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Human Capital Management Drives Financial Performance

Human Capital Management Drives Financial Performance

Erik Berggren / Success Factors and Jac Fitz-enz / Workforce Intelligence Institute

March 16, 2010

How Smart Human Capital Management Drives Financial Performance

Premise

The first question of management is what difference does it make if we invest in people, technology or facilities? The corollary: which investment will give us the greatest return in the shortest time?

SuccessFactors and Workforce Intelligence Institute (WII) believe that there are two fundamentals of management that, over time, will consistently show the greatest returns. They are: 1) performance management through goal alignment and 2) pay for performance. Logic has it that if people can see how their work links directly to corporate goals, they will be stimulated to work long and hard in service to that vision. Logic also cautions us that if people do commit themselves to the vision they must believe that their efforts are equitably compensated.

To build on our previous research and test our assumptions, we combined forces to study the performance management system sophistication or maturity of 40 corporations of varying sizes. As one would expect, there was a distribution of financial performance and system maturities across the 40. Our quantitative and qualitative analyses reveal where performance management practices do and do not affect financial performance. Financial performance was tracked in three ways:

• Return on equity
• Revenue growth, last 12 months
• Net income, last 12 months

The 40 companies were divided into strongest and weakest financial performers with a number in the middle. We compared each company’s financial performance with its industry mean. Since different companies operate under different market conditions, comparing across industries does not make sense.

Process

Through survey questionnaires and follow up interviews we gathered data from the companies in these topic areas:

1. Connections of people with management processes.
Our questions touched on the sophistication of their systems, frequency and constancy of application, consistency across the organization and estimates of their effectiveness.

2. Effects of goal alignment discussions and evaluations.
We looked for evidence of the impact of discussions between supervisors and employees regarding personal performance objectives and their connection to corporate goals.

3. Application of process management tools.
Our objective was to learn if respondents could identify value-adding effects from investments in performance management technology.

Outcomes

From a human capital management viewpoint, the most interesting outcome had to do with the state-of-the-art of performance management systems.

Generally speaking, companies with mature systems that they applied consistently across most of the organization financially outperformed those whose systems were not as robust.

Population size did not allow for statistical correlations, nevertheless the inferences and connections were clear and susceptible to later testing.