Does investing in people actually benefit companies? In this new report and accompanying article, McKinsey explores how a dual focus on developing people and managing them well can give companies a long-term performance edge.
Performance through people: Transforming human capital into competitive advantage
How does developing talent affect financial returns for firms? This research finds that companies with a dual focus on developing human capital and managing it well have a performance edge. These People + Performance Winners rank among the most profitable firms within their industries. They further stand out in two important ways: greater earnings resilience and a superior ability to attract and retain talent, key advantages as businesses face economic headwinds and a war for talent. In addition to building skills, these companies have distinctive organizational capital—that is, their management practices, systems, and culture. They challenge and empower employees while fostering bottomup innovation to make their human capital investments pay off. While focusing solely on financial returns is one path to success, choosing the P+P model of emphasizing people and performance can yield the longer-term benefits of resilience and talent retention.
People + Performance Winners develop talent and deliver top-tier financial returns in tandem. We analyze 1,800 large companies across all sectors in 15 countries, sorting them into four categories based on markers of human capital development and financial performance over the prepandemic decade relative to sector peers. P+P Winners excel on both dimensions. They average high economic profit and returns on invested capital, similar to firms in our second category, Performance-Driven Companies. But P+P Winners put a greater emphasis on talent, with a higher share of internal role moves and more training for employees. Members of our third group, People-Focused Companies, also emphasize talent development but are unable to translate that into strong financials. Typical Performers stand out on neither dimension.
Firms that invest in human capital have greater resilience and more consistent earnings relative to their peers. P+P Winners closely track Performance-Driven Companies on profitability and shareholder returns. Yet they are roughly 1.5 times more likely to remain high performers over time and have about half the earnings volatility. When the pandemic hit, they maintained profitability and grew revenues twice as fast as Performance-Driven Companies. Even beyond the top-quintile financial performers, investing in talent development seems to pay off: People-Focused Companies showed more consistency and resilience than Typical Performers. Developing human capital helps firms retain talent and deliver a better payoff for their people.
P+P Winners are talent magnets, with attrition rates almost five percentage points lower than those of Performance-Driven Companies. Their employees report higher job satisfaction, and they are 1.3 times more likely to move into higher lifetime earnings brackets than those of Performance-Driven Companies. People-Focused Companies have similarly high levels of employee satisfaction and even lower attrition than P+P Winners, although not with the same stellar financial performance. P+P Winners achieve higher returns on human and organizational capital investment. Firms invest in different types of capital to boost revenues: physical capital, human capital, organizational capital, and other varieties of intangible capital (such as intellectual property and brand). P+P Winners achieve roughly 30 percent higher revenue growth than both Performance-Driven and People-Focused Companies for every dollar they invest in human and organizational capital (spending that amounts to one-third of all firms’ revenue, on average). By contrast, PerformanceDriven Companies generate higher return on R&D and sales and marketing investment (typically one-eighth of all firms’ revenue) but may stand to gain by making their human and organizational capital spending more productive.
Certain mixes of organizational practices are more effective at activating human capital. Organizational capital is the fabric that surrounds employees, and its pattern matters. We compare the practices of each group using McKinsey’s Organizational Health Index diagnostic and other firm-level metrics. P+P Winners achieve higher returns with a signature characterized by consultative and challenging leadership; bottom-up innovation and collaboration; positive, inclusive work environments; and rewards and advancement opportunities for employees. PerformanceDriven Companies have similar leadership styles but are more externally oriented to customers and competitors, with less emphasis on company-wide innovation, motivation, work environment, and on-the-job coaching. While PeopleFocused Companies have many practices in common with P+P Winners (such as motivating employees and creating positive work environments), their leadership is less resultsoriented, and they do not emphasize bottom-up innovation.
Leaders can transform their organizational capital to drive sustained outperformance. People are a company’s core asset, and the organizing principles governing how they work are crucial to realizing their potential. While some organizations have a singular focus on financial results, supporting talent with effective organizational practices does not come at the expense of performance. Companies that make their systems more people-centric stand to boost their bottom lines over the long term—while delivering for employees as well. At a time of uncertainty and talent scarcity, leaders can choose to capture lasting benefits by ensuring that their organizations truly work for their people.