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High-Value HR Practices

There are some HR efforts that have shown a significant correlation to increased shareholder value.

January 8, 2002
Related Topics: HR Services and Administration

Looking for a specific HR activity that is sure to boost profits in your company? Sorry, there is no such thing. Proving cause and effect of any particular HR effort in an individual company is almost impossible. That said, however, there are some HR efforts that have shown a significant correlation to increased shareholder value.

According to the Shareowner Alignment Index, a survey conducted by Stern Stewart & Co., originators of the economic-value-added management framework, and Hackett Benchmarking & Research, a division of Answerthink, Inc., companies that make use of certain management practices consistently produce annual shareholder returns that are 16 percent higher than those of companies that do not utilize these practices. Over a five-year period, firms that make use of these practices produce over twice the amount of shareholder value that other firms do.

What management practices do high-return companies utilize that other lower-value companies do not? According to William Smith, director of research for Hackett Benchmarking & Research in Hudson, Ohio, "value-aligned" companies, which are those that consistently deliver value to shareholders:

  1. Do not cap incentive-compensation plans. Value-aligned companies offer an unlimited upside to their bonus compensation in order to instill a culture of ownership. They also hold a portion of annual bonuses at risk based on cumulative performance over multiple years to ensure that performance can be sustained.

  2. Share financial information. Financial information is widely shared throughout the company. In particular, middle-level managers possess a high degree of business and financial literacy. This allows more employees to take an economic view of their decisions.

  3. Base bonuses on objective measures. Value-aligned companies are more likely to base bonuses on economic profit (which is profit measured after subtracting the cost of capital) than on operating profit, cash flow, returns, and earnings. In particular, they downplay operational input measures, focusing instead on financial output, and they also rely far more on objective measurements than subjective judgments.

  4. Tolerate failure. At 93 percent of value-aligned companies, failure is tolerated as a form of learning, compared to 47 percent of non-aligned companies.

  5. Communicate successes. Companies that outperform their peers are two times as likely to consistently communicate successes to employees.

Workforce, December 2001, p. 30 -- Subscribe Now!

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