How a new approach to human capital can help create value

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6 minute read

Several private equity (PE) firms have been projecting that the era of super outsized returns is behind us for a while. Meanwhile, human capital remains one relatively untapped area for value creation. This is an area where firms can drive workforce discretionary energy and not only enhance financial outcomes but can also improve job quality — and PE's brand in the process.

Here are some examples of how portfolio companies are considering or already bringing this approach to life.

Using employee feedback to create value

A private equity talent playbook includes many human capital value creation levers. Within that playbook, the levers related to Voice of the Worker (VoW) are increasingly being broadly deployed with great efficacy. Many companies gather ideas, preferences and suggestions from employees and then use that information to improve company performance and streamline costs.

While there are numerous potential tools in the VoW toolbox, we see opportunity for a one-two punch on every deal. There’s also a third step for deals with the right set of circumstances.

Good Job Score: This first part of the one-two punch uses employee feedback to efficiently improve job quality in a manner correlated with financial outcomes.
Dynamic employee preference analytics: The second part of the one-two punch leverages shifting employee preferences to reduce costs while boosting morale.
Broad-based equity ownership programs: This is a third option that can be considered depending on the company’s financial situation, culture and management.

Good Job Score (GJS) is a key performance indicator that can be benchmarked versus peers. It’s a short (3-5 minute) survey that can measure employee job quality in a manner that’s correlated to company performance. It provides actionable insights on what workers can do to feel that they have a “good job.” Companies with higher scores have been shown to financially outperform peers.

In our experience, companies with a higher GJS also tend to have lower turnover. In one example, PE portfolio companies in the upper quintile of GJS had just under half of the average turnover rates as that of the PE’s lowest scoring companies. At a different PE firm, we saw GJS detect problems highly correlated with financial performance that another employee listening platform had missed.

Several PE firms are rolling GJS out across their portfolios to improve company performance, job quality and their brand in the market. They’re developing an initial baseline score, then identifying areas for improvement and taking those identified actions to help improve their scores.

Dynamic employee surveys can be used to reduce costs by identifying the benefits that employees truly value, boosting morale in the process. Portfolio companies can eliminate costly benefits that don’t move the needle on employee satisfaction. For instance, a portfolio company might find that most of its workers prefer to streamline some medical and retirement benefits in exchange for greater career pathway and skills opportunities. These cost savings aren’t trivial, potentially allowing a company to save millions of dollars while making its workers happier in the process.

We recently saw a 2,000-employee company that already had a lean benefits program identify over $4 million in recurring savings through a redefined total rewards program. A majority of the workforce preferred the less costly yet modernized rewards program to the existing program. The impact on cost structure and employee morale were both significant.

Some PE firms have begun to explore broader equity ownership beyond the top industry leaders in their portfolio companies. This approach is in the early stages of potential development. But the approach is worth keeping an eye on in the marketplace to see when it might be an effective way to help improve a company’s performance.

In our experience, consider how effective programs:

Provide a meaningful payout to each employee while balancing with dilution.
Have management teams that are bought into the approach, including championing the program with their workforce.
Roll out a financial education and an ownership mindset culture program.

Designing a program that can provide meaningful payouts to employees at exit, while staying financially viable for the company overall, is often critical for success. Modeling of target payouts and impact to dilution need to be assessed up front for feasibility. Various approaches for balancing returns with payouts and dilution are continuing to evolve. Some companies use six-month pay as a target minimum payout for individual employees.

What we have learned

We see some consistent themes from these initiatives. Rewards related to skills and career pathways, for example, are generally greatly valued by employees and preferred to some levels of traditional benefits — even though they’re often less costly to provide. Career pathway and skill development opportunities aren’t just nice to have, they’re essential in a high-performing organization. Implementing these types of cost savings is often made easier by the fact that the changes stem from feedback gathered from workers.

The PE brand can benefit from this form of value creation. Imagine if your firm is known to start every post-closing period with a message of “your voice matters” to energize the workforce, enhance performance, save costs and calm the waters during what is often an unsettling time for employees. That could give PE acquirers a potential advantage in negotiations with some sellers and also help improve the industry’s profile among the regulators that are often crucial to a deal’s close.

The bottom line

Closing valuation gaps and increasing bottom lines aren’t diametrically opposed to fostering relationships with workforces. We’ve seen first-hand how PE firms can uncover value when incorporating these approaches in their acquisitions. Their success often results in other portfolio companies adopting similar approaches. In the current economic environment, these human capital initiatives are important approaches for PEs to consider in creating value.

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Carrie Duarte Steele

Deals Partner, PwC US

Myra D’Souza

Deals Managing Director, PwC US

Christine Randazzo

Principal, Workforce Transformation, PwC US

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