Best HR practices linked to financial success

Report identifies practices that pay off

A new study shows that there is a cause and effect relationship between human capital management and financial performance.

That doesn’t necessarily mean that effective HR practices drive positive financial results. But there is a correlation between superior human resources practices and improved financial outcomes.

Watson Wyatt’s Human Capital Index report surveyed human resources practices as 750 North American and European companies. All the companies had a track record of at least three years of total return to shareholders (TRS), 1,000 or more employees, and a minimum of $100 million in revenues and market value.

The survey data was matched to objective financial measures of each company’s worth. On the basis of that analysis, each company was given a Human Capital Index score between 0 and 100 (the highest).

The bottom line is that companies with the best HR practices provided a 64 per cent TRS over a five-year period. That’s more than three times the 21 per cent TRS for companies with the weakest HR practices.

So what are these “best HR practices”? The study identified 43 specific HR practices that play the greatest role in creating shareholder value. Those 43 practices are divided into five key areas, identified below. The research quantifies exactly how much improvement in the company’s market value can be expected from significant upgrading in each area.

•Total rewards and accountability – 16.5%

•Collegial, flexible workplace – 9.0%

•Recruiting and retention excellence – 7.9%

•Communications integrity – 7.1%

•Focused HR service technologies – 6.5%

The HCI study also identified some HR practices that are associated with a decrease in financial performance:

•360-degree review;

•developmental training; and

•implementing HR technologies with “softer” goals, such as culture change.

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