The Value of HRThis presentation provides

summary results from key HR research done over the past fifteen

years.

Compiled by Darin Phillips

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Shareholder ReturnsThe five highest return to shareholders from

1972-1992 (Southwest Airlines Co. 21,775%, Wal-Mart Stores, Inc. 19,897%, Tyson Foods, Inc. 18,118%, Circuit City Stores, Inc. 16,410%, and Plenum Publishing 15,689%) differentiated themselves from their competitors and the market only through the way they managed their people.

– Pfeffer (1994). Competitive Advantage Through People, 1994.

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Three HR GenerationsFunctional HR departments (transaction, administration, and

compliance cost centers who view employees as an overhead cost to be minimized) add value by preventing loss through policy enforcement

Second-generation HR processes add value by removing barriers to performance (elements of strategic HR in a function that views employees as a leverageable asset)

Third-generation (strategic) HR systems (investment and ROI centers who align and improve strategically-focused employee performance) have integrated all best practices aligning them as a strategic system.

High performance work systems include ‘rigorous recruitment and selection procedures, performance-contingent incentive compensation systems, and management development and training activities linked to the needs of the business’ (‘which in turn, drive profits, growth, and ultimately market value’).

– Becker, B., Huselid, M., Pickus, P. & Spratt, M. (1997). HR as a Source of Shareholder Value: Research and Recommendations. Human Resource Management, Spring 1997, Vol. 36, No. 1, pp. 39-47. ( - Becker, B., Huselid, M. & Ulrich, D. (2001). Making HR a Strategic Asset. Working paper. State University of New York at Buffalo.)

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What is 3rd Generation HR worth?Initial research on 740 companies’ HR practices found that those

with the most integrated high performance work systems (HPWS) had economically and statistically significantly higher levels of company performance. One standard deviation of improvement on their bell curve of integrated HPWS was associated with changes in market value from $15,000 to $60,000 per employee. Employee productivity was calculated as the logarithm of net sales per employee using gross rate of return on assets (GRATE), which is less sensitive to depreciation and other non-cash transactions, and Tobin’s q, a future-oriented and risk-adjusted capital-market measure of performance that reflects both current and anticipated profitability and often mirrors the price that the market will pay for intangible assets (goodwill).

– Huselid, M. and Becker, B. (1995). High Performance Work Systems and Organizational Performance. Paper presented at the 1995 Academy of Management annual conference, Vancouver, B.C.

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3rd Generation: Follow-up Research…Further research that included three US surveys and the

experience of more than 2,400 companies continued to show significant impact of systems that select, maintain, develop, and reinforce employee performance on both market-based and accounting-based measures of company performance (while statistically controlling for R&D investment, industry market changes, capital improvements, sales growth trends, etc.). Moving from the 60th percentile of integrated HPWS to the 80th percentile improved market valuation by $20,000 per employee. This reflects both operational excellence and alignment with the company’s strategy. When the elements are present, but not aligned with the company strategy there is a 27% drop off in measured gains.

– Huselid, M. and Becker, B. (1998). High Performance Work Systems, Intellectual Capital, and The Creation of Shareholder Wealth. Working paper. School of Management and Labor Relations, Rutgers University.

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What is included in an HR HPWS?A value-added HR function develops supporting policies, practices, and/or

strategies that include:o A business strategy that relies on people as a source of competitive

advantage and a management culture that embraces that beliefo Strong CEO and line manager supporto Understanding and integration of required leadership competencies in all HR

systems• Employee development

o Success profileso Assessmento Training o Developmental assignmentso Coaching

• Targeted selection• Performance management• Pay-for-performance relationship• Branding as an employer of choice

– Becker, B., Huselid, M., Brockbank, W., Losey, M., Rucci, T & Ulrich, D. (1999). Human Resource Management, Winter 1999, Vol. 38, No. 4.

