Does how an organization manages its people affect profitability and stock price? Yes, according to an award-winning study by Mark Huselid. But it is not people versus profitability - rather the reverse.

The research was based on 968 responses to a survey of the senior human resources professional in a sample of 3,452 firms representing all major industries. Huselid used the survey responses to construct two scales. The first, called employee skills and organizational structures, "includes a broad range of practices intended to enhance employees’ knowledge, skills and abilities and provide mechanisms through which employees can use those attributes in performing their roles."

The second scale, measuring employee motivation, is comprised of practices "designed to recognize and reinforce desired employee behaviors. These practices include using formal performance appraisals, linking those appraisals tightly with employee compensation, and focusing on merit in promotion decisions."

The study assessed the effects of management practices on turnover, sales per employee (a measure of productivity), and the firm’s ratio of stock market to book value. In his analysis, Huselid not only included a large number of potential alternative explanations for the results, such as size, capital intensity, concentration ratio of the firm’s industry, research and development expenditures as a proportion of sales, and others, he also employed statistical methodology that permitted him to better assess the direction of causality: Was performance driving management practices or were the practices affecting performance?

Finally, the study employed statistical procedures to overcome sample selection bias, that is, the possibility that the 28 percent of the surveyed firms that actually responded were somehow systematically different from the nonresponders in ways that could bias the results.

Huselid observed both statistically significant and substantively important results for both of his scales assessing management practices:

The magnitude of the returns for investment in Solutions Work Practices is substantial. A one standard deviation increase in such practices is associated with a ….7.05 percent decrease in turnover and, on a per employee basis, $27,044 more in sales and $18,641 and $3,814 more in market value and profits, respectively.

Yes, you read those results correctly, and they were derived from a number of different estimation procedures. One standard deviation above the mean puts the company in the upper 16 percent of all those in the study in terms of its use of high commitment work practices—so it is in reasonably select company. But the economic returns for those implementing these policies have been enormous—more than an $18,000 increase in stock market value per employee.

A subsequent study conducted in 1996 of 702 firms, using a somewhat more comprehensive conception of the human resource management system, found even larger economic benefits: "A one standard deviation improvement in the HR system index was associated with an increase in shareholder wealth of $41,000 per employee." Since the average stock market value per worker for all of the firms in the sample was about $300,000, firms in the upper 16 percent of the distribution in terms of their use of Solutions management practices experienced about a 14 percent market value premium—clearly economically substantial.

Are these results unique to firms operating in the United States? No. Similar results were obtained in a study of more than one hundred German companies operating in ten industrial sectors. The study found "a strong link between investing in employees and stock market performance. Companies which place workers at the core of their strategies produce higher long-term returns to shareholders than their industry peers."

The research also found that companies that focused on their people not only delivered superior returns to their stockholders but also created more jobs, an important result given the high unemployment rate in much of Europe.

with thanks to The Human Equation by Jeffrey Pfeffer - The Business Case for Managing People Right

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