watsonwyatt.com winning people practices university of south florida 2007 hr-roi conference jackie...

watsonwyatt.com

Winning People Practices

University of South Florida2007 HR-ROI Conference

Jackie L. Greaner, Ph.D.February 15, 2007

Copyright © Watson Wyatt Worldwide. All rights reserved

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Our Game Plan

HCI: Background 1999/2002 HCI Results 2005 Results

– Key Findings Winning People Practices


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The Human Capital Index® (1999-2006) Five iterations of WW ground-breaking Human

Capital Index® (HCI) Research demonstrated:

– Better people management is linked to superior shareholder returns

– There are ‘global truths’ of people management across North America, Europe and Asia-Pacific

– The HCI ranking can be a leading indicator of business performance

Copyright © 2002 United Feature Syndicate, Inc.


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Continue to reaffirm empirically “it pays to manage people right”

Help managers and organizations assess people investments

Provide HR with framework for examining priorities and monitoring metrics

Determine whether some practices offer a “bigger bang for the buck” than others

Further explore relationships between people practices and individual employee behavior (e.g., productivity, turnover)

Why Study the Impact of People Practices?


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HCI: The Business Case

FINDING:Superior HCpractices area leading indicator of financialperformance

FINDING: Companies withbest HC practices provide 3 times the shareholder returnas companies with weak HC practices

FINDING: Specific practices drive shareholder value, while othersactually diminish it

IMPLICATION: HC practices implemented now will help companies inthe future

IMPLICATION:HC outlays can be justifiedusing quantitative data

IMPLICATION:Companies can allocate resources to practices that generate the most value


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First study in 1999 demonstrated link between superior HR practices and shareholder value creation

Questions on human capital practices plus a variety of financial outcome measures (TRS, Market Value)

Identified 30 people practices associated with 30% increase in market value

Five key dimensions: Recruiting Excellence, Clear Rewards and Accountability, Collegial, Flexible Workplace, Communications Integrity and Prudent Use of Resources

The First HCI Report


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Process Overview

Quick Process Review


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750 large, public companies Best HR practices provided 64% total return to

shareholders 3X companies with weakest HR practices

To determine the relationship between HR practices and financial performance, Watson Wyatt compared 2 different correlations using HCI scores and financial data for 51 companies that participated in 1999 and 2002 HCI studies

HCI study shows which People practices(43 specific practices) had the most impact

Significant improvement in all practices leads to a 47% increase in market value

2002 HCI Study Details


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Higher HCI Companies Create More Value

5-Year Total Returnto Shareholders

5-Year TRS(1996-2001)

5-Year TRS(1994-1999)


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About the 2005 HCI: Practices of High Performing Organizations

Study gathered data on budgets, programs and policies correlated with bottom-line performance

Focused on practices that could be measured objectively

Detailed picture of which People practices differentiate high performing organizations


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About the 2005 HCI Research

Included more objective items based on past research indicating correlations with firm performance or with behavioral metrics, e.g. turnover Examples:– How many job applications does your

organization receive?– What is the average number of offers

extended?– Approximately what percentage of non-entry

level positions are filled by promotions from within, external new hires?


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2005 HCI Metrics

Study uses 2 metrics: total return to shareholders and market premium

Total Return to Shareholders = TRS– Measure used to calculate total return on investment over a

defined period of time

Market Premium– Extent to which market

value of a company exceeds

the cost of its assets

– Represents the market's assessment of company’s ability to generate future profits from intangible assets like human capital


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150 organizations representing all major industry sectors in North America

Average company size $6.4 billion in revenue and 15,400 employees

About the Survey

Respondents by Company Size

21%

10%

17%25%

27%

> 25000 10000-25000 5000-9999

2000-4999 < 2000


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HCI Key Findings – 2005

Employee Development – Best firms balanced approach to hiring non-entry level

positions and fill 1/2 of the non-entry level positions internally.

– TRS nearly 6 X greater – Maintaining Training budgets and having Flatter Organization

structures also correlate to TRS. Recruiting Excellence

– Companies that fill vacancies more quickly reduce disruption and lost productivity.

– TRS = 5X higher – Higher offer acceptance rates and Employee Referred rates

correlate to higher shareholder returns.


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HCI Key Findings – 2005 (2 of 2)

Turnover Management – Firms with “optimal turnover” TRS over 10

points higher.

