Our analysis confirmed what “people” companies have long sensed: good people practices confer a performance advantage. But just how strong is the correlation to economic performance? As a preliminary test, we looked at Fortune magazine’s “100 Best Companies to Work For.” Consider the average growth in share price for these companies between 2001 and 2011. (See Exhibit 1.) The perennial “100 Best” (that is, the companies that have made the list for three or more years) outperformed the S&P 500 in eight out of ten years—and over the course of the decade, they cumulatively beat the S&P 500 by 99 percentage points.
Does this mean that good HR practices drive good performance? Or that good performance enables good HR practices? To claim a direct cause-and-effect link here would be overreaching. But probing the relationship between HR practices and business performance is a worthwhile exercise if it sheds light on those activities that seem to be particularly beneficial.
We then asked our BCG/WFPMA survey participants to rate their current capability in the 22 HR topics that comprise the framework of our annual Creating People Advantage study. Moreover, we asked them to report their company’s revenue growth from 2010 through 2011 and average profit margin in 2011. In 21 out of 22 topics, we identified a positive correlation between capability and performance: companies that rated their current capabilities “very high” experienced significantly greater revenue growth and higher average profit margins than those characterizing their capabilities as “low.” (See Exhibit 2.) Even mastering classic HR processes showed a markedly positive impact on financial performance. These results underscore the fact that people management is a holistic process. Because the impacts of the 22 topics are interrelated, it’s important to excel in all of them.
High-performing companies consistently did more in all major activities within these topics than their low-performing peers, but in certain activities their efforts truly stood out. For six topics in particular, the correlation between capability and economic performance was striking: recruiting, onboarding new hires and employee retention, talent management, employer branding, performance management and rewards, and leadership development. For example, companies adept at recruiting enjoyed 3.5 times the revenue growth and 2.0 times the profit margin of their less capable peers. In talent management, the highly capable enjoyed more than twice the revenue growth and profit margin of those less capable. And companies that are serious about leadership development experienced 2.1 times the revenue growth and 1.8 times the profit margin.
This prompted the question: what concrete actions correlate with business performance? In other words, what do the high-performing companies—the top 10 percent by revenue growth and profit margin—do differently from the bottom 10 percent?