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What is included in an HR HPWS?o Operational excellence, a focus on client services for individual employees

and managers, and delivery of these services at the lowest possible costo Self-service administration

• Benefits • Staff requisitions and job posting• Onboarding new employees • Self-paced training• Developmental tips and tools

o HR managers that understand the human capital implications of business problems and can access or modify the HR system to solve those problemso Identify, secure and leverage resources

• Assess and develop for potential• Build, buy, borrow, bind or release• Succession planning

o Change managemento Team developmento Improved communication and decision-making systems

– Becker, B., Huselid, M., Brockbank, W., Losey, M., Rucci, T & Ulrich, D. (1999). Human Resource Management, Winter 1999, Vol. 38, No. 4.

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Employee Development = RetentionA study of 474 university graduates in eight organizations

found that, of seven work-related experiences measured, the quality of the graduates career development was strongly related to later organizational commitment and intention to leave.

- Arnold, J. and Davey, K. (1999). Graduates work experiences as predictors of organizational commitment, intention to leave, and turnover: Which experiences really matter? Applied Psychology: An international review, 48, pp211-238.

A study of 257 MBA graduates found that encouraging continued development of knowledge and skills was related to job satisfaction, organizational commitment, and intention to leave.

- Irving, P. and Meyer, J. (1994). Re-examination of the Met-Expectations Hypothesis: A longitudinal analysis. Journal of Applied Psychology, 79, pp 937-949.

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The Power of ProfilesASTD and SHRM studied companies that are renowned for their

ability to attract and retain top talent (Dow Chemical, Edward Jones, Great Plains, Sears, and Southwest Airlines). One key finding was that all of these companies implemented competency-based position profiles so that employees understood the skills and abilities required to move into other roles, including leadership positions.

- American Society for Training and Development and Society for Human Resource Management (1999). Recruiting and Retaining Employees: Using training and education in the war for talent. Alexandria, VA: ASTD.

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Employees Need Direction

1. Do I know what is expected of me?

2. Do I have the materials and equipment I need to do my work right?

3. Do I have the opportunity to do what I do best every day?

4. In the last seven days, have I received recognition or praise for doing good work?

5. Does my supervisor, or someone at work, seem to care about me as a person?

6. Is there someone at work who encourages my development?

7. At work, do my opinions seem to count?

8. Does the mission of my company make me feel my job is important?

9. Are my co-workers committed to doing quality work?

10. Do I have a best friend at work?

11. In the last six months, has someone talked to me about my progress?

12. This last year, have I had opportunities at work to learn and grow?

Copyright © 1999 The Gallup Organization. All rights reserved.http://gmj.gallup.com/press_room/release.asp?i=114

Gallup Management Journal reported the following in 2001 based on the survey below:

• 19% of all employees are actively disengaged from their jobs• 55% of all employees are not engaged in their jobs• 26% of all employees are engaged in their jobsAt a cost of $292-355 Billion per year to the US economy.

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HR Adds Shareholder Value in Europe• Great people management equals great shareholder value: European

companies with the best human capital management deliver around twice as much shareholder value as their average competitors.

• Great people management practices persist: The key practices associated with higher value continue to show up in bull, bear and flat markets, with the emphasis evolving over time. And so do the HR practices which are linked with a loss of value.

• Great people management travels well: Excellent HR practice is similar across the world, with some interesting local variations.

• Great HR builds great people management: The effectiveness of the HR function itself is a key factor – to drive value from your human capital you need great practices and a highly efficient HR function which is closely aligned with the business's needs.

http://www.watsonwyatt.com/research/resrender.asp?id=hci2002&page=1

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HR Adds Shareholder Value in EuropeWatson Wyatt’s 2002 European Human Capital Index study shows that 36 key human

capital variables (practices and policies) are associated with an almost 90% increase in value. These are grouped into six globally consistent dimensions, each contributing to the total as shown in the chart below.

http://www.watsonwyatt.com/research/resrender.asp?id=hci2002&page=1

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Benefits of e-HR Systems• In the early stages of e-HR just a few years ago, the vision was simple:

implement as many e-HR applications and make them available to as many employees as possible, using multiple channels such as e-mail, voicemail, IVR, VRS, the company intranet, the public Internet and HR service centers. The assumption was that the faster an organization moved its traditional HR services into an e-HR environment, the more efficient HR would become and the more satisfied employees would be with HR services.

