Companies that back up talk about investing in employees with action are associated with a four per cent higher return on invested capital, according to a global report by the CPP Investments Insights Institute, FCLTGlobal and the University of Pennsylvania’s Wharton School.
The report, which analyzed year-end data for roughly 2,900 companies in the MSCI all country world index between 2010 and 2021, found companies reported a 1.2 per cent increase in contemporaneous annual return on invested capital on an absolute basis, a 0.5 per cent increase in contemporaneous annual sales growth on an absolute basis and 2.8 per cent lower annual employee turnover on an absolute basis.
It also found that, within a year, employers that commit to investing in employees are associated with better outcomes than companies that neither communicate nor demonstrate this commitment.
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Non-compensation employee-oriented strategies — such as employee engagement, diversity, equity and inclusion commitments and programs, labour policies and employee health and safety — are key contributors to companies’ outperformance, according to the report. It concluded that no individual sub-component alone sufficiently accounts for outperformance, but taken together these actions are collectively correlated with long-term value creation. For example, compensation-related investments work best in tandem with non-compensation-related investments.
“The successful firms were moving together in all the dimensions of the work environment that we captured,” says Witold Henisz, vice dean and faculty director of the environmental, social and governance initiative at the University of Pennsylvania’s Wharton School. “If you exclude one, . . . you can’t really do well and deliver the full performance.”
The report also found U.S. companies have increasingly talked about investing in employees since 2018. While talk has also increased at European firms, it’s at a considerably lower rate. Median talk scores for U.S. companies increased 13.9 per cent between 2018 and 2021, while walk scores — a measure of companies’ actions on employee investments — only increased 7.6 per cent over the same time period.
Comparatively, European walk and talk scores increased only 0.1 per cent and 0.2 per cent, respectively. The correlation between high walk and talk scores and explicit financial outcomes — return on invested capital and sales growth — is stronger at European firms, said the report, noting there’s evidence of a similar relationship at U.S. companies.
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Embedding employee well-being into an organization’s workplace culture and core business practice is a good starting point to really generate the kind of return on investment seen in the study, says Allen He, research director at FCLTGlobal, noting it’s about the entire employee experience.
“It’s not just about raising wages, [which] is important. Employers should also ensure they’re keeping up with inflation and are in line with their peers, [when it comes to] . . . flexibility, benefits . . . experience [and] safety measures.”
But balancing the employee experience with other stakeholders’ interests is also crucial, he adds. One of the measures examined in terms of walk was employee turnover. Amid a spate of mass layoffs announced by companies such as Accenture, Meta Inc. and Shopify Inc., the report cautioned employers to evaluate potential trade-offs between the competitive pressures of short-term demands and long-term resilience.
“What [the data] shows is that you’re cutting an investment,” says Henisz. “Don’t get seduced by the short-term benefit of cutting your workforce [because] you’re going to lose an important asset that contributes to your long-term value creation.”
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