U.S. leads the way on employee ROI

Trends in Human Capital is based on data drawn from more than 10,000 companies in 40 countries to report the pre-tax profit produced for every pound, euro or dollar paid out in remuneration: the human capital return on investment (HC ROI).

According to the report, HC ROI rose by 4.6% in the U.K. and 8.3% in Western Europe during the uninterrupted growth years of 2002 to 2006. In the U.S., growth was 19.8% in the U.S. over the same period.

Even in the grip of the 2007 credit crisis, which saw the index fall in the U.K. by 2.8% and 1.7% for Western Europe, the U.S. held steady.

The strong American results can be partly attributed to the country’s relatively liberal regulatory regime, explains Richard Phelps, human resource services partner at PricewaterhouseCoopers LLP in the U.K.

“U.S. firms have proved better at flexing employment costs to market conditions,” he says. “Less prescriptive rules have allowed them to adjust staff numbers and salaries where necessary. The impressive return on investment levels is starting to feed through to the dollar. In the U.K. and Western Europe the more regulated environment prevents such agility. Firms here will need to find other ways to improve staff returns to compete globally with their more aggressive competitors.”

The report offers numerous suggestions for increasing HC ROI, including investigating the utilization of overtime; reviewing absenteeism; adjusting the balance of full-time, part-time staff and contract workers; assessing benefits structures, and facilities and overheads costs.

“While many companies invariably made job cuts to survive the recession, some employers introduced cost saving initiatives with similar results but with less pain,” says Phelps. “Either way, the downturn has highlighted the need for companies to have a clear idea of the contribution their people make to the bottom line. A fact-based approach can help ensure decisive and transparent decision making.”

“However, companies need to ensure employees remain engaged during any subsequent changes as their support is equally vital to return on workforce investment.”

The overriding theme of the report focuses on keeping employees motivated and nurturing talent. The data shows that while organizations on average have at least one potential successor for each key position, when vacancies arise, only one in three are filled by the succession candidates. Companies need to strengthen talent management programs, argues Phelps, who suggests identifying exemplar employees who set standards for other workers as a solution.

He also explains that retaining valued employees will become ever more challenging as emerging economies start to compete for talent. These economies are stepping up investment in R&D and often foster a more innovatory culture.

“Companies should recognize the maturity of emerging markets as the new trend setters in this field,” he says. “But all regions face the challenge of an increasingly mobile workforce and organizations large and small need to plan for their ever more globalize future. It will be interesting to see if organizations globally respond to a period of growth by employing more people. In my experience increasing headcount does not directly correlate with profitability and it’s perhaps better to bear the grind for a little longer.”

Read the PwC Trends in Human Capital report here.