A Blog by Jonathan Low


Aug 22, 2018

Why Effectively Managing Employees Provides Best Boost To Corporate Performance

Organizations that improved the most in employee engagement and development showed the greatest improvement in Wall Street Journal/Drucker Institute data.

And those that dropped the most in that category showed the greatest decline in performance. JL

Rick Wartzman and Lawrence Crosby report in the Wall Street Journal:

The employee category is the key source of change in effectiveness scores.The biggest overall gainers shot up 11.2 points in employee engagement and development - more than one full standard deviation - enough to move a company from the middle of the pack to the top 15%, or from the top 15% to the top 2%. In financial strength, the improvement was 7.8 points. “The yield from the human resource really determines the organization’s performance.”
Among Peter Drucker’s most famous maxims was that “any business enterprise has two—and only these two—basic functions: marketing and innovation.”
By the former, he meant understanding what the customer needs and values so deeply that “selling” becomes superfluous. By the latter, he meant the creation of better and more economical goods and services, as well as processes and procedures.
At the same time, Mr. Drucker left little doubt about the engine required to make these functions flourish. They weren’t going to happen magically on their own.
“The yield from the human resource,” he wrote, “really determines the organization’s performance.”
Based on Mr. Drucker’s ideas and ideals, our measure serves as the basis of the Management Top 250, an annual ranking of corporate performance produced in partnership with The Wall Street Journal. Inaugurated last December, it aims to provide a comprehensive view of a company’s “effectiveness”—defined, to use Mr. Drucker’s words, as “doing the right things well.”
To come up with our rankings, we evaluated 693 large, publicly traded corporations. The companies were then compared with one another through standardized scores, which have a range of 0 to 100 and a mean of 50.
In calculating our scores, we drew on 37 indicators covering five different areas: customer satisfaction, employee engagement and development, innovation, social responsibility and financial strength.
But while all five interrelate—and it’s important for executives to pursue excellence across functions—it is evident from our historical data that the employee category is the key source of change in total effectiveness scores over time.
Our employee metrics capture how well a company conveys to its workers a vision and sense of mission; its pay and benefit levels; job satisfaction; and opportunities for training and promotion.
For our most recent test, we computed effectiveness scores from 2012 and put them up against last year’s scores. And we found that the 50 biggest overall gainers on our list during that span shot up by an average of 11.2 points in employee engagement and development.
That’s more than one full standard deviation—enough to move a company from the middle of the pack to the top 15%, or from the top 15% to the top 2%.
The gainers also made progress in other categories during that six-year period, but not by a full standard deviation. In financial strength, the average improvement was 7.8 points. The average advance in customer satisfaction was 6.2 points.
And the biggest losers
Similarly, the 50 companies suffering the biggest decreases in effectiveness since 2012 were off the most in employee engagement and development—by an average of 13.5 points. None of the other four areas came close.
We also assessed those companies that started one full standard deviation above the mean in 2012 in terms of overall effectiveness but whose total score went down by 2017. Likewise, we looked at those that started one full standard deviation below the mean in effectiveness and whose total score climbed over the six years. In both cases, variation in employee engagement and development was the leading factor in their rise or fall.
There is, of course, no guarantee that if a company makes strides in the employee category it will automatically see its total effectiveness score increase.
Symantec Corp. , for instance, registered a 5-point jump in its employee score, to 59.1, from 2012 to 2017. Nonetheless, the cybersecurity company’s effectiveness score slipped 6.4 points over that time to 56.0, landing it at No. 147 in last year’s Management Top 250. Sharp declines in customer satisfaction and financial strength were primarily responsible. Symantec didn’t respond to requests for comment.
Still, the general pattern is undeniable: Many of the biggest gainers in total effectiveness during the past six years were propelled by a substantial upswing in their employee score. And many of the biggest losers overall were hit by a significant drop in their employee score.
Two companies illustrate the phenomenon. Lam Research Corp. , the semiconductor equipment maker, was the third biggest gainer overall, soaring 19.2 points in total effectiveness from 2012 to 2017. The company, which ranked No. 72 in last year’s Management Top 250, went up in all five categories, but it made its largest leap—22.8 points—in the employee area. Meanwhile, heavy equipment manufacturer Caterpillar Inc. was the third biggest loser overall, with an effectiveness score that tumbled 13.8 points from 2012 to 2017. Ranked No. 225 last year, its scores went down in all five categories. Yet its largest falloff was 14.2 points in employee engagement and development.
“Following our peak in 2012, Caterpillar experienced an unprecedented four-year downturn in our business and the company undertook significant restructuring and cost reduction actions,” Caterpillar said in a statement. “We recognize that this was a challenging time for our employees. In 2017, we launched a new corporate strategy that includes a focus on profitable growth and a high-performing, productive and engaged culture. In 2018, the Caterpillar team achieved record first-quarter and record second-quarter profit per share. We are very proud of our employees’ dedication and resilience.”
As we’ve pointed out—and it bears repeating—the best managers keep a close eye on all five dimensions of performance. But if you’re trying to figure out where to focus first, you can’t go wrong by taking good care of your people.


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