, combined, important for recruiting and retention" (1.3%). When added up, the various practices that link compensation to employee performance are associated with a 6.3% increase.
"Establishing a collegial and flexible workplace" is the category with the second largest impact on market value, at 9%. It includes practices such as establishing flexible work arrangements, engendering employee satisfaction and trust in leadership, and having managers who demonstrate organizational values.
Among other primary categories, "recruiting and retention excellence" is associated with a 7.9% increase in market value, "communications integrity" with 7.1%, and "focused HR service technologies" with 6.5%.
Some uses of HR service technologies are, however, associated with a negative impact on market value. HRfocus magazine reports, "The respondents who said their key goals for implementing HR technology included enhancing employee communication and promoting corporate culture reported an average dip in market value of 7.7% and 6.6%, respectively." The study suggests that technology that's implemented without the benefit of relatively clear and quantifiable HR goals (such as improved accuracy, service and cost-effectiveness) will not pay off for shareholders. Among the other practices that don't tend to add market value are 360-degree performance reviews and training that is geared toward career advancement rather than employees' current jobs.
The Watson Wyatt is one of a number of studies establishing links between HR practices and financial performance. Such studies can be seen as part of a larger trend: the development of metrics that help HR practitioners recognize which strategies enable their companies to get the best return out of their investments in human capital.
For more on the HCI study, including ordering information, go to
http://www.i4cp.com/UZGYq0
The articles read in the composition of this TrendWatcher include the following:
Britt, Julie. "Focused HR Technology Can Add Value." HR Magazine, March 2002, p. 24.
Brown, David. "Profit Driven by Good HR, Study Finds." Canadian HR Reporter, November 19, 2001, p. 3.
"HR and Corporate Financial Performance Truly Are Related." HRfocus, March 2002, p. 8.
Southwell, Mary. "Data Reveals HR Link with Performance." Irish Times, April 5, 2002, p. 55.
Terez, Tom. "Build a Case for HR's Bottom-Line Impact." Workforce, March 2002, pp. 22-24.
"Which HR/Comp. Practices Have the Biggest Impact on the Bottomline?" IOMA's Pay for Performance Report, April 2002.