By Melissa J. Anderson

It’s easy to assume that companies with good people management practices are likely to perform better financially. But without hard numbers, it’s difficult to prove – until now that is. Recently, Boston Consulting Group polled over four thousand individuals from around the world on their companies’ effectiveness on 22 different measures of talent management. Then BCG’s researchers compared their answers with their companies’ growth and average profit margin change from 2010 through 2011.

And the results were striking. The research revealed a strong correlation between people management best practices and stronger financial performance.

The writers of the report, Rainer Strack, Jean-Michel Caye, Carsten von der Linden, Horacio Quiros, and Pieter Haen, believe that keeping this correlation in mind will help companies and HR departments continue to implement talent management programs, despite growing calls for metrics- and performance-based analysis in the post-recession environment.

They write:

“In the wake of the financial crisis, departmental budgets have increasingly been allocated on the basis of return on investment. For HR departments, quantifying the economic value of people management is a tricky proposition. Yet now is not the time for companies to skimp on their people expenditures. With the pressures of globalization, the growing scarcity of talent, and an employer-employee relationship frayed by persistent economic pressures, companies today—more than ever—must regard their human capital as an asset worthy of continual investment.”

Based on their research, human capital investment pays off.

Studying Metrics

BCG and the World Federation of People Management Associations believe the study confirms that “good people practices confer a performance advantage.”

They started their research by looking at the 100 companies that have been featured on Forbes “Best Places to Work” list most frequently, and confirmed that these same companies cumulatively outperformed the S&P 500 by 99 percentage points. They noted that while this suggests that good employment practices help boost financial performance, it didn’t prove a direct cause-and-effect relationship.

Next they identified 22 best practices for people management, and for 21 out of 22 of them, confirmed that firms which were rated “very high” for these practices by employees showed “significantly greater revenue growth and higher average profit margins” than those which were rated “low.”

But that’s not all, the researchers continue. “For six topics in particular, the correlation between capability and economic performance was striking: recruiting, onboarding new hires and employee retention, talent management, employer branding, performance management and rewards, and leadership development.”

Companies with high marks for recruiting had 3.5 times the revenue growth and twice the profit margin than others. Likewise, companies rated highly in terms of talent management enjoyed twice the revenue growth and profit margin. Companies with high marks on leadership development revealed 2.1 times the revenue growth and 1.8 times the profit margin.

Holistic Exercise

The other aspect emphasized by the report is the importance of doing all of these things together – firms can’t just do one or two and expect to outperform their peers. The researchers believe that because aspects of people management are so intrinsically related, companies must do them all together, and do them well. They explain:

“And critical mass matters: companies must be good at many activities, and they must integrate those activities. Moreover, it’s not enough to carry out important people-management activities in a step-by-step, linear fashion. Each critical topic, and the critical activities it entails, needs to be carried out in parallel.”

According to the researchers, applying these best practices simultaneously is “key to keeping the supply of talent and leadership—along with economic performance—steady and sustainable.”

It may be easy to suggest that the research merely shows a correlation, that perhaps it is not people management that causes good performance, but that good performance enables firms to invest more in people management. This may be true. But any firm that finds itself in the good performance category, without also being in the good people management category will quickly see an exodus of high performing talent.

Rather than a chicken or egg debate, the research shows that it is more of a chicken and egg issue. Good performing companies will attract good talent. But keeping good talent requires the good people management practices that in turn produce more good talent on a sustainable basis. By investing in people management best practices, firms are looking out for their bottom line today and tomorrow.