Human capital management for private companies

Even as the "Great Resignation" and "Quiet Quitting" phenomena have largely dissipated, top talent remains in high demand. One in three US employees reports juggling four or more offers during their most recent job search and a staggering 50% have backed out of accepted offers.¹ Simultaneously, employee burnout risk is on the rise as companies increasingly push for efficiency, expecting workers to deliver more without additional resources.²

This context helps explain why, though overall start-up employee attrition is down in 2024, ~25% of new employees still leave within their first year and the total number of applications per open role continues to rise (outpacing a 30% increase in postings).³

Why HCM matters for private companies

HCM still appears to be top of mind for private equity firms and portfolio companies in 2024. PE firms rate talent retention as their second biggest challenge (behind finding sustained growth models), while PE portfolio companies say talent is the most important requirement for them to achieve successful business transformation.⁴ Notably, companies spend 50% – 75% of an employee’s annual salary replacing them⁵ and 100% – 150% of salary⁶ replacing technical employees (a common need for many private companies). In addition, 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 can be an outsized burden compared to public-market peers.

HCM tangibly impacts company performance

Private companies with strong HCM practices may also be better prepared to meet evolving investor and regulatory expectations as they enter the public markets. Though public-market investors’ average support for HCM-related shareholder proposals declined from 2022 to 2023, five HCM proposals still received majority shareholder support (as compared to only one environmental-related proposal).⁷ In our view, companies should expect to see the total number of HCM shareholder proposals continue to increase. Furthermore, in the US, the SEC is expected to publish a proposal on new HCM disclosure rules in 2024 pending its ongoing review of the 2020 HCM rule.

In our view, HCM is as much about opportunity as it as about risk. For instance, companies with top-quartile employee engagement have 23% higher median profitability than bottom quartile peers.⁸ Moreover, companies with top talent management are 6X more likely to report higher total shareholder returns than those with lagging talent management.⁹

Four key areas to improve human capital management

Private companies may 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 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. It should also be matched with analytics to improve 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 can be a cornerstone of long-term employee success. Ideal onboarding experiences can increase employee engagement by 135%, but only 12% of employees strongly agree their organization has effective onboarding processes.¹⁰ 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 has begun to rebound after two years of consecutive decline, but at 34%, the number of employees reporting they are engaged is still well below the pre-pandemic peak of 40%.¹¹ Low engagement can have real costs to organizations. A recent study of S&P 500 companies showed that low employee engagement reduced productivity by 6% and cost the median company US$91 million annually.¹²

We recommend that companies create and maintain clear strategies 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 (at least annually) 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
Good company culture is widely viewed as a critical value driver for companies. A 2023 survey showed employees had 790% higher job satisfaction when they rated their company culture as “good or excellent.”¹⁴ Culture can also be a key consideration in evaluating M&A opportunities. In a recent survey of corporate CFOs, over 50% said they would not make an offer to a company they viewed as a bad cultural fit, while another one third said they would discount their price by up to 20%.¹⁵ 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. Purpose and values can unify employees around a common mission and help companies endure periods of disruption. Though DEI has become a more polarized topic in the past year, we believe it remains an important component of corporate values. A 2024 survey of C-suite executives showed 80% are continuing to invest in DEI efforts, with 44% actually increasing their commitments.¹⁶ We similarly continue to believe that companies benefit from an intentional approach to DEI rooted in its strategic value to the business. As noted earlier, employee attrition can be costly to organizations. 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 support 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 (including marketing materials and recruiting strategies).

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, employee demands, and SEC rules.

In addition, we believe 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 may be worth monitoring today’s changing employee preferences to understand what that constitutes. For example, while flexible work opportunities continue to remain a significant benefit, a recent survey showed that comprehensive health care is now considered the most important benefit to employees.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

We believe 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 may be best positioned to attract and retain top talent as well as to navigate future periods of uncertainty and disruption.

Appendix A: Nine HCM questions to expect from investors

Below we share nine common questions investors might ask when assessing your company’s approach to human capital management. Preparing to answer these questions can help you develop clarity around your HCM practices and reveal areas of uncertainty, risk, and opportunity.

Employee recruitment, engagement, and retention
1. What strategies does your company employ to attract, recruit, and retain qualified candidates?

2. Do you conduct employee engagement surveys to track and measure employee satisfaction? If so, how responsive are employees and what have you learned?

3. What strategies does your company use to minimize turnover and its associated cost and disruption to your business?

Culture and DEI
4. What do you think are the strongest aspects of your company’s culture? What is one area you would like to improve?

5. What policies or practices do you maintain to help prevent discrimination against employees, particularly related to promotion and compensation?

6. What is your company’s philosophy and approach on DEI?

Compensation and benefits
7. What are the key drivers of your company’s performance? Are those reflected in your compensation program?

8. How do you assess and benchmark your compensation and benefits relative to your market and peers?

9. Are your employment benefits offerings a differentiator when competing for talent?