It pays to treat employees well
STOCK PERFORMANCE SURVEY Direct correlation between HR practices and share price
When times are tough, companies tend to base human resources practices on mundane needs, rather than bottom-line accounting. But a new survey by Watson Wyatt consulting firm suggests firms looking to turn around an anemic stock performance might want to keep an eye on how they deal with their human capital.
Since 1998 when it began the Human Capital Index Report, Watson Wyatt has compiled detailed information on the HR practices and three- year stock performances of more than 2,000 organizations around the world.
The trends show a clear relationship between HR practices and firm performance, says Graham Dodd, an author of the report.
“The bottom line is companies with superior human [resource] practices create substantially more shareholder value than companies with average human [resource] practices,” the report notes.
The term “human resources practices” is an admittedly nebulous concept, Mr. Dodd acknowledges. But the correlation is nonetheless clear: HR policies can fundamentally impact a company’s bottom line.
Turnover, for example, can be a key indicator of a company’s fiscal health. In any industry, a certain amount of turnover is expected.
Obviously, it’s not good to have a revolving door, nor is it desirable to have a workforce that never changes. But what is healthy?
According to the report, in the past three years, shares of companies with moderate (15%) turnover rates tended to outperform those of companies with extremely high (43%) or extremely low ( 2%) turnover.
The time it takes to fill positions also appears to play a role. Firms that fill positions quickly (about two weeks) typically outperform those that take longer ( more than seven weeks) to satisfy staffing needs, by as much as 48%.
“Companies that fill vacancies more quickly reduce the period of disruption and lost productivity associated with turnover,” the report says.
And it’s not just about how long it takes to fill positions — where the new hires come from matters equally, the report suggests.
Promoting from within is considered good for morale, and helps retain talented employees, but the best firms recognize some positions have to be filled externally. The only question is, how many?
“Firms that adopt a balanced approach, filling roughly half their positions internally, had a threeyear total return to shareholders of 56%,” the report says. By way of contrast, firms that filled only 10% of positions internally tended to see their three- year return actually decrease by 2%, even in today’s bull run.
On the other side of the coin, those that filled more than 80% of positions internally had an average three-year return of 32%. As was the case with turnover, Mr. Dodd says, a balance was the way to go.
The report also found that a corporation’s knee- jerk instinct to slash benefits when times get tough may be counterproductive. According to the report, organizations that target their benefits higher than the industry standard enjoyed average returns 12 percentage points above their competitors.
“ For most organizations, salary and benefits are the single biggest cost,” Mr. Dodd says. “So make sure that you’re spending it appropriately.”
If companies can resist the urge to arbitrarily slash benefits during lean periods and instead merely reshuffle them, they may weather the storm, he suggests.
“ Make sure whatever you’re doing in compensation is valued by employees. You may actually be able to decrease the overall spending but actually increase the perceived value to employees just by structuring it differently — including things you didn’t have before but leaving out things that just aren’t valued by employees.”
All in all, Mr. Dodd says, the numbers show a clear trend: What the company does at the human resources level has a much greater impact on its bottom line than what is generally believed.
That’s not to suggest companies should start pouring money into HR. Ironically, the survey notes that firms that keep their HR staffing levels low outperformed more bureaucratic organizations, nearly two to one.
“It’s not a straight line correlation saying ‘ do this, and your stock will go up,’ ” he says.
“ It simply suggests that companies might want to look at high performers, and value what they value.”