By Ed Frauenheim
Aug. 29, 2011
A new study bolsters the case that smart people management practices produce better business results.
Companies that set goals for employees, align those goals with broader strategies and vary the performance ratings that employees receive tend to outperform their peers in the stock market, according to the report from human resources software provider SuccessFactors Inc.
The SuccessFactors study found that a 10 percent increase in goal-setting activity at firms was associated with a 6 percent increase in industry-adjusted stock returns, which are stock gains or losses compared with direct competitors. They are a measurement that controls for industry-specific factors that may have pumped up or depressed a stock. A 6 percent industry-adjusted stock boost also was associated with a 10 percent increase in the extent to which managers used the full spectrum of the performance ratings scale when evaluating employees.
Erik Berggren, vice president of global research and customer results at San Mateo, California-based SuccessFactors, says these findings boil down to the simple practices of telling people what they are expected to do and giving them honest feedback. In other words, he argues, giving better performers higher marks and weaker performers lower marks—rather than the common practice of giving the vast majority of employees a “meets expectations” rating—helps organizations execute more effectively and, ultimately, beat rivals in the stock market.
The report, based on 153 publicly traded SuccessFactors customers, is part of a growing body of research quantifying the link between particular people management practices and business results. Wayne Cascio, a management professor at the University of Colorado at Denver, says the study adds to research indicating that company performance is boosted when firms set goals for employees that “cascade” down from overall business strategy and then manage employee performance effectively.
SuccessFactors is one of the most prominent vendors of talent management software, which refers to tools for key HR tasks such as recruiting, compensation, learning and employee performance management. The company has sought to set itself apart from the competition by calling its products “business execution” applications.
Last year, SuccessFactors published a report showing that a stock portfolio made up of a group of its own customers had outperformed major benchmark stock indices between Oct. 1, 2008, and April 14, 2010. The latest SuccessFactors study again suggests that use of its software is linked to better share prices. The report said a 10 percent increase in a measure of the extent to which a company uses the SuccessFactors business execution suite was associated with a 4 percent increase in industry-adjusted stock returns.
The importance of the software is that it helps ensure that people do things differently, such as set more regular performance goals for employees, Berggren says. In a news release announcing the study, SuccessFactors declares that the research “Proves That Companies Investing in Business Execution Software Achieve Higher Shareholder Returns.”
But John Haggerty, managing director of executive education at Cornell University’s Center for Advanced Human Resource Studies, questioned that conclusion. He pointed out that all the companies in the sample had invested in SuccessFactors’ software.
“There is no finding in this study that supports that the investment (buying the software) drives a return,” Haggerty said in an email, “only that more extensive use of the features drives a higher return among those who already made the investment.”
Workforce Management, July 2011, p. 6 — Subscribe Now!
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