Business leaders talk often about Return on Investment, or ROI. In its most basic definition, ROI calculates how much benefit can be derived from a given investment of effort. Usually, but not always, the equation is expressed in dollars. The formal equation is expressed as a ratio or percent.
ROI = (Gain from Investment - Cost of Investment)
Cost of Investment
In other words, if you invest $1000 in something, say a stock, and make $200, your ROI is calculated as:
ROI = ($1200- $1000) = $ 200 = 20%
$1000 $1000
The problem with ROI is that until recently, few people understood that a business could determine the “hard” dollar benefits of “soft” business behaviors like communication, employee education, or management behavior. Consequently, business schools focused their measurements on things like inputs and outputs in manufacturing and the arithmetic of finance. HR and Staffing were left with various efficiency measurements such as cost, time, quality and satisfaction.
In recent years, business researchers have begun to change this perception. They have compared the characteristics of successful enterprises with the characteristics of less successful companies and discovered that there is indeed a measurable financial benefit to certain “soft” HR and staffing practices.
In 1998 and again in 2003, Hewitt Associates, in partnership with Vanderbilt University, compared the financial performance of the companies that were rated “best to work for” with similar organizations. They discovered that the “best” companies had greater income, superior return on assets, and cumulative stock returns that beat the market averages by 50%.
A similar study in Australia found that companies on the “best” list averaged 13% revenue growth and 21% profit growth while comparable companies not on the list averaged only 7% revenue growth and a 44% drop in profits. More recently, a third study noted an average 18.9% return for “best” companies between 1998 and 2007, against the Standard & Poor’s index average of only 8.4%
In 2004, a well publicized study of Wal-Mart's Sam's Club and rival Costco compared the HR policies of the two companies. The particular significance of this study lay in the fiercely competitive low-end market they both serve, where strict cost-control, a Wal-Mart specialty, was thought to be essential to success. The comparison showed that despite much more generous salary and benefit packages, Sam's Club's cost of labor and overhead as a percent of sales was 17%, almost double Costco's 9%. Added to that, Costco's sales were much higher on a per-store basis as it generated nearly as much total revenue with one-third fewer employees. Consequently, profit per employee at Costco was $13,467 compared to only $11,039 at Sam's Club.
Finally, a comparison of shareholder returns between 1998 and 2002 using three indexes, the S&P 500, the Russell 3000 (largest market cap) and The Best 100 Companies To Work For, showed this:
1998-2002
- S & P -.071% return to shareholders
- Russell 3000 -.056% return to shareholders
- Best Companies +9.86% return to shareholders
Obviously there are multiple factors involved in creating the work environment of a “best to work for” company, from the leadership skills of senior management to upkeep of the bathrooms. The important thing to remember here is that good people policies, from the earliest stages of recruiting through onboarding and satisfaction surveys, do have “hard” financial benefits that can be quantified and presented to management.
Our forthcoming 2008 Recruiting Metrics and Performance Benchmark Report contains extensive management benchmark data from 1015 companies. |
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