Can We Link Human Performance To Financial Outcome?

I remember my first meeting with Lynda Gratton, Professor of Organisational Behaviour and Dean of the full time MBA Programme at the London Business School (LBS) in September. I was attending a two-week Human Resources Excellence Programme and Lynda Gratton was scheduled to spend two days with us. As the director of the LBS 'Human Resource Strategy in Transforming Organizations' executive programme, Lynda Gratton is acknowledged as a global authority on the people implications of strategy. She has profoundly influenced the way managers think about human resource strategy. This programme came up not too long after the publication of her book, Living Strategy, the book that “puts human back into human capital." 

As we settled into the auditorium that Thursday 19 September, her first question was “Can you prove the link between human performance and financial performance?” The twenty-eight different nationalities in the auditorium who were at a forming stage in the early days of the programme, debated the question. She then pointed out that in an organisation, financial outcomes are directly determined by how well the business leaders choose to approach the business goals. The outcome of the approach chosen could be increased commitment to, and deeper knowledge of customers. This should lead to delivery of business goals such as increased customer satisfaction which ultimately leads to better financial performance (increased revenue).

She added that when the practices in the organisation such as:

a. rigorous selection

b. internal career opportunities

c. Formal training systems

d. Appraisal measures

e. Profit sharing/merit pay

f. Employment security

g. Voice mechanisms

h. Job definition/determination of work/employee involvement

are applied consistently and effectively, they impact the performance of the firm leading to:

a. Improved market share

b. Shareholder profit

c. Sustained productivity

d. Capital market measures

e. ROA/ROE

f. Relative performance

Has this worked before? Can you prove the link? We asked. She shared research by Huselid & Becker which showed that one standard deviation improvement in HR systems index is equal to increased shareholder wealth of $42,000 per employee. Their research showed that concern for employee welfare accounted for 15% of variation in profitability between companies across two time periods. Research data from Patterson & West showed that 19% of variance in changes in profitability was accounted for by HR practices. 29% of variance in change in productivity was accounted for by organisational culture (concern for employee welfare). Job satisfaction explains 20% of the variance between companies in change in performance. Organisational commitment explains 17%.

What is different about human capital? How does it differ from financial capital? What are the sources of difference? What is the impact on the way we create, develop and structure our organisations? The essence of human capital, she said, is anchored on three tenets.

a. We operate in time

b. We strive for meaning

c. We have a Soul.

‘Does your organisation have a soul?’ While we all reflected on this question, she said "If 'people are your greatest assets', it is time to make strategies that people can live in. There is a need for a fundamental shift in our thinking. It is time to let go of memory of the past and create our future memory in staged development while building resilience to change.

The first tenet is that we operate in time. The organisation’s perspective on time is based on the past, present and the future. The new agenda requires that there is a time-frame for change in performance in terms of:

a. Building visioning capabilities

b. Developing future sensing capabilities

c. Creating a people-centred strategy

For the second tenet, Striving for meaning, the new agenda requires:

a. Understanding the meaning in the organisation

b. Creating adaptation and flexibility

c. Developing systemic thinking

The third tenet’s focus is that we have a Soul.

a. You need to understand emotional capital.

b. You need to focus on process fairness.

c. You need to build the psychological contract with your employees.

To build the Soul, employees must:

a. Believe that the organisation has integrity. 

b. They must feel proud to tell others that they are part of the organisation.

c. They must talk about the organisation as a great place to work. 

d. They must really care about the fate of the organisation

This psychological contract will help your organisation from falling into a cycle of despair which is characterized by mistrust, reduced commitment, lowered flexibility and reduced self esteem. To maintain a cycle of hope, people must have a voice and choice. They must have perceptions of fairness in process and actions. This leads to high commitment, trust, flexibility and enhanced self esteem. At the end of day one, I received an autographed copy of her book, Living Strategy. The book shows you why and how to design strategies that have meaning and purpose for people, without whose commitment your strategies will be nothing more than mere drawings on a wall.