Total Rewards– The best organizations make sharp

distinctions based on performance and reap TRS 5X higher


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Detailed Findings


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People Practices: Development

Successful development practices include:

– Maintaining a Training Budget

• 3 yr TRS 5X higher

– Filling Non-Entry Level Positions by Promoting from Within and Through the External Market

– Flattening the Organizational Structure

• Creating Fewer Levels and Salary Grades

• Limiting Use of Employee Evaluations of Superiors


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A balanced approach to hiring from within is needed to maximize returns

Best firms fill 1/2 of their non-entry level positions internally

Firms that fill fewer positions internally (12%) have lowest returns (-2%)

Those that fill most positions internally (80% or more) have lower performance (32%)

High Medium Low

% of non-entry level positions filled by promotion from within

80% 50% 12%

Market Premium 35% 42% 2%

3-year TRS 32% 56% -2%


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Less hierarchical organizations allow for faster-paced business

Flatter organizations with fewer levels or salary grades tend to be faster paced

More employees per level or salary grade is associated with higher shareholder returns

Flatter organizations have market premium scores between 2 and 8 X greater than more hierarchical organizations

Employ/Level

# of levels (20k ees)

Market Prem.

3-year TRS

Employ./ Salary Grade

Salary Grades

(20k ees)

Market Prem.

3-year TRS

High 1323 15 38.7% 48% 467 43 30.7% 40%

Low 229 87 4.5% 33% 106 189 15.4% 31%


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360°performance evaluations should be used sparingly

Employee evaluations are best used for feedback and career coaching

Improperly used, 360°evaluations can lead to less informative performance evaluations and inhibit senior managers

Low High

% of employees participating in evaluating immediate supervisors

0% 30%

Market Premium 37.9% 16.8%

3-year TRS 47% 31%


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Better acceptance ratios correlate with higher market premiums

Firms that fill openings with one offer outstrip those that require two or more

One-offer firms have a roughly 3 X the market premium and 12 point higher returns

Low High

Number of offers typically made 1 2 or more


3-Year TRS 44% 32%


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Employees hired through referrals have lower initial turnover rates

Using employee referrals can be faster and more efficient

Companies that hire more referrals have a market premium 3X higher than those that use fewer referrals

More Referrals Fewer Referrals

Percent of new hires from referrals

38% 9%


3-Year TRS 48% 23%


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Companies that hire more quickly have higher shareholder returns

Faster recruiting reduces disruption and lost productivity

Organizations that fill positions in around 2 weeks outperform those that take 3X as long by 48 %

Faster Longer

Average Time to Fill Openings

2 weeks 7 weeks

Market Premium 18.2% -1.3%

3-year TRS 59% 11%


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People Practices: Turnover Management

One key to maximizing investment in human capital is to optimize turnover

By balancing departures and arrivals, a firm can extend its earnings potential

Copyright © 1994 United Feature Syndicate, Inc.


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Balanced turnover is associated with the best firm performance

Some turnover is healthy

Firms with too much (~ 43 percent) and too little turnover (~ 5 percent) had the lowest returns

Organizations with moderate turnover (~ 15 percent) had highest shareholder returns

Turnover Rate High Moderate Low

Voluntary 25% 9% 2%

Involuntary 18% 6% 3%

Total Percent (assuming 20K employees)

43%

(8,600)

15%

(3,000)

5%

(1,000)

Market Premium 14.2% 28.1% 1.1%

3-year TRS 34% 43% 31%


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The Voluntary Turnover Landscape

13.7%

2003 2004 2005 2006*

Industry Benchmark

11.7%

9.6%

7.9%

Areas of Concern

Overall Customer Service Organization

New employees

Hispanic and African American

12.0%

Watson Wyatt’s Human Capital Index research suggest that companies with a 9% rate of voluntary produce the highest shareholder value

12.0%

*As of 6/30/06

11.4%


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The 2005 workforce profile shows a high rate of voluntary turnover and outside hires, good gender balance but little progress in achieving diversity

MetricNew

Entrants2005*

Voluntary Terminations

2005

Current Employees12/31/2005

Industry Comparison**

Number 968 1018 7429

Median Age 32 33 39

Median Service n/a 2-3 years 4-5 years

Gender Female – 51% Female – 55% Female – 58% Female – 55%

Ethnicity:

Caucasian 75% 80% 84% 84%

African American/Black

8% 9% 6% 10%

Hispanic 5% 5% 4%N/A – included in

other groups

Asian/Pacific Islander 8% 6% 5% 5%

* Includes only those still working for XYZ Corporation as of 12/31/2005 ** From the Bureau of Labor Statistics for Financial Services industry which includes: Banks, Insurance and Investment Services


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People Practices: Total Rewards Total Rewards strategies aid in

– Aligning employees with organization’s objectives– Getting employees to give discretionary effort – Encouraging employees to stay

Total Rewards strategies that offer high returns:– Finding right mix of short- and long-term incentives – Using customer satisfaction in rewarding bonuses– Maintaining a larger merit increase and promotion

budget– Making sharp merit distinctions between employees– Targeting benefit levels higher relative to the market– Maximizing executive eligibility for stock options,

restricted stock and discounted stock purchase – Making more employees eligible for discounted stock

purchase – Having a high employee stock ownership


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Firms with a total rewards strategy outperform other firms

Looking at benefits and rewards holistically adds value to an organization

Firms with total rewards strategy have a market premium nearly 3X greater than those without

Do you have a total rewards strategy?

Yes No


3-year TRS 37% 33%


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Incentives should figure prominently in a total rewards strategy

Previous HCI reports showed that paying top-performers significantly more associated with higher returns

True for short- and long-term incentives (STI/LTI) STI/LTI should constitute a significant portion of

rewards

High STI / LTI

High Salary

Salary as % of Total Rewards 63% 79%

STI / LTI as % of Total Rewards 13% 8%


3-year TRS 44% 25%


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Firms must make hefty distinctions between high and low performers

Best organizations make substantial distinctions in short term incentives

Organizations that make largest distinctions and pay top performers more than 4½ times the payout of lower performers had a 3-year TRS 49 points higher

High Differential Companies

Low Differential Companies

Payout to higher performing ees vs. lower performing ees

4.7 2.1

Market Premium 30% 6.7%

3-year TRS 47% -2%


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High-performing firms link customer satisfaction to bonus objectives

Customer satisfaction is an important bonus factor for those with direct customer contact

Firms that tie customer satisfaction to bonus objectives had a 3-year TRS more than 3X higher

High Low

% of employees with direct customer contact with bonus objectives tied to customer satisfaction

77% 0%


3-year TRS 73% 23%


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Firms should use stock-based incentive compensation

Firms with widest eligibility for stock options, restricted stock plans and discounted stock purchase plans surpass those that don’t

Stock Option

Restricted Stock

Discounted Stock purchase

High Low High Low High Low

% of executive/

managers eligible

93% 5% 36% 0% 98% 0%

Market Premium 31.7%

18.7%

33.6% 26.7% 67% 0.8%

3-year TRS 38% 37% 50% 24% 57% 27%


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Winning People Practices

Maximize your return on human capital by focusing on:– Recruiting Excellence

• Fill key positions quickly • Increase offer acceptance ratio• Utilize employee referrals

– Employee Development

• Maximize training

• Balance promotion from within with external hires

• Maintain fewer salary levels and grades

• Limit employee evaluations of managers


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Winning People Practices (cont’d)

Total Rewards– Target benefit levels above market – Link bonus pay to customer satisfaction, when

possible– Utilize STI, stock-based and other LTI– Stringently differentiate between high and low

performers Turnover Management

– Balance turnover


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For more information

www.watsonwyatt.com

THANK YOU


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Appendix


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HCI Leads Financial Performance

1999 FinancialOutcomes

=

=

Correlation B

1999 HCI 2002 FinancialOutcomes

2002 HCI

Correlation A

X

X


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Key Links Between Human Capital and Shareholder Value (NA)

Significant Improvement 47% Increase in Market Value

Total Rewards & Accountability and Value Creation

Collegial, FlexibleWorkplace and Value Creation

Recruiting & Retention Excellence and Value Creation

Communications Integrity and Value Creation

Focused HR ServiceTechnologies and Value Creation

Expected change in market value associated with a significant (1 SD) improvement in HCI dimension

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Documents

impact of people practices

superior hr practices

superior hc practices

human capital practices

weakest hr practices

hci results

hci researchincluded

hci scores