At a dinner some weeks ago, a good friend, who is CEO of a mid-sized service company, shared his frustration with me. He is one of those guys with the deep conviction that his employees should come first. He strongly believes that creating an environment, where talented people can be happy and do their best work, will lead to everything else one could possibly desire for a business - growth, profit, impact, reputation – and will eventually make all stakeholders happy.
His problem is that his leadership team does not fully share his “people first” approach. It is composed of hard driven managers who prefer a more direct path to growth and financial returns with less consideration for investments in employee's engagement and happiness.
So I thought I give him a hand and provide some hard evidence that investments in people have very attractive ROIs and that there is no conflict between his “people first” philosophy and his colleagues interest in financial returns.
Good Companies are profitable companies
A good place to look for data that supports this hypothesis are the companies that appear in the Best Place to Work rankings. If you compare their stock market performance with that of regular businesses it becomes evident that the best places to work produce superior returns. A study done by the Russell Investment Group shows that between 1998 and 2010 the Fortune 100 Best Companies to Work have outperformed the S&P 500 index by a ratio of almost 3 to 1 (10% vs. 3.8% average annualized return).
To understand in particular the return on investments in employee’s training and development, we can refer to further research done by Bassi and her team. This study demonstrated that investments in employee training and development outperformed any other investment a business could make - more than any R&D, hardware, or capital investment. In fact, companies that invested in training and development had ...
24% higher profit margin
218% higher income per employee
86% higher company value
21% increase in productivity
300% reduction in employee turnover, and
a return per dollar invested of $6.72
Employee engagement drives performance at all levels
Additional support for the hypothesis that investments in people and culture have an attractive ROI comes from Gallup’s research on engagement. Over the past 30 years, Gallup has measured the engagement (defined as the discretionary effort an employee is willing to give and a good proxy for happiness at work) of millions of employees in thousands of companies and discovered that people´s engagement is highly correlated with important performance measures. Companies that scored in the upper quartile vs. companies in the lower quartile in these surveys had ...
22% higher profitability
21% higher productivity
10% customer satisfaction
41% less quality issues or defects
41% less patient safety incidents
45% employee turnover
37% less absenteeism
Remarkable in this context is the significant influence managers have on engagement and performance. Gallup research showed that the direct manager accounts for 70% of the variance in employee engagement scores and thus has tremendous influence on a company’s performance. So it seems that starting a middle management training and development program is a good way to improve your company’s profitability.
We could dig up a lot more research on this topic, but I would think that this is already quite clear evidence for the superior returns of human capital investments. Let´s instead look at another compelling reason to make sure your people are happy and thriving in the workplace.
Put people first or perish in the digital revolution
Digital technology and the internet of things will disrupt about every business on this planet in the next decade or two. No company, big or small, will be safe (Kodak, Nokia and Blackberry can already sing a song about this). The only assets that could possibly protect a company from these continuous disruptions are its people and the culture they work in. Culture, if consciously nurtured and developed, remains the only sustainable competitive advantage. Only companies with well trained, creative, innovative, motivated, flexible and “anti-fragile” (how Nassim Nicholas Taleb would call them) people will survive the imminent tectonic shifts in the business landscape.
You might think that you have heard this type of prophecies before and not much happened. Possible, but I am convinced that this time will be different. Read Salim Ismail’s Exponential Organizationsor Peter Diamandis’ Bold and you will stop thinking that investments in people are a luxury.
Business has always been about people
By any means, the claim to focus on people in order to successfully grow a business is not new. The digital revolution only aggravates this exigency. Peter Drucker, arguably management’s greatest thinker of all times, knew it all along when decades ago he famously said: “Culture eats strategy for breakfast”.
Apart from all statistics, let’s not forget what is probably the most important reason to put people first. All spiritual currents of the world agree that life, in essence, is about being with and for other people and not about making money. We might have forgotten, but Adam Smith, the father of modern capitalism, defended that businesses should serve human beings; that their purpose is to improve the lives of people, those inside and outside the company. Earning a return is a necessary and desirable condition for being in business, just like breathing is a necessary condition for living, but it is not its purpose.
It is obvious that leaders cannot only focus on their employees. They have to balance the interests of all stakeholders. But the question is: Where should I start? I believe the sequence should be this: Happy employees make happy customers. Happy customers make happy shareholders. In that sense, my friend has made the right choice to start this virtuous circle with his people. It seems a sensible business decision when his goal is to build a thriving, sustainable business in a world full of change and disruption.