US consultancy Watson Wyatt shows that superior human resources practices are a leading indicator of increased shareholder value.

US consultancy Watson Wyatt says that its latest study, 2002 Human Capital Index, shows that superior human resources practices are not only correlated with improved financial returns but are a leading indicator of increased shareholder value.

The study reports that companies with the best HR practices provided a 64% total return to shareholders (TRS) over a five-year period, more than three times the 21% TRS for companies with the weakest HR practices. However, Bruce Pfau, head of organisation effectiveness consulting at Watson Wyatt and author of the study, said that this left unanswered the question of whether effective HR practices drive positive financial results, or whether successful companies simply have more resources to invest in HR.

The HCI study also identifies 43 specific HR practices that play the greatest role in creating shareholder value. They are divided into five key areas, and the research quantifies exactly how much an improvement in each area is expected to increase a company’s market value. The top area, associated with a 16.5% improvement, is total rewards and accountability.

Some HR practices that are applauded by conventional wisdom were actually associated with a decrease in financial performance. Three in particular were 360-degree review, developmental training and implementing HR technologies with ‘softer’ goals in mind, such as culture change. “These types of complex, process-driven programmes can actually destroy value if they aren’t aligned with strategy and executed properly,” says Pfau.

The study also showed that:

  • making a stronger effort to link pay to performance, through stock programmes, incentive/profit sharing plans, or higher pay for top performers is associated with a 6.3% increase in market value overall
  • capitalising on basic communication technology holds tremendous potential: companies that give employees easy access to these technologies see a 4.2% gain in market value
  • companies that support flexible work arrangements such as flexitime, telecommuting and job sharing have 3.5% higher market value.