Book Examines Value of 'Human Capital'

Jan. 24, 2002
Companies that want to make themselves attractive to investors must take a hard look at their employee management practices.

Companies that want to make themselves attractive to investors must take a hard look at their employee management practices, according to a new book. Or, as authors Bruce Pfau, Ph.D., and Ira Kay, Ph.D., put it, their "human capital" management practices.

Pfau and Kay, practice leaders at global human capital consulting firm Watson Wyatt Worldwide, have written a book on the subject, The Human Capital Edge: 21 People Management Practices Your Company Must Implement (or Avoid) to Maximize Shareholder Value (McGraw-Hill, February 2002, $29.95). In their book, they offer new data showing that specific human capital management practices can add - or subtract - millions of dollars from the bottom line.

"Increasingly, investors will understand this and deploy their resources accordingly," Kay says.

In the book, Pfau and Kay quantify the effect of specific human capital management practices on companies'' total return to shareholders. They deliver evidence that companies that adopt and combine a select set of human resources practices can experience up to a 47 percent jump in shareholder value.

"To put this in perspective," Pfau says, "picture two $1 billion companies that are highly similar in terms of research and development levels, industry and capital structure, but very different" in terms of their employee management strategies. "The difference in market value between the two companies can be as much as $400 million to $500 million, based solely on variations in human capital management practices, such as stock options, work arrangements and appropriate use of human resources technologies," he adds.

Understanding the linkage between employee management practices and shareholder value is especially important given the current uncertainty in the global economy. Pfau and Kay''s data shows that superior employee management practices are lead, not lag, indicators of future financial results. As a result, Pfau says, "companies that act now to adopt the right [employee management] practices will emerge from the current slowdown faster and stronger than the competition."

Pfau and Kay show that many companies fail to maximize the link between employee management and the bottom line because they assume their management practices are sound. They''re not. Just ask their employees. Significant gaps exist between the perceptions of employers and those of their employees in areas such as compensation, benefits, communication and technology. Until employers align their employee management practices with their employees'' needs, "they will continue to waste resources on strategies that diminish, rather than increase, shareholder value," Kay says.

So what are the 21 employee practices outlined by Pfau and Kay? They are:

  1. 1. Hire people who can hit the ground running. Companies like to hire people with potential. They like to hire people who will grow into the job. They like to hire people they think may turn out to be stars. While those are good intentions, the hard economic truth is that they need to hire people who are already stars at doing the same kind of work in a similar environment. No company has the time for any other approach.
  2. 2. It''s not enough to be a great place to work. Make sure your company is known as a great place to work. Only 11 percent of the workforce is out seeking a job. The brightest stars are most likely in the 89 percent of the workforce that is not actively looking.
  3. 3. Presume people are more alike than different. "Over and over again we have seen organizations spending phenomenal amounts of money figuring out what their target employees (say, female Generation Xers) want, and then putting special programs in place to attract them," Pfau says. "In our view, this is a serious misallocation of resources. Because what those female GenXers want the most from the workplace is exactly what everyone else wants the most: pay for performance, opportunity, strong leadership, fairness. It is very difficult for companies to get those big things right, so they should place their resources where they can do the most good."
  4. 4. Synchronize pay, creating opportunities for all employees to soar. "Just as we believe stock options should be offered at all levels of the company, we believe compensation packages at all levels of the company should have a similar structure," Kay explains. "For example, if the CEO has a salary, the opportunity for a bonus and stock options, so should his division managers, his salespeople and his assistant. That way, they share risk, they share opportunity, and they share reward."
  5. 5. Don''t underestimate the crucial importance of senior leadership. Conventional wisdom says that when it comes to employee commitment, what counts is the employee''s direct supervisor. But current research reveals that senior leadership is a fast-growing key component in employee satisfaction. And it is senior leadership - not individual managers - that can make or break a transformation effort.
  6. 6. Physician heal thyself. Part of successful human resources delivery service delivery is understanding the delicate balance between day-to-day operations and big picture initiatives. HR departments have to get their house in order first. That means streamlining the payroll process and getting new hires seamlessly integrated before concentrating on defining the organization''s strategies and building programs to attract, retain and support the right workforce.
  7. 7. Be careful in implementing 360-degree feedback. "If it is not handled correctly, asking employees to evaluate their managers can decrease shareholder value. Similarly, asking employees to evaluate their peers can interfere with teamwork and, again, hurt shareholder value. Companies need to be very careful in implementing 360-degree feedback," Pfau warns.

Other employee practices include:

  1. 8. Approach recruiting and retention as mission-critical.
  2. 9. Involve employees in the hiring process.
  3. 10. Link pay to performance.
  4. 11. Demand that CEOs hold a significant stake in the company.
  5. 12. Offer significant stock-based incentives across the board.
  6. 13. Don''t treat benefits as "fringe."
  7. 14. Understand that employee satisfaction is critical to any business goal.
  8. 15. Minimize status distinctions.
  9. 16. Make work arrangements flexible.
  10. 17. Learn how to manage change.
  11. 18. Don''t assume workers no longer care about job security.
  12. 19. Be cautious about developmental training.
  13. 20. Make communication open and candid.
  14. 21. Enable employees to share knowledge by capitalizing on technology.

For more information about the book or how to purchase it, go to

by Sandy Smith ([email protected])

Voice your opinion!

To join the conversation, and become an exclusive member of EHS Today, create an account today!