ESG Insights for Private Companies

Human capital management for private companies

Multiple authors
2023-12-31
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The views expressed are those of the authors at the time of writing. Other teams may hold different views and make different investment decisions. The value of your investment may become worth more or less than at the time of original investment. While any third-party data used is considered reliable, its accuracy is not guaranteed. For professional, institutional, or accredited investors only.

This paper is an introduction to our Private Investments ESG Team’s new Human Capital Management (HCM) Tool Kit, which will be released exclusively to our portfolio companies in 2023. To learn more about the HCM Tool Kit, read below.

The “Great Resignation” and “Quiet Quitting” are persistent trends signaling a fundamental shift in employee expectations, and by extension, a new paradigm in human capital management for employers. Though the environment has evolved during 2022 with some sectors now facing meaningful layoffs, competition for talent remains fierce and job-switching barriers continue to decrease. We believe companies must therefore understand the root of these trends and proactively mitigate the risks they present.

We believe this is particularly pertinent for private companies who often must “do more with less,” growing quickly while lacking the large employee and resource bases of public counterparts. In this paper, we explain why effective people management is critical to private companies in every market environment and outline four strategic focus areas that can help companies navigate evolving employee needs, regulatory changes, and investor expectations.

Why HCM matters for private companies

HCM was top of mind for private equity firms and portfolio companies in 2022. In fact, 75% of portfolio companies rated talent retention as their most pressing challenge for the year (Figure 1).1 Notably, companies spend 50% – 75% of an employee’s annual salary replacing them2 and 100% – 150% of salary3 replacing technical employees, a common need for many private companies. Moreover, private companies often have fewer employees, meaning a higher percentage of projects, customers, and colleagues may be directly impacted by individual departures. For private companies seeking to reduce burn rates and maintain steady growth, these replacement costs are an outsized burden compared to public-market peers. 

Figure 1
The importance of human capital management

Private companies with strong HCM practices can also be better prepared to meet evolving investor and regulatory expectations as they enter the public markets. Public-market investors have increasingly supported HCM proposals. For example, shareholder proposal filings related to employment rights increased 333%, more than any other proposal type, through the first half of 2022.4,5 In the US, the SEC is considering new disclosure standards for HCM valuation and performance data, and numerous states are implementing their own HCM regulations.

Crucially, HCM is as much about opportunity as it as about risk. For instance, strong workforce culture and productivity can lead to a 4X increase in revenue and improve shareholder returns.6 Moreover, companies with top talent management are 6X more likely to report higher total shareholder returns than those with lagging talent management.7

Four key areas to improve human capital management 

In short, private companies can better mitigate economic risks, enhance organizational resilience, and prepare for public markets by strengthening their HCM practices. To do so, we encourage them to focus on four key areas.

Recruiting, hiring, and onboarding
We believe companies can avoid future HCM challenges by implementing strong practices before employees sign their offers. Companies should be able to articulate hiring goals tied to specific growth and corporate objectives — such as a revenue-to-headcount ratio or diversity, equity, and inclusion (DEI) goals — and should clearly define recruiting processes and standards to meet those objectives. This can help create a consistent, transparent process that can scale with growth and should also be matched with analytics to optimize the recruitment process over time. We believe this enables companies to be judicious in their hiring to avoid unnecessary onboarding expenses and the potential for cyclical layoffs such as those faced by the tech sector today.

Successfully onboarding new employees is a cornerstone of long-term employee success. Notably, companies with a formal onboarding program can see up to 50% greater retention and 62% higher productivity among new hires, but only 12% of employees strongly agree their organization has effective onboarding processes.8 We recommend that companies develop role-specific onboarding plans for all employees, including highly coordinated first weeks on the job and longer-term plans to take employees through their first three to six months.

Employee development and engagement
US employee engagement began dropping meaningfully in the second half of 2021 as job resignations increased heading into 2022.9 Career advancement was noted as the top reason people left their jobs,10 ahead of compensation and followed closely by other employee-engagement themes such as leadership quality and perceived work value.11 Importantly, companies that excel at internal mobility retain employees over 2X longer than those that do not.12

We recommend that companies develop and maintain a clear strategy for employee development and engagement. Instead of using a “one-size-fits-all” approach, these should map out specific skill gaps that will emerge as the organization scales, identify the employees who can be developed to fill them, and tailor those employees’ learning goals accordingly. These can include tuition reimbursement, educational partnerships, or more economical solutions such as in-house upskilling programs and online courses. Combining a strategically integrated development plan with formalized assessment and promotion criteria can help foster transparency. We also recommend regularly conducting employee engagement surveys to proactively identify improvement opportunities across areas such as job satisfaction, benefits, and DEI. Transparent employee feedback and organizational responsiveness can lead to higher retention rates, lower absenteeism, improved productivity, better customer service, and enhanced morale.13

