Study Measures Impact of Intangibles on Future Earnings

Global consultant Watson Wyatt conducted a study that measures the impact of key intangibles on a company's future financial performance. The intangibles are aggregated into a human capital index (HCI) that assesses the levels of value or risk inherent in a company's management practices.

The study found six factors helped future financial performance. The factors, and their respective value added, are: clear rewards and accountability (22%), recruiting and retention excellence (15%), flexible workplace (11%), communications integrity (7%), prudent use of resources (15%) and human resource effectiveness (21%).

The factors that hurt future financial performance include:

  1. Use of a disposable workforce. The use of temporary workers to provide a cushion of disposable workers can undermine financial performance by creating tensions and jealousies with permanent employees in good times, while offering little protection to permanent employees in times of layoffs.

  2. Developmental training. Companies that provide training to employees may succeed in increasing the value of the individual, but not necessarily the value of the company. This can happen if the training is not well-timed or good enough, or because costs of employment rise as employees demand more pay or move to another employer to realize their enhanced value.

  3. Excessive paternalism. Examples of excessively paternalistic practices include maintaining training regardless of economic circumstances and avoiding at all costs the termination of employees.

Commenting on the intangibles involved, Watson Wyatt's Steven Dicker explained, "With the return to real-world economics after the bursting of the 'tech' bubble and unwinding of the 1990s' creative accounting, most businesses are fundamentally 'people' businesses. Increasingly, it is the quality of a company's people management that determines its real success or failure." Overall, an analysis of return on equity over the past two years for companies participating in the study showed those with high human capital indexes in 2000 generated returns of over 20%, while low-scoring companies showed a negative return on equity during the same period.

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