REWARD MANAGEMENT
Good reward practices can boost shareholder value by 9.2%
New American research suggests that businesses using a specific set of reward management practices tend to achieve better financial performance. Companies reporting strong gains in shareholder value were more likely to offer stock options, reward employees for superior performance and adopt strict termination policies, says consultancy Watson Wyatt.
The report adds to the growing body of evidence that shows a clear link between progressive people management practices and bottom line performance.
Watson Wyatt’ s study draws on a large sample of firms from all sectors of the US and Canadian economies. The researchers developed a measure called the human capital index to summarise the effectiveness of each company’ s HR practices, with a score of zero representing extremely poor human capital management and a figure of 100 awarded to those with the ideal set of practices. The study then looked at the links between the index and various measures of company financial performance, such as total shareholder return .
The results were remarkable and conclusive: in short, financial performance soared in companies with a high human capital index (HCI). Among the most telling findings of the research was that those companies with a high HCI returned 103% to shareholders over a five-year period between 1994 and 1999, whereas shareholders received just 53% by investing in low HCI companies.
This relationship we found is so clear that a significant improvement in 30 key HR practices is associated with a 30% increases in market value, says Watson Wyatt.
From the raft of data, the researchers were able to breakdown the 30 key HR practices into five key groups. They found that a significant improvement in recruiting excellence was associated with a potential 10.1% increase in market value. The next most important factor was clear rewards and accountability, which could bring a 9.2% increase, followed by collegial, flexible workforce (7.8%).
A quick glance at the table below shows that when it comes to reward practices Watson Wyatt found clear evidence that adopting three key techniques was associated with a significant improvement in financial performance: widespread share options, helping poor performers improve, and strict termination polices for those who consistently underperform. Each accounted for a 1.8% gain in market value.
All of these practices reflect the importance of fairness in achieving better performance, says Watson Wyatt. When employees work hard and the company succeeds, they want to share in the benefits. People also want to be rewarded for superior performance. When organisations do so, they attract top performers who are confident in their abilities and who want to work where rewards are based on their own performance.
Links between reward practices and shareholder value
| Reward practice | Potential increase in market value |
| Large percentage of employees are eligible for stock plans | 1.8% |
| Company does good job helping poor performers improve | 1.8% |
| Company terminates employees who perform unacceptably | 1.8% |
| Top performers get significantly more pay than average performers | 1.5% |
| Company positions pay above market | 0.8% |
| Pay is linked to company’ s business strategy | 0.6% |
| Performance appraisals used to set pay | 0.4% |
| Profit-sharing plan based on firm’ s overall success | 0.4% |
Source: Watson Wyatt.
Survey details
Title: The Human Capital index: linking human capital and shareholder value
Survey sample: the 12-page survey is based on information supplied by more than 400 US and Canadian companies, with an average workforce size of 8,944.
Business sectors: participants are drawn from a broad range of sectors — the sample was highly representative of the New York Stock Exchange and NASDAQ companies .
Availability: Watson Wyatt Worldwide, contact Victoria Ransom, tel: 01737 241144.
Want to know more? If you want to browse the Watson Wyatt’ s human capital index web site at www.hcindex.com