• Watson Wyatt’s 2002 research shows that getting results has more to do with a properly focused e-HR strategy implemented with excellence than with the speed or extent of an organization’s e-HR progression. Those with a formal e-HR strategy spent .5% of revenue on HR and had 94.8 employees per HR person vs. .69% and 87.9 employees.

http://www.watsonwyatt.com/research/resrender.asp?id=W-524&page=1

These organizations are already maximizing the impact and returns of the limited e-HR investments they have made to date. It is possible that as they make new investments in e-HR, their HR performance may decline until the return on those investments is realized.

These organizations have made limited investments in e-HR, and are not operating efficiently relative to their peers.

These are the organizations that have properly focused e-HR investments as they moved quickly along the e-HR progression scale over the past few years. They have implemented their e-HR initiatives with excellence, and have the opportunity to continue to be early adopters and maintain competitive advantage over their peers.

These primarily large organizations have made significant investments in e-HR initiatives, and have yet to realize the full performance payoffs.

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Benefits of e-HR in Europe• According to Watson Wyatt’s 2002 research most European companies are planning to substantially

enhance their B2E/e-HR capabilities in the next two years. (B2E=Business to Employee)

• The shift is away from simply publishing information on an intranet to more personalized and interactive capabilities.

• Where technology has been adopted, the web is the primary vehicle for delivery of HR services with telephone technology not being prevalent. This is in contrast to the US, where telephone technology is widely used.

• However, simply offering technology to employees may not be enough to engage them in using it. This has been demonstrated with a number of companies reporting low usage.

• The key drivers for investment in B2E/e-HR are organizations recognizing the business benefits and responding to employee expectations.

• Continental European companies tend to focus on ‘softer’ reasons for investing, despite US companies reporting that ‘soft’ drivers simply do not deliver. UK companies invest to achieve ‘hard’ measures.

• Developing a convincing business case seems to be the biggest barrier for B2E/e-HR programs with companies indicating that they are unsure how to value the benefits of B2E/e-HR.

• Most e-HR applications are limited to HRIS systems:

http://www.watsonwyatt.com/research/resrender.asp?id=2000861&page=1

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Benefits of e-HR in EuropeWatson Wyatt asked why are you using e-HR? And how does it benefit your company?

And what barriers do you face in implementing?And are you achieving your e-HR goals?

http://www.watsonwyatt.com/research/resrender.asp?id=2000861&page=1

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People Management = Higher Returns• In addition to supporting Becker and Huselid’s 1998 results, the 2001 Watson Wyatt Human

Capital Index study showed precisely which HR practices have an impact on the bottom line. 49 specific HR practices across 6 dimensions played the greatest role in creating shareholder value. The research quantified exactly how much an improvement in each practice could be expected to increase a company’s market value. For example, a company that makes a significant improvement (one standard deviation) in all of the practices categorized under “Total Rewards and Accountability” should see its value improve by 16.5 percent (see below), and a significant improvement in 43 key HR practices is associated with an increase of 47 percent in market value. Additionally, one dimension, "Prudent Use of Resources" identifies six practices that diminish shareholder value (e.g. training that is not connected to the business objectives and not evaluated for ROI).

– 16.5% impact on company market value from total rewards and accountability– 9% impact from a collegial, flexible workplace– 7.9% impact from recruiting and retention excellence– 7.1% impact from the integrity of communications– 6.5% impact from the implementation of focused HR service technologies– 33.9% loss from non-prudent use of resources

• Careful inspection of all the data shows that for every available correlation calculated over time, the relationship between past HR practices and future financial performance is stronger than the relationship between past financial outcomes and future HR practices. This is the first study to show that HR practices actually increase financial performance (.41 correlation) instead of inferring that companies that make more money can afford better HR practices (.19 correlation).

http://www.watsonwyatt.com/research/resrender.asp?id=W-488&page=1

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Critical Competencies Produce Results• The 1998 Watson Wyatt study, Competencies and the Competitive Edge, consists of

survey responses from 1,020 organizations in North America and in-depth case studies of 17 companies. The most critical employee competencies by industry:

http://www.watsonwyatt.com/research/resrender.asp?id=W-488&page=1 http://www.watsonwyatt.com/research/resrender.asp?id=W-99&page=1

• Development of the critical competencies was positively correlated to the quality of developmental solutions and the employee’s motivation. Succession planning, promotional opportunities, mentoring programs, on-the-job learning and career workshops all seem to be significant factors in the individual’s performance and contribution level.

