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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

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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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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)

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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
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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
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Process Overview
Quick Process Review
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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
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Higher HCI Companies Create More Value
5-Year Total Return
to 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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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
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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 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%
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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
% of employees participating in
evaluating immediate supervisors
Market Premium
3-year TRS
Low
High
0%
30%
37.9%
16.8%
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
Number of offers typically made
Market Premium
3-Year TRS
Low
High
1
2 or more
41.2%
14.2%
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
Percent of new hires from
referrals
Market Premium
3-Year TRS
More Referrals
Fewer Referrals
38%
9%
39.9%
12.8%
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 %
Average Time to Fill
Openings
Market Premium
3-year TRS
Faster
Longer
2 weeks
7 weeks
18.2%
-1.3%
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%
34%
43%
31%
3-year TRS
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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
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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
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
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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?
Market Premium
3-year TRS
Yes
No
36.9%
-17.8%
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%
48.9%
-2.8%
44%
25%
Market Premium
3-year TRS
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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
4.7
2.1
Market Premium
30%
6.7%
3-year TRS
47%
-2%
Payout to higher performing ees
vs. lower performing ees
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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
% 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%
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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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THANK YOU
For more information
www.watsonwyatt.com
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Appendix
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HCI Leads Financial Performance
Correlation A
=
X
2002 Financial
Outcomes
1999 HCI
Correlation B
X
1999 Financial
Outcomes
=
2002 HCI
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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
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