‘People + Performance Winners’ empower their employees better

Employers that build skills are also able to ensure internal mobility and better organisational health says a McKinsey report

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‘People + Performance Winners’ (P+P Winners) manage to create opportunities for their employees to build skills even while constantly managing to clear the way towards financial performance, says a recent report. The companies part of this category or data set, ‘(P+P) Winners’, are those — less than 10 per cent of the 1,800 organisations covered — that outperformed in terms of financials as well as human capital development.

The other categories were ‘performance-driven companies, that is, 21 per cent of all companies that post financial results in the top quintile for their sector but lag behind in terms of developing people.

The ‘people-focused companies’— form 15 per cent of the companies covered —that emphasise human-capital development but fail to translate talent into strong financial performance. The last category is that of ‘typical performers’ comprising about 55 per cent of the roughly 1,800 companies across 15 countries, which failed on both fronts, that is, human capital development as well as financial results.

While both ‘P+P winners’ and ‘performance-driven companies’ score high in terms of economic profitability and show similar results in terms of return on invested capital (ROIC), there does exist a gap between ‘people-focussed companies’ and ‘typical performers’.

‘People-focussed companies’ are a shade better than ‘typical performers’ in terms of ROIC and revenue growth. They also have a slightly higher growth in EBITDA and ten-year total returns to shareholders. The study reveals that investment in human capital pays off for companies, whether they are amongst the top financial performers or not.

Resilience: ‘P+P Winners’ are more resilient than the other categories, and are able to handle all ups and downs in the business cycles and face disruptions. This is a must-have quality during these times of uncertainty. The focus on people development along with financial outcomes appears to provide a certain level of protection against volatility. During the pandemic, the ‘P+P Winners’ were able to overcome the crisis and avoid succumbing to it. Only 54 per cent of ‘P+P Winners’ saw a reduction of more than 0.5 percentage point in ROIC from 2019 to 2020, compared to 65 per cent of ‘performance-driven companies’.

Performance: It is observed that ‘P+P Winners’ were 4.3 times more likely than the average company to stay amongst the top quintile of their sectors in terms of ROIC for at least nine out of the ten years from 2010 to 2019. ‘Performance-driven companies’ also topped the average company, but their likelihood of maintaining this exceptional performance for nine out of ten years was smaller, at 2.7 times. That means, ‘P+P Winners’ were 1.6 times more likely than ‘performance-driven companies’ to consistently perform better than the others in terms of ROIC over time. Their volatility in terms of earnings was also lower across the decade-long time period, with a nine per cent standard deviation in ROIC, versus 16 per cent for ‘performance-driven companies’.

Growth: More ‘P+P Winners’ found growth opportunities amidst the crisis. From 2019 to 2021, their revenue increased twice as fast as ‘performance-driven companies’ (eight per cent versus four per cent).

P+P Winners are better able to build scale. Their average economic profit is $1.1 billion, which is way more than the $400 million average for ‘performance-driven companies. A significant number are part of the world’s ‘superstar’ firms.

How can companies succeed in terms of finances and human capital development?

Investment in human capital offers an edge to all types of companies, albeit in different ways.

It is not natural or easy for companies to follow the ‘P+P Winner’ template. A significant majority are driven solely by financial results and focus less on people. However, according to the ‘Performance through people: Transforming human capital into competitive advantage’ report, the companies that do choose to follow the P+P template not only gain financially, but are able to become more consistent and resilient. They are also able to attract talent, enjoy more loyalty from the workforce and have a good reputation. Naturally, they thrive in the long run because of the following main reasons:

Organisational capital: They have efficient management practices, systems and culture to ensure that they do well on the financial front as well as on the human capital development front. In short, they have effective organisational capital. Only when the organisational fabric works effectively does it lead to a productive workplace. This, in turn, draws quality talent from the market and incubates them.

Leadership: P+P Winners have a strong leadership with a unique style of leadership that empowers employees.

For this report, data was gathered by the McKinsey Global Institute — on financial performance and indicators of human and organisational capital — from companies with annual revenue of over $100 million, across various nations including the US, the UK, China, France, India, Japan, Australia, Germany, South Korea, Indonesia, Malaysia, the Philippines, Singapore, Thailand and Vietnam. The companies covered are from across sectors such as finance, energy, communication services, consumer discretionary goods, consumer staples, healthcare, industrials, information technology, materials, utilities and so on.

Investing in talent alone is not enough to gain meaningful performance edge and push the company to the top. While both ‘P+P Winners’ and ‘people-focused companies’ emphasise human capital development, P+P Winners are more effective in profiting from their investment.

In the pre-pandemic period of 2010–19, ‘P+P Winners’ posted an average economic profit of nine per cent of revenue, while ‘people-focused companies’ averaged – 5 per cent. They also posted higher ROIC, faster revenue growth, higher total returns to shareholders, and more robust EBITDA margins.

Clearly, employers that are able to do well in terms of building skills, end up creating more chances for internal mobility. As a result, there is an overall organisational health, which helps the employees maximise the value of their own human capital. These positive effects even after the individuals move on. Employees who spend the initial years of their career in a positive workplace setting where learning is encouraged are able to move faster towards a higher lifetime earnings bracket compared to their starting point.

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