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Readiness for rebound is a point developed further in Deutsche Bank Analyst, Thematic Research Luke Templeman’s paper, Furloughs, layoffs, and recovering from Covid-19, which, despite the high profile lay-offs in the news, reveals a more far-sighted approach to preserving human capital.
“Perhaps the biggest difference between the [2008-09] financial crisis and today is the huge increase in furloughing rather than permanent layoffs,” reflects Templeman (see Figure 5). “There are three reasons for this: most economists and firms expect the Covid-19 crisis to be short, albeit deep; there is a greater risk of reputational damage in laying off staff; and staff have increasingly become more important to companies.”
The report analyses several metrics to determine the importance of staff to long-term profitability:
- Companies now make a lot more profit from each of their employees than previously. Large US companies generate more than US$55,000 per staff member each year, a significant jump from the roughly US$38,000 generated just in the pre-financial crisis boom era. Meanwhile, European companies generate just over €33,000, a little higher than the pre-crisis level, however, a strong climb since its immediate aftermath.
- The report examines the Human Capital Return on Investment (RoI) by taking a deep dive into the financial accounts of individual European stocks. One unexpected result is the relationship between Human Capital RoI and subsequent share price movements, Returns on Equity (RoE), and a firm’s overall staff costs. In short, the higher a company’s staff costs, as a proportion of its total operating costs, the lower its Human Capital RoI. This suggests that in firms where staff costs are not a large proportion of the cost base, managers are less troubled by ensuring that new hires are justified, and they therefore bring lower returns. This might be easy to explain if these companies were young, high-growth companies. But this is not the case: the sample of low-staff cost companies was dominated by energy, utility, and consumer firms.
- It is also quite striking from the research to see which companies exhibit the strongest relationship between RoE and Human Capital RoI. Companies in the top quartile for RoE see very little correlation with Human Capital RoI, while the worst stocks have the strongest positive relationship between RoE and Human Capital RoI.
Templeman concludes: “From our sample of large companies, we find that companies that are struggling may have the most to gain. This implies that, if the worst performing firms can increase the efficiency of their hiring decisions, this can have a substantial effect on their returns.”
At the end of the day, the balance of public sector exchequers to support private sector future revenues – and tax flows – is a difficult one. Some industries are at a crossroads and are navigating the “new normal” post-Covid-19 or could find themselves in an environment where everyone lives with it. This requires innovation and resilience to deliver value and that means having the right people.