New Research in Human Capital, Health & Productivity and Pay Practices

This article discusses four recent studies conducted by Watson Wyatt Worldwide in the areas of human resources practices, disability management, executive pay and the effective use of strategic rewards. Some of the results confirm—or at least build on—results of previous studies, but others are counterintuitive, flying in the face of conventional wisdom.

The Watson Wyatt Human Capital Index™

Companies that have superior human capital practices create superior returns for their shareholders. That is the primary finding of the first ever Watson Wyatt Human Capital Index.

The study found that a significant improvement in 30 key human capital practices is associated with a 30 percent increase in market value. The 30 practices identified in the study were grouped into five key dimensions: recruiting excellence; clear rewards and accountability; a collegial, flexible workplace; communications integrity; and prudent use of resources.

The year-long study was based on a comprehensive analysis of human resources practices at 405 publicly traded U.S. companies with at least three years of total returns to shareholders (TRS) and a minimum of $100 million in revenue or market value. The survey data was matched to objective financial measures of a company's value, including its market value, three- and five-year TRS, and its Tobin's Q (a company's stock market value plus its long-term debt divided by the replacement cost of its assets). Following a series of sophisticated statistical analyses, including factor analysis and multiple regression, each company was given a Human Capital Index score on a scale of 1 to 100.

The study shows a strong relationship between human capital practices and shareholder value creation over both the short and long term. Over a five-year period, TRS was nearly twice as much for high-index companies (103 percent) compared to companies with a low index (53 percent). Over the most recent six-month period following the survey (January-June 1999), high-index companies reported 28 percent TRS versus a negative 6 percent return for companies with a low index.

Figure 1

*One standard deviation.
Source: Watson Wyatt Worldwide.

According to the study, certain practices that conventional wisdom applauds, such as 360-degree feedback and general training programs, are actually linked to lower market value. These counterintuitive findings are grouped together in the fifth dimension of the index called the Prudent Use of Resources. While there may be nothing inherently wrong with these practices, they are frequently implemented in misguided ways. Prevalence of these programs did not correlate with added economic value but rather was associated with a 10 percent decrease in market value. The data suggests that companies who choose to implement these practices must be very prudent with resources, both human and financial.

To learn more about Watson Wyatt's Human Capital Index, please visit Research and Reports at www.watsonwyatt.com/homepage/res.htm or call 1-800-388-9868.

Staying@Work®: Focusing on What Works in Integrated Disability Management

The fourth annual Washington Business Group on Health/Watson Wyatt survey on improving employees' health and productivity through integrated disability management finds employers at a crossroads. This year we can identify the winning activities employers have engaged in to successfully reduce disability-related costs while keeping employees healthy and at work. Furthermore, those employers that have integrated multiple activities across occupational and non-occupational disability programs have seen the best disability management investments.

But our survey also finds that disability costs are still climbing for many employers, suggesting some misdirected efforts, increasing disability rates or both—and reflecting continued opportunities for improvement.

Figure 2

*One standard deviation.
Source: Watson Wyatt Worldwide.

Other survey highlights include:

• The total average costs for workers' compensation, sick pay, short-term disability (STD) and long-term disability (LTD) as a percentage of payroll were 6.3 percent, up slightly from 6.1 percent in the 1998/99 survey.
  
  
• The indirect costs of disability also continue to rise. Total average costs for overtime, replacement employees and workstation/job accommodations stand at 8 percent of payroll, up from 6.7 percent last year. The jump is almost entirely due to the rising cost of replacing employees in a tight labor market.
  
  
• The four most cost-effective disability management activities are transitional and modified return-to-work (RTW) programs, case management, behavioral health interventions and independent medical exams.
  
  
• Twenty-five percent of companies with RTW programs saw declines in their LTD costs. No company without such a program saw a decline in LTD costs.
  
  

To learn more about the new Staying@Work survey, to download specific data cuts, to examine case studies or to participate in an online discussion of how to improve the effectiveness of disability management programs, please visit www.stayingatwork.com.

Executive Pay in 2000: Superior Pay for Superior Performance

U.S. executive pay, especially CEO pay, continues to generate controversy. In general, the media believes we have gone beyond appropriate limits.

Others, including most institutional investors and Watson Wyatt, believe that the way U.S. executives are paid is a source of significant international competitive advantage. That is, the structure and size of executive pay opportunities have helped drive superior economic performance at individual U.S. companies and for the entire U.S. economy.

While it is true that CEO pay levels are very high by everyday standards and that some companies do not pay fairly for performance, Watson Wyatt believes that there is a strong and very real relationship between CEO pay and performance. In this year's study, we found that:

• High levels of CEO stock ownership (excluding stock options) are related to superior levels of financial performance, including TRS, Return on Equity (ROE), Earnings per Share (EPS) growth and Tobin's Q.
  
  
• High levels of CEO total pay and changes in CEO cash compensation are highly related to TRS.
  
  

Figure 3

S ource: Watson Wyatt Worldwide.

In addition to examining the relationship between CEO pay and shareholder returns, the report also looks at broad trends in executive pay practices, from average salary increases to the size of stock option grants.

To learn more about the new Executive Pay survey report, please visit Research and Reports at www.watsonwyatt.com or call 1-800-388-9868.

Strategic Rewards® 1999/2000

The new employer-employee deal of the 1990s has been replaced with a myriad of deals for 2000 and beyond. The new deal of the 1990s taught employees to see themselves as free agents. In one sense, employers are reaping what they have sown as companies have moved away from the model of career employment and asked employees to forego loyalty in return for transportable skills.

At the same time, the realities of baby boom demographics—a dramatic shortfall in the number of new entrants into the workforce—suggest an imminent labor supply crunch. We have had almost two decades of maximizing shareholder value partially through an abundance of labor. As this abundance is fading rapidly into shortage, the balance of power in the employment relationship has shifted from corporate consumers of labor to its suppliers—employees.

What many companies still don't understand is that different employees require different people strategies—or different ìdealsî—to attract, retain and motivate them. Companies that see their people strategy as a source of competitive advantage and back it up with carefully put together reward plans are outperforming companies that don't by a margin of more than two-to-one.

Figure 4

Source: Watson Wyatt Worldwide.

Other survey highlights include:

• Forty-five percent of respondent companies do not have a formal recruitment strategy, yet 80 percent reported moderate or great difficulties in attracting critical-skill employees.
  
  
• The desire to maintain a good reputation at work is the most effective motivator for 81 percent of top-performing employees.
  
  
• Opportunities for advancement, job redesign and learning new skills are the three non-compensatory rewards most valued by top-performing employees.
  
  
• Top-performing employees say dissatisfaction with benefits, conflicts with co-workers/supervisors, an unpleasant work environment and lack of time for personal affairs have a far greater impact on their decision to resign than companies realize.
  
  
• For companies where top performers believe that true pay for performance is practiced, average total shareholder returns during the period 1996-1998 were 112 percent. This compares to 80 percent for companies whose employees believe it is not.
  
  

To learn more about the new Strategic Rewards survey report, please visit Research and Reports or call 1-800-388-9868.