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Critical Competencies Produce Results• The 1998 Watson Wyatt study, Competencies and the Competitive Edge, showed that when an organization

identifies and communicates the core competencies that it needs to be successful in the present and the future, it has developed a powerful tool to help meet its goals. Competencies define and communicate an organization’s strategy and help employees to understand that strategy and achieve its goals. The many roles that competencies can play in an organization include:

– Articulating what the organization values – Providing a common language for employees and managers to describe value creation – Establishing a new paradigm for human resource programs (organizational levers) – Focusing on the development of the individual instead of an organizational structure – Linking pay, promotions and growth directly to what the organization values to be successful – Guiding employees and managers to what is expected and how value is defined even in times of dramatic change and

restructuring

• Competencies serve as a powerful communication vehicle to focus all members of the organization on the skills and activities that will create both value and wealth.

• Competency-based programs can make a difference to the bottom line. Analysis of the financial data clearly shows that companies with competency- based programs perform better in the marketplace. Such programs help focus the organization and all the individuals in it on what they can do to add value to the organization.

• Contributions are role-related rather than position-related. Adopting this view of contribution to value will help organizations think differently about their human resource and development programs. Organizations can focus on competencies needed for the future and identify the roles that employees do and must play.

• Programs that build employee commitment can bring great returns. Data from this and other Watson Wyatt studies clearly demonstrate that both individual and organizational performance increase when employees are committed to their companies. Ensuring that organizational levers that build employee commitment are in place and working will affect the bottom line.

• Training is important, but it is no substitute for good management. A large majority of the organizations participating in this study identified training and development as the driver of future corporate success. The high-performing companies identified it slightly more often than the others.

http://www.watsonwyatt.com/research/resrender.asp?id=W-488&page=1 http://www.watsonwyatt.com/research/resrender.asp?id=W-99&page=1

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Market Capitalization of TalentWhereas at the start of the 1990s a company's stock market

valuation was invariably gauged by studying its earnings and fixed assets and adding a token amount for goodwill, by the end of the decade a seismic shift had taken place.

When accountants Ernst & Young came to look at the issue, they found that the largest slice of most companies' market capitalization was held in intangibles - primarily, the talent, knowledge and teamwork of its staff. In high-tech companies like Nokia, the percentage was as high as 95 per cent; but even 'old economy' stalwarts like BP, despite its huge investments in oil platforms and exploration equipment, notched up a significant 74 per cent.

The upshot was that even companies operating in the same sector with similar earnings could experience widely differing stock valuations. Those ignoring the new emphasis on 'intangibles' invariably found themselves penalized by the markets.

http://www.personneltoday.com/pt_archive/arch_details.asp?ID=15731&Source=1

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Shifting Values, Shifting Rewards• The shocks of September 11 and dramatic changes in employees' value systems

are sending companies scrambling to find new ways of attracting and motivating workers. A massive survey measuring the values and beliefs over the last three decades in 60 nations shows an unmistakable shift to a post-materialist value system. People in the developed countries are less concerned with material gains and more interested in self expression, their personal well-being and improving the quality of their lives.

• A new book shows how Microsoft, Intel, Nokia, Starbucks, Singapore Airlines and 20 other world-class organizations are luring and holding high-quality employees. The companies studied stress the importance of trusting, unleashing and listening to their employees. Virtually all of them also invest heavily in new technology, training and employee benefits and recognize the importance of increasing their employees' business knowledge.

