Most employers know high turnover rates don’t lead to healthy shareholder returns, but how many are aware single-digit turnover rates can lead to worse business results?
A Watson Wyatt Human Capital Index study, which tracks the correlation between HR practices and total shareholder returns, has produced some surprising results. Among them is the finding that firms with a five-per-cent turnover rate actually obtain lower shareholder returns than firms with a 43-per-cent turnover. Both fare worse than firms with a turnover rate of 15 per cent.
Graham Dodd, national practice director of the Watson Wyatt consultancy house, said in a series of six surveys conducted since 1999, the same results keep showing up, “although we’ve found that in different economic times, different factors become more important.”
For example, during the heady days of the dot-com boom, investment in training actually resulted in negative returns. Employees simply took their learning to the next employer instead of applying it where it was learned.
By contrast, the 2005 edition of the survey shows that organizations that haven’t cut their training investment since 2000 see on average a 54-per-cent total return to shareholders (TRS) over a three-year period. Those that have cut training dollars have seen only a 10-per-cent TRS over three years.
The study also shows a strong link between good recruiting practices and positive results on the bottom line. Organizations that fill positions in two weeks outperformed those that take seven weeks by 48 percentage points.
Organizations with a balanced approach to hiring — a 50-50 mix of internal hires and outside hires — also had a three-year TRS of 56 per cent. In contrast, those that fill 80 per cent of positions or more with internal hires had only a 32-per-cent TRS over three years, and those with the least amount of internal hiring (12 per cent) had the lowest returns at negative two per cent.
Employers that hire 38 per cent of all new employees through employee referrals had a three-year TRS of 48 per cent; employers that hire less than 10 per cent through employee referrals had a three-year TRS of 23 per cent.
The study also shows variable pay results in positive returns, but only when employers make a strong distinction between high performers and low performers. The study looks at the pay differentials: firms that pay top performers 2.1 times more than low performers ended up with a negative-two TRS over three years. Firms paying 4.7 times more reaped a 47 per-cent three-year TRS.
“One of the potential criticisms is, which way does it work? Do high performing companies have money and resources to spend on HR practices, or do good HR practices lead to high-performing companies?” said Dodd.
“Because we’ve been doing these studies fairly consistently, we can show that there’s a much higher degree of correlation between good HR practices leading to high financial performance, than there is between high performing companies having strong HR practices.”
The study also found firms using 360-degree feedback had poorer shareholder returns.
When it comes to the correlation between negative returns and the use of 360-degree feedback, Dodd said one possible reason is the system requires a lot of resources and time in order to do right.
“The other, more important reason is 360-degree feedback really only works when you already have a trusting culture. We’ve seen in a quite a few organizations that 360 is put in as a fix to broader management issues,” said Dodd.
“And our work has shown that 360 is much more effective in the developmental side than in the performance side.” If the feedback is used to manage people’s performance, employees will only give feedback that they know will result in a favourable assessment of their co-workers.
If an employer says, on the other hand, that the feedback is collected to understand an individual’s training needs, said Dodd, people will feel more at ease in providing a true, frank opinion of the individuals they’re asked to rate.
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