WW: Superior Hiring Can Boost Shareholder Returns

August 16, 2005 (PLANSPONSOR.com) - Hiring the right people quickly isn't just smart, it's good for business, a new study found.

A Watson Wyatt news release said that its Human Capital Index (HCI) study found that successful recruiting – filling jobs quickly, hiring first-choice candidates, and using employee referrals – is a strong indicator of superior financial performance and shareholder value. Pay-for-performance and equity compensation programs also drive higher shareholder returns, Watson Wyatt said.

The HCI study found that companies that fill positions within two weeks provided total return to shareholders (TRS) of 59% between 2002 and 2004 versus 11% 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% versus 32% for companies that typically have to make two or more before a candidate accepts a job offer.

“Inside” Information

Companies that hire more than one-third of new employees through employee referrals generated more than twice the total return to shareholders (48%) of employers that hired less than 10% of employees through referrals (23%), according to the study.

“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, in the news release. “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%, versus a negative 2% TRS for companies with a less differentiated compensation structure.

Stock Incentives

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

The best firms also seem to 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% among the survey base. Firms that fill fewer positions (12%) tend to have the lowest returns (negative 2%), while those that fill the most non-entry-level positions internally (80% or more) also have lower performance (32%).

The 2005 HCI study is based on a survey of human resource practices at 147 large North American companies with a track record of at least three years of total returns to shareholders (TRS), 1,000 or more employees and a minimum of $100 million in revenues or market value.

The report is available for purchase on Watson Wyatt’s Web site for $45. More information is here .