Achieving 26% (and up to 43%) increase in your firm's returns to shareholders

Update 2011 !!!

This article was originally written based on Watson Wyatt research which suggested a 26% gain.  ACAS, the Arbitration and Conciliation Service, has since completed its own research suggesting up to 43% gain.

Intuitively we all know that if we treat people well and manage them effectively, they are likely to reward us with improved productivity. Yet, until recent research, no one really knew just how much added productivity might be available. This short article quantifies the productivity increase and hence the improved profits that each aspect of HR practice brings when it is done right.

The Research

This increase is real and tangible. The proof of this comes from research conducted by Watson Wyatt, a major management consulting firm, and CIPD¹, the representative institution for all HR professionals.

Watson Wyatt conducted a pan- European survey in 2000² during which they developed the Human Capital Index (HCI) as a way of measuring the impact of HR practices on shareholder value. The research clearly showed that 19 key HR practices were associated with a 26% increase in result. The 19 factors were grouped into five dimensions. The impact of each is shown quantitatively in the diagram below.

The HCI study was conducted again two years ago, comparing original data for each organisation with the current situation. This showed even more staggering results. Again the report concluded that positive HR practices have significant impact on the economic results of the organisation. Those with highest HCI scores achieved 64% better returns for shareholders over five years, and mid range HCI scores yielded 39% improvement³.

Interpreting the results

In simple terms the message is this: get HR management right in your firm and you will grow your bottom line. And if you work for a not-for- profit organisation, you’ll be able to do more with the same resources.
Looking at the detail shows the following:

• Getting the right people in place (including the right balance of staff and contractors), using knowledge workers⁴ and sustaining good employee relations contributes 7.1%;
• Avoiding hierarchical structures, providing clear leadership, effecting teamwork and having effective appraisal contributes 4.7%;
• Putting in place the right pay and benefits but expanding this to include stock and incentives adds 3.7%;
• Placing management focus on the employee, sharing business information, reacting to employee feedback and getting employees to manage their own development adds 3.2%;
• And on the negative side, keeping people you should have long since let go and fostering a cosy job security subtracts 7.5%.

All of the above are about a firm’s human resource management practice. The total adds to 26% of net benefit to a firm compared to the same state in one that did not engage with the idea of getting HR right.

Using the results
One of the first actions any firm should take is an HR audit. The firm’s management needs to know where it is now and how much improvement there might be if things change. Then the firm needs a strategy to develop its HR practices over a period to achieve what might be referred to as ‘HR excellence’.

But that might be too big a step for now. Why not make a start by utilising the TimelessTime SUPPORT service. Simply call 07554 420419 or email TimelessTime now to get your complimentary people management audit and detailed report.

¹ CIPD – Chartered Institute of Personnel and Development
² Waton Wyatt (2000) The Human Capital Index: European Survey report 2000
³ Watson Wyatt (2009) Ideas and Research; http://www.watsonwyatt.com/research/resrender.asp?id=w-488&page=3 (accessed 4 November 2009)
⁴ A knowledge worker is someone who uses knowledge to improve their productivity rather than just doing what they had been taught to do. This implies personal and proactive learning. One definition that expresses this well is “someone who applies his or her intellectual capacities to the acquisition, processing, management, and communication of knowledge in their job”