How’s Your Return on People?

Companies investing in employee development can outperform the market.

Just ask their shareholders.

By Laurie Bassi and Daniel McMurrer
Harvard Business Review, March 2004, p. 18

Managers are always claiming, “People are our most important asset.” But deep down, they can’t shake the feeling that employees are costs. Big costs. And they treat them that way. Quarterly earnings off? Cut the perks, rein in training, and downsize. This strategy may raise earnings in the short term, but it’s myopic. Recent studies suggest that layoffs actually destroy shareholder value. And our research shows that treating employees like the assets they are – by investing in their development – boosts returns over the long term.

In December 2001, we decided to put our money where our research was, creating a live portfolio of companies that spend aggressively on employee development. In its first 25 months since inception, that portfolio has outperformed the S&P 500 index by 4.6 percentage points (2.2% versus a decline of 2.4 percentage points for the index).

In January 2003, we expanded our investment strategy by launching two additional live equity portfolios composed of similar development-oriented companies.

The results speak for themselves: While past performance is never a guarantee of future results, and while it is always possible to lose money, each of these three portfolios outperformed the S&P 500 by 17% to 35% in 2003. (See the exhibit “The People Payoff.”) How are you investing in your most important asset?

The full article is available for purchase from Harvard Business Review by clicking on this web link.


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