The Watson Wyatt Brand: Powered by Relationships
Download
Report
Transcript The Watson Wyatt Brand: Powered by Relationships
watsonwyatt.com
Winning People Practices
University of South Florida
2007 HR-ROI Conference
Jackie L. Greaner, Ph.D.
February 15, 2007
Our Game Plan
HCI: Background
1999/2002 HCI Results
2005 Results
– Key Findings
Winning People Practices
2
Copyright © Watson Wyatt Worldwide. All rights reserved
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.
3
Copyright © Watson Wyatt Worldwide. All rights reserved
Why Study the Impact of People Practices?
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)
4
Copyright © Watson Wyatt Worldwide. All rights reserved
HCI: The Business Case
FINDING:
Superior HC
practices are
a leading
indicator of
financial
performance
IMPLICATION:
HC practices implemented
now will help companies in
the future
FINDING:
Companies with
best HC practices
provide 3 times the
shareholder return
as companies with
weak HC practices
IMPLICATION:
HC outlays can be justified
using quantitative data
FINDING:
Specific practices
drive shareholder
value, while others
actually diminish it
IMPLICATION:
Companies can allocate
resources to practices that
generate the most value
5
Copyright © Watson Wyatt Worldwide. All rights reserved
The First HCI Report
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
6
Copyright © Watson Wyatt Worldwide. All rights reserved
Process Overview
Quick Process Review
7
Copyright © Watson Wyatt Worldwide. All rights reserved
2002 HCI Study Details
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
8
Copyright © Watson Wyatt Worldwide. All rights reserved
Higher HCI Companies Create More Value
5-Year Total Return
to Shareholders
5-Year TRS
(1996-2001)
5-Year TRS
(1994-1999)
9
Copyright © Watson Wyatt Worldwide. All rights reserved
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
10
Copyright © Watson Wyatt Worldwide. All rights reserved
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?
11
Copyright © Watson Wyatt Worldwide. All rights reserved
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
12
Copyright © Watson Wyatt Worldwide. All rights reserved
About the Survey
150 organizations
representing all major
industry sectors in
North America
Average company size
$6.4 billion in revenue
and 15,400 employees
Respondents by Com pany Size
21%
27%
10%
17%
25%
> 25000
10000-25000
2000-4999
< 2000
5000-9999
13
Copyright © Watson Wyatt Worldwide. All rights reserved
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.
14
Copyright © Watson Wyatt Worldwide. All rights reserved
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
15
Copyright © Watson Wyatt Worldwide. All rights reserved
Detailed Findings
16
Copyright © Watson Wyatt Worldwide. All rights reserved
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
17
Copyright © Watson Wyatt Worldwide. All rights reserved
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%
18
Copyright © Watson Wyatt Worldwide. All rights reserved
Less hierarchical organizations allow for fasterpaced 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%
19
Copyright © Watson Wyatt Worldwide. All rights reserved
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
% of employees participating in
evaluating immediate supervisors
Market Premium
3-year TRS
Low
High
0%
30%
37.9%
16.8%
47%
31%
20
Copyright © Watson Wyatt Worldwide. All rights reserved
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
Number of offers typically made
Market Premium
3-Year TRS
Low
High
1
2 or more
41.2%
14.2%
44%
32%
21
Copyright © Watson Wyatt Worldwide. All rights reserved
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
Percent of new hires from
referrals
Market Premium
3-Year TRS
More Referrals
Fewer Referrals
38%
9%
39.9%
12.8%
48%
23%
22
Copyright © Watson Wyatt Worldwide. All rights reserved
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 %
Average Time to Fill
Openings
Market Premium
3-year TRS
Faster
Longer
2 weeks
7 weeks
18.2%
-1.3%
59%
11%
23
Copyright © Watson Wyatt Worldwide. All rights reserved
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.
24
Copyright © Watson Wyatt Worldwide. All rights reserved
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%
34%
43%
31%
3-year TRS
25
Copyright © Watson Wyatt Worldwide. All rights reserved
The Voluntary Turnover Landscape
13.7%
11.4%
12.0%
12.0%
11.7%
Areas of Concern
9.6%
7.9%
Overall Customer Service
Organization
New employees
2003
2004
2005
2006*
Industry
Benchmark
Hispanic and African
American
*As of 6/30/06
Watson Wyatt’s Human Capital Index research suggest that companies with a 9% rate of voluntary
produce the highest shareholder value
26
Copyright © Watson Wyatt Worldwide. All rights reserved
The 2005 workforce profile shows a high rate of voluntary turnover
and outside hires, good gender balance but little progress in
achieving diversity
Metric
New
Entrants
2005*
Voluntary
Terminations
2005
Current
Employees
12/31/2005
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%
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%
Industry
Comparison**
Ethnicity:
*
**
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
27
Copyright © Watson Wyatt Worldwide. All rights reserved
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
28
Copyright © Watson Wyatt Worldwide. All rights reserved
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?
Market Premium
3-year TRS
Yes
No
36.9%
-17.8%
37%
33%
29
Copyright © Watson Wyatt Worldwide. All rights reserved
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%
48.9%
-2.8%
44%
25%
Market Premium
3-year TRS
30
Copyright © Watson Wyatt Worldwide. All rights reserved
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
4.7
2.1
Market Premium
30%
6.7%
3-year TRS
47%
-2%
Payout to higher performing ees
vs. lower performing ees
31
Copyright © Watson Wyatt Worldwide. All rights reserved
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
% of employees with direct customer
contact with bonus objectives tied to
customer satisfaction
Market Premium
3-year TRS
High
Low
77%
0%
10.1%
8.6%
73%
23%
32
Copyright © Watson Wyatt Worldwide. All rights reserved
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%
33
Copyright © Watson Wyatt Worldwide. All rights reserved
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
34
Copyright © Watson Wyatt Worldwide. All rights reserved
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
35
Copyright © Watson Wyatt Worldwide. All rights reserved
THANK YOU
For more information
www.watsonwyatt.com
36
Copyright © Watson Wyatt Worldwide. All rights reserved
Appendix
37
Copyright © Watson Wyatt Worldwide. All rights reserved
HCI Leads Financial Performance
Correlation A
=
X
2002 Financial
Outcomes
1999 HCI
Correlation B
X
1999 Financial
Outcomes
=
2002 HCI
38
Copyright © Watson Wyatt Worldwide. All rights reserved
Key Links Between Human
Capital and Shareholder Value (NA)
Total Rewards & Accountability
and Value Creation
Collegial, Flexible
Workplace and Value Creation
Recruiting & Retention
Excellence and Value Creation
Communications
Integrity and Value Creation
Focused HR Service
Technologies and Value Creation
Significant Improvement
47% Increase in Market Value
Expected change in market value associated with a
significant (1 SD) improvement in HCI dimension
39
Copyright © Watson Wyatt Worldwide. All rights reserved