Study: Recruiting Affects Profitability

August 25, 2005
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WASHINGTON, D.C. — Organizations with superior recruiting practices — such as filling jobs quickly, hiring their first-choice candidate and using employee referrals — financially outperform those with less effective programs, according to a new study by human capital consulting firm Watson Wyatt.

The study also found that pay-for-performance and stock-based compensation programs are associated with higher shareholder returns.

Watson Wyatt’s Human Capital Index (HCI) study found that successful recruiting is a strong indicator of higher shareholder value. Companies that fill positions within two weeks provided total return to shareholders (TRS) of 59 percent between 2002 and 2004 vs. 11 percent at companies that required at least seven weeks to fill positions.

Additionally, companies that typically fill a position after just one offer is made had a three-year TRS of 44 percent vs. 32 percent for companies that typically have to make two or more offers to fill an opening.

“An organization’s first opportunity to increase value is effective recruiting,” said Paul Platten, global director of human capital consulting at Watson Wyatt. “Companies that minimize the disruption and lost productivity caused by turnover create a significant advantage that allows them to outperform their competition financially.”

Employee referrals can be a much more efficient way to find new workers, according to the study. Companies that hire more than one-third of new employees through employee referrals generated more than twice the total return to shareholders (48 percent) of employers that hired less than 10 percent of employees through referrals (23 percent).

“While it is possible to find good candidates from any source, there are several advantages to hiring new employees using referrals from existing employees,” said Ilene Gochman, national practice leader for organization effectiveness at Watson Wyatt. “Since new employees already know someone at the organization, they tend to be familiar with their new employer and are likely to develop a greater level of commitment.”

The HCI study also found that companies that differentiate employee bonuses based on performance and use stock-based compensation financially outperform those that do not. Companies that make sharper distinctions in bonus payouts based on employee performance achieved a three-year TRS of 47 percent vs. a -2 percent TRS for companies with a less differentiated compensation structure.

Firms that make greater use of stock-based incentives also perform better. Those that use discounted stock purchase plans had a three-year TRS of 57 percent, 30 points higher than that of firms that do not use such incentive plans. The study also revealed that firms with the widest eligibility for restricted stock plans (where 36 percent of executives and managers are eligible) had a three-year TRS of 50 percent, more than double that of firms with lower rates of eligibility.

“As our study confirms, employers that incorporate effective reward programs will maximize the value of their human capital as well as their financial performance,” said Platten. “The top-performing companies in our study are those that have robust stock-based incentives and are not afraid to make substantial pay distinctions based on performance.”

The best firms take a more balanced approach to hiring non-entry-level positions, filling roughly half of these positions internally, which resulted in a three-year TRS of 56 percent. Firms that fill fewer positions (12 percent) tend to have the lowest returns (-2 percent), while those that fill the most non-entry-level positions internally (80 percent or more) also have lower performance (32 percent).

Too much and too little turnover is unhealthy for an organization. Firms with more moderate turnover (around 15 percent on average) had a three-year TRS of 43 percent, outperforming those with higher and lower turnover by at least 9 percentage points.       

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