Connecting the Dots Between HCM and Financial Performance

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Intuitively we know that exceptional talent and high employee engagement make a company more successful. We know that high performing teams are more productive and high trust work environments support all of the above.

The challenge for human resources executives and managers, however, is to translate that intuitive understanding into concrete metrics that justify their commitment to the necessary HR policies and people investments.

HR Policy and Investment Outcomes

The Investor Responsibility Research Center Institute (IRRCi) together with Larry Beeferman and Aaron Bernstein (Labor and Worklife Program, Harvard Law School) may have just made this connection a little easier to illustrate. They recently completed an analysis of existing research into the relationship between corporate HR policies and financial performance, to determine whether they are connected. The results of their research offer strong evidence of positive correlations between HR policies and key financial metrics, including return on equity, return on investment and profit margins.

In designing their investigation, one of the challenges the researchers faced was finding empirical studies that focused on the financial impacts of HR policies, since human capital has historically been seen as a social component of the corporate structure rather than a bottom line contributor.  In the end, they found 92 studies “that used conventional investment indicators to emphasize the conclusion that human capital is material under definitions acceptable to the U.S. Securities and Exchange Commission and U.S. securities law.”

The majority of those studies demonstrated positive correlations between training and HR policies with respect to better investment outcomes. The following table[1] from the report illustrates the frequency of these positive correlations.

Human Capital Studies

Topic

 

Financial Effect

 

 

Positive

 

Mixed

 

None

 

Negative

Training (36 Studies)

 

22

 

8

 

5

 

1

HR Policy (56 Studies)

 

45

 

9

 

2

 

0

Total Number of Studies

 

67

 

17

 

7

 

1

                 

The report’s authors seek to highlight the implications for investors of clear corporate training and well aligned HR policies—such as those included in high performance work systems (HPWS)—by demonstrating their positive impact on investment returns. In the words of Aaron Bernstein, study co-author, “Decades of research offer powerful evidence that human capital factors can be material to financial performance…”   

No Single HR Policy Wins 

Interestingly, aside from training, which showed a positive impact on its own, there were no individual HR policies that outperformed. Rather, the simple presence of bundled HR policies that aligned with corporate culture (whatever that culture might be) was the factor that positively correlated with improved financial performance. The following is a list of the most commonly occurring policies appearing in the research, many of which are associated with high performance work systems.)[2]

Compensation and Benefits

  • Pay for Performance
  • Formal Appraisal for Pay
  • External Pay Equity/Competitiveness
  • Incentive Compensation
  • Comprehensive Benefits
  • Profit or Gain Sharing
  • Group-Based Pay Pay for Skills/Knowledge
  • Employee Stock Ownership
  • Bonuses or Cash for Performance
  • Equitable Pay Processes
  • Public Recognition/Nonfinancial Rewards

Job and Work Design

  • Decentralized Participative Decisions
  • Project or Other Temporary Work Teams
  • Job Analysis
  • Job Rotation/Cross Functional
  • Utilization Self-Managed Work Teams (Quality Circles)
  • Greater Discretion and Autonomy
  • Job Enlargement and Enrichment
  • Broad Task Responsibilities
  • Flexible Work Schedule

Training and Development

  • Training Extensiveness
  • Use of Training to Improve Performance
  • Training for Job or Firm Specific Skill
  • Training for Career Development
  • Evaluation of Training
  • Cross-Functional or Multiskill Training
  • New Employee Training and Orientation

Recruiting and Selection

  • Hiring Selectivity or Low Selection Ratio
  • Specific and Explicit Hiring Criteria
  • Multiple Tools Used to Screen Applicants
  • Employment Tests or Structured Interviews
  • Planning Selection Processes and Staffing
  • Matching Candidates to Firm Strategy
  • Innovative Recruiting Practices

Employee Relations

  • Job Security/Emphasis on Permanent Jobs
  • Low Status Differentials
  • Complaint or Grievance Procedure
  • Measurement of Employee Relations Outcomes
  • Employee Opinion and Attitude Surveys
  • Labor Union Collaboration
  • Social and Family Events and Policies
  • Diversity and Equal Employment Opportunity

Communication

  • Formal Information Sharing Program
  • Employees Receive Market, Firm Performance, or Strategic Information
  • Employee Input and Suggestion Processes
  • Frequent/Regular Meetings with Employees

Performance Management and Appraisal

  • Appraisals Based on Objective Results/Behaviors
  • Appraisals for Development/Potential
  • Frequent Performance Appraisal Meetings
  • Employees Involved in Setting Appraisal Objectives
  • Written Performance Plan With Defined Objectives
  • Multisource Feedback and Peer Appraisal
  • Appraisal Based on Strategic or Team Goals

Promotions

  • Promotions From Within
  • Promotions Objectively Based on Merit
  • Career Planning
  • Promotion Opportunities (e.g., frequency)
  • Career Paths and Job Ladders
  • Succession Planning
  • Turnover, Retention, and Exit Management

Once again, it’s easy to make the intuitive leap from many of these policies to a more engaged, committed and productive workforce—and from there to improved financial performance. But intuition has always been a double-edged sword for HR professionals.

An inherent (or intuitive) understanding of human nature is a distinct asset when it comes to fostering high-trust working environments, but translating that awareness into an effective business case can be daunting. That’s why this report is so encouraging. From our perspective (the HR perspective) it helps to have some concrete evidence to support our belief that good human capital management (HCM) is just good business!

 

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[1] The IRRC, Aaron Bernstein and Larry Beeferman (April 2015) The Materiality of Human Capital to Corporate Financial Performance. Table 1.  http://irrcinstitute.org/pdf/FINAL-Human-Capital-Materiality-April-23-2015.pdf

[2] The list (table) provided in the report was taken from: Posthuma. 2013. The study authors found that these 61 policies appeared a total of 2,042 times in 181 peer-reviewed academic and practitioner studies of high performance work systems published between 1992 and 2011. These included studies that examined correlations to investment outcomes as well as those that looked at other variables.

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