• "Microsoft has a market capitalization of $450 billion, the largest in the world. If you add up every desk and chair, every computer, every building, every piece of land, everything we own, including the $17 billion or so we have in the bank, it comes to about $30 billion. If you then add in things like goodwill and other financial assets, maybe you'll come up with another $70 billion, if you really struggle. But that means that there is $350 billion more that people have given us credit for that is not there. What is it? Well, it's the stuff in smart people's heads."

http://www.conference-board.org/knowledge/knowledgeBook.cfm?id=497&nav=hr

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HR Factors Affect Profit15% of profit performance is driven by:• Management participation• Open management style• Taking some risks, but not too many• Top managers spending 20% of time with

customers• Around 20% of top management should be

outsiders• Management training is deemed important• Top managers are effectively incentivized• Succession planning is done• A good appraisal system is in place• Employees get feedback

http://www.pims-europe.com

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HR Factors Affect Market Value26% increase in market value in 2000 was

driven by:• Use of knowledge and contract workers• Recruiting excellence• Consistent pan-European HR practices• Good union-management relations• Lack of hierarchy, clear leadership• Teamwork and 360° feedback• Customer-focused environment• Remuneration• Sharing information with employees

http://www.watsonwyatt.com

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Employee Engagement

• 26% of employees are engaged in their jobs

• 55% of employees are not engaged in their jobs

• 19% of employees are actively disengaged in their jobs

- Gallup Management Journal, 2001

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Attract & Retain or Lose to ResignationWhat attracts and

retains high performers?

79% stay because of opportunities for advancement

69% stay because their job is redesigned

65% stay because they are learning new skills in their current job

Why do high performers resign?

56% leave because they are dissatisfied with company management

56% leave due to inadequate opportunity for promotion

50% leave due to dissatisfaction with pay

- “Strategic Rewards” by Watson Wyatt, 1999

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Non-Financial Corporate Value

• 35% of an institutional investor’s valuation of a company is attributable to non-financial information.

- Mavrinac and Siesfield, 1997

0

1

2

3

4

5

6

1985 1990 1995 1999

Market toBook Valueof SP 500

Tobin’s qA future-oriented and risk-adjusted capital market measure of performance that

reflects both current and anticipated profitability by dividing the markets valuation of a firm’s assets by their current replacement cost.

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Keys to HR Impact1. Base the design of your HR system on

the business’ strategic objectives2. Align recruitment, selection,

development, incentives, and retention strategies

3. Measure employee behaviors that are focused on key business priorities and drive profits, growth, and market value

4. Evaluate operating performance as affected by the HR system

- Becker, Brian, Huselid, Mark, Pickus, Peter, & Spratt, Michael (1997). HR as a Source of Shareholder Value: Research and Recommendations. Human Resource Management, Spring 1997, Vol. 36, No. 1, pp. 39-47.

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HR System Impact - Shareholder Value

$290

$310

$330

$350

$370

$390

$410

0

20

40

60

80

10

0

MarketValue perEmployee inThousands

The difference between a non-strategic HR system (0) and one that has removed the barriers to performance (20) are dramatic.

Improving the relative sophistication of the HR system by adopting best practices does not provide measurable value (20%-60% adoption of a strategic HR system).

Integrating the strategic elements of HR into the broader fabric of the organization provides a significant improvement in shareholder value (60%-80%).

When HR systems have adopted best practices and aligned those systems with business priorities and initiatives they return the greatest shareholder value (80%-100%).

- Huselid, Mark and Becker, Brian (1995). High Performance Work Systems and Organizational Performance. Paper presented at the 1995 Academy of Management Annual Conference, Vancouver, BC.

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HR Skills vs. ImportanceThe skills that are most important to the near future are

inversely related to those that HR is currently good at. HR excels in the areas of benefits, labor relations, employee relations, external recruiting, and training and education yet those are the 16th, 19th, 17th, 14th, and 11th most important skills out of 19 surveyed by the Human Resources Planning Society. The most important skills (change management, strategic HR planning, executive development, organizational effectiveness, and culture management) rank as the 17th, 12th, 8th, 14th, and 15th most-skilled areas respectively.

– Eichinger, R., Ulrich, D. & The Human Resources Planning Society (1996). It’s De-Ja Future All Over Again: Are you getting ready? The Second Annual State-of-the-Art (SOTA) Council Report.