Culture and DEI
In a recent survey, 66% of C-suite and board members said that culture is more important to performance than the organization’s strategy or operating model.14 We therefore believe it is critical to establish a company’s culture early on as part of its growth strategy. While culture can refer to a broad set of beliefs and behaviors, we view a company’s purpose and values as core to its culture. Corporate purpose can unify employees around a common mission and help companies endure periods of disruption. A survey of global employees conducted during the pandemic found that, among employees who reported increased job satisfaction during that period, 86% said their company had a purpose about which they were passionate.15 While purpose drives the corporate mission, values guide its achievement. We view DEI as an essential value for companies to consider, particularly as it grows in importance with younger workers.

Employees that do not feel heard or treated fairly may avoid or quit a company unless it can create a space for them to feel valued. One way to do this is to promote transparent feedback and avenues for employees to voice complaints. Companies should train employees, and particularly managers, to listen for commonalities instead of differences while simultaneously assuring inclusivity is integrated across all aspects of company operations, such as marketing materials and recruiting strategies. Among respondents to a recent survey, nearly ¾ of respondents who felt very included at their organization felt “entirely engaged” as compared to only ¼ of those who did not feel included.16 A workplace culture that fosters autonomy and flexibility can help increase inclusion by expanding opportunities to broader employee pools and creating a culture where different types of contributions are valued.

Compensation and benefits
Compensation and benefits are growing areas of employee focus and can differentiate a company in an increasingly competitive labor market. We suggest that companies establish a compensation philosophy early on to guide their decisions. We also recommend implementing pay transparency as it is increasingly required by state laws and employee demands.

In addition, it is important that company leadership consider the full “benefits stack” and distinguish between “core” and “nice-to-have” benefits. Early-stage private companies may prioritize “core” benefits, but it’s worth monitoring today’s changing employee preferences to understand what that constitutes. For example, 70% of employees ranked flexible work benefits as being “very” or “extremely important” in 2022, versus only 49% in 2019.17 Finally, we recommend that private companies, particularly at early stages in their evolution, establish consistent and employee-friendly processes for pay and benefits administration, as well as codify details such as compensation bands to help maintain transparent and equitable pay practices.

Bottom line on human capital management

HCM is an increasingly critical factor for private companies given the current market environment, shifting labor pool preferences, and evolving investor and regulatory expectations. In our view, companies that think holistically and strategically about HCM practices will be best positioned to attract and retain top talent as well as to navigate future periods of uncertainty and disruption. 

Throughout 2023, we’ll offer deeper insights on these four key areas in our new Human Capital Management Tool Kit — an exclusive resource for our portfolio companies. The tool kit will provide actionable guidance and resources such as templates for designing an employee onboarding plan, guidance on best practices for interview training, and much more. 

1Source: AlixPartners, “Seventh Annual Private Equity Leadership Survey.” As of 31 March 2022. | 2Source: The Society for Human Resource Management, “Slowing Job Growth Good News for Those Concerned About Inflation.” As of 7 October 2022. | 3Source: PeopleKeep, “Employee retention: The real cost of losing an employee.” As of 28 June 2022. | 4Source: Orrick, “ESG-Related Shareholder Proposals – Takeaways from the First Half of 2022.” As of 25 July 2022. | 5Source: PJT Partners, “2022 Proxy Season Review” As of August 2022. | 6Source: McKinsey & Company, “Winning with your talent-management strategy.” As of 7 August 2018. | 7ibid. | 8Source: Harvard Business Review, “Onboarding can make or break a new hire’s experience,” by Sinazo Sibisi and Gys Kappers. As of 5 April 2022. | 9Source: Gallup, “Is quiet quitting real?” As of 6 September 2022. | 10Source: McKinsey & Company, “The great attrition is making hiring harder.” As of 13 July 2022. | 11ibid. | 12Source: LinkedIn, “2019 Workplace Learning Report.” | 13ibid. | 14Source: PWC, “Global Culture Survey 2021.” | 15Source: Bain & Company, Forbes. “How to build a corporate purpose that will help navigate change.” As of 2 March 2021. | 16Source: McKinsey & Company, “Understanding organizational barriers to a more inclusive workplace.” As of 23 June 2020. | 17 Source: The Society for Human Resource Management, 2022 Employee Benefits Survey.

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