Companies have an easy way to boost their financial performance: hire, invest in, and retain the best employees at all levels of the company.
It sounds easy. but More than 51% of the Russell 1000 do not pay their employees a living wage.. Why not? Because companies are under pressure to cut costs in order to return more money to shareholders, labor is the biggest “cost” for most companies. Unfortunately, this approach may actually lower shareholder returns in the medium and long term.
Our research found that we do not use useful measures of decision-making when it comes to hiring companies in the United States, which means that we do not properly assess the role of human capital in companies’ financial performance. Neither our accounting methods nor our reporting metrics are up to the task. Current financial accounting values investments in personnel as labor costs (Although those investments potentially lead to higher productivity and retention.) These costs are not detailed in US financial statements (and only about 15% of companies disclose them), even though employee-related spending typically accounts for more than half of a company’s operating costs.
In addition, current ESG reporting metrics do not capture what is needed to measure human capital, such as the share of employees earning a living wage, turnover cost, or benefit value. Even when relevant metrics are encouraged by standard-setters such as the Sustainable Standards Accounting Council, they are not generally reported. in our area review From the current “S” data, we find very limited job-related reporting (excluding executive compensation). However, investors, regulators, and managers themselves rely on that incomplete data to make decisions that have a significant impact on employees, society, and the bottom line.
Amazon is an example of this. Leaked internal documents It reportedly found an unfortunate decrease (people who left Amazon didn’t want to leave) of 69.5% to 81.3% across all 10 employee levels, with a cost to Amazon of $8 billion, or about 25% of its total annual profits.
Amazon declined to confirm or deny any of the specific claims or figures contained in the documents and said it was doing its best to be the employer of choice. But there is clearly significant employee resentment toward Amazon, which is having a material financial impact. However, Amazon is highly rated by ESG rating providers (Refinitiv gives Amazon an A for an “S”) as well as by LinkedIn (listed as one of the three best companies to work for) and the American Opportunity Index (listed in the top 50 for career growth). Why has Refinitiv given Amazon an A in social metrics for the past four years? Disclosure of HR policy, gender pay gap, and diversity metrics is great, and the rest (such as living wage, benefits, inclusion, and career development) is not required or reported. Refinitiv has given Amazon a D- over the past four years in a separate ESG disputes score — and appears to be driven by third-party reporting on employee-related issues, which is not incorporated into an A-score for social metrics as above. Notably, turnover was not reported although investors (according to the ISSB) may find it material. Interestingly, Amazon announced recently Salary increase by $1 billion for hourly workers.
Better disclosure and reporting alone, while helpful, will not necessarily lead to better performance. Companies disclose CEO salary multiples/average worker and this disclosure It did not change the upward trajectory of CEO pay. To be useful, metrics of human capital must be linked to financial metrics in reporting, accounting, and corporate management practice. How much does involuntary turnover over 100% (retail and fast food minimum turnover) cost the company? To what extent do lower productivity and higher theft from dissatisfied workers affect the bottom line? How does a company’s bad reputation in the workplace affect customer loyalty and purchase? To what extent does the company’s best-in-class treatment of its workers positively affect its valuation?
The quick service restaurant industry has the highest turnover of any industry-144% in 2021. Domino’s lists labor shortages as a major risk in 10k deposit with the SEC, noting increased turnover, but not disclosing its actual turnover or turnover of franchise operations. Store workers and delivery workers earn an average of $6-10.
Since no actual data is available, we are working with aggregate numbers here and they should be considered directional. But this is clearly too material and financially problematic to be tracked or reported to the company and its shareholders. Cornell University has estimated Staff turnover costs in the restaurant industry Approximately $5,864 for one person. Domino’s estimated the cost at $2,500 per hourly worker and $20,000 per manager back in 2005. Domino’s Franchise System employs 350,000 In total. If they had a turnover rate of 144%, they would have to hire approximately 525,000 people per year at a cost of $2,500-6,000 each for a total of approximately $1-3 billion per year versus a total revenue in 2021 of approximately $4.5 billion. .
Based on this research, we have some suggestions for corporate leaders and investors. As a basic principle, we should invest in retaining one or more employees. Strong training, supportive managers, fair wages and benefits, work-life balance, company purpose, and fairness must be prioritized. A more comprehensive approach to assessing returns on employee investments and educating investors and other stakeholders on the benefits of better human capital management for a company’s financial returns will be critical.
Investors should understand the shortcomings in current job reporting and accounting and require corporate leaders to follow best practices in human capital management and publicly disclose their regrettable and unrepentant turnover rate, as well as the percentage of workers earning a living wage and above, as a minimum. .
Ulrich Atz is a Research Fellow at New York University’s Stern Center for Sustainable Business. Tensie Whelan is a clinical professor and founding director of the NYU Stern Center for Sustainable Business.
The opinions expressed in Fortune.com articles. Comments are solely those of the authors and do not necessarily reflect the opinions or beliefs luck.