Companies that want to increase revenue growth and profit margins should start looking in a new area—human resources.
A new study indicates that companies with strong core HR practices have revenue growth that is up to 3.5 times higher than that of their peers and profit margins that are 2.1 times better. The study, conducted by The Boston Consulting Group and the World Federation of People Management Associations, is based on interviews with more than 4,200 HR and non-HR managers in more than 100 countries.
The study looked at 22 HR areas and focuses on just six with the greatest tie between economic performance and a company’s capability. These areas are recruiting, on-boarding of new hires and employee retention, talent management, employer branding, performance management and rewards, and leadership development. However, the highest performing companies particularly differentiate themselves in three of these areas—leadership development, talent management, and performance management and rewards.
Let’s look more closely at how this happens in each area.
Leadership development. When it comes to developing leadership, the higher performing companies offer leadership models that provide clear expectations around leaders’ contributions and behavior. In other words, leaders and potential leaders in these companies know exactly what they need to do to succeed in that organization. In addition, these companies measure these leaders not just on their own performance but on their ability to develop their people. These companies then reinforce this by tying pay and career advancement, in part, on success in this area.
Talent management. To ensure a constantly full talent pipeline, these companies extend development programs to a broader range of talent, not just those on track to become senior management, and actively recruit international talent. These companies also do all of the things most companies commit to but don’t always follow through on. For example, these higher performing companies offer their people regular talent reviews and ample vertical and horizontal career-advancement opportunities and focus on nurturing employees’ individual growth and professional fulfillment.
Performance management. Transparency is the watchword for these high-performing companies when it comes to managing and tracking individual performance. In these cases, employees know on what they will be measured and specifically how that performance will impact rewards. More importantly, these companies tend to reward behavior, not just results, more clearly than other companies. With a culture based on meritocracy, these companies are able to communicate clear norms, expectations and global standards that, in turn, help motivate employees and allow those employees to align their performance and actions to company needs.
The report points to cosmetics giant L’Oréal as an example of these phenomena in action. L’Oréal develops its talent portfolio and allocates resources in pursuit of a clear goal—supporting continued growth by ensuring a steady supply of leaders and top flight talent with the key competencies the company requires in critical parts of its geographic operations. To do that, the company takes a quantitative approach to identifying future talent needs by analyzing its sources of future growth and where it is likely to expand production.