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It's the People, Stupid

New data supports old contention: Human-capital improvements can boost financial performance.
David M. Katz, CFO Magazine
January 1, 2002

It's a line employees and union leaders have touted for years: Happy employees make for more profitable companies. Now there seems to be more data to back it up.

Watson Wyatt Worldwide, the benefits consulting firm, says it has evidence to support the idea that improvements in human-capital practices (in which it includes both compensation and traditional human-resources concerns such as employee recruiting and retention) can boost a company's financial performance. What's more, after comparing the human-capital practices and financial results of 51 companies for 1999 and 2001, the consultants claim that the practices are a leading, rather than a lagging, indicator of financial performance.

If a company makes a "significant improvement" in 16 pay and benefits practices, for instance, its market value should jump 16.5 percent, according to the study. Practices yielding the biggest gains included linking pay to performance and using the lure of stellar health benefits as a recruiting tool.

Brian Becker, a professor at the State University of New York at Buffalo's School of Management, says the Wyatt findings confirm similar discoveries he and colleague Mark Huselid of Rutgers University made in the 1990s. In five surveys that polled a total of 3,000 companies between 1992 and 1997, the research team found that significant jumps in an index of human-capital improvements tend to lift shareholder value 20 percent.

Such findings may cause finance executives to pause before they opt for cutbacks in the current downturn. "If human-capital practices drive financial results, then it behooves you to make the investment even in a down market," argues Bruce Pfau, a Watson Wyatt consultant and author of the study. And rash reductions in benefits packages or pay-for performance incentives made in response to the recession may have unintended financial consequences, says Becker.

Missing Links

Human-capital and shareholder-value links

Practice

Market-value impact (%)

Total rewards16.5
Flexible workplace9.0
Recruiting, retention7.9
Communications integrity7.1

Source: Watson Wyatt Worldwide




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