Companies that are highly skilled in core HR practices experience up to 3.5 times the revenue growth and as much as 2.1 times the profit margins of less capable companies, according to new research by The Boston Consulting Group (BCG) and the World Federation of People Management Associations (WFPMA).

The joint report, From Capability to Profitability, was based on a survey of more than 4,200 HR and non-HR managers in more than 100 countries worldwide. It measured companies for proficiency in 22 HR areas and compared this to firms’ economic performance.

The report found the correlation between economic performance and HR capability was especially strong in six areas: recruiting, onboarding of new hires and employee retention, talent management, employer branding, performance management and reward, and leadership development. Of these, the three most pivotal areas were leadership development, talent management and performance management/reward.

“Overall, what these findings reveal is that ‘people’ companies are far more proactive and more strategic about ensuring they have the talent they need—today and in the future,” said Rainer Strack, senior partner at BCG and co-author of the report. “They fully understand the connection between talent and sustainable performance.”

The study noted a handful of key differentiators that marked out the companies displaying both HR excellence and high performance. These included leadership models that clarify leaders’ expected contributions and behaviour; a talent pipeline that extends beyond successors to top management, and embraces international talent; proactive talent reviews; and reward systems that reward behaviour, not just results. Furthermore, the best companies combine these practices in an integrated and coherent way rather than carrying out processes in a linear and separate fashion, found the researchers.

“These findings should be a wake-up call for executives and HR people everywhere,” said Pieter Haen, secretary-general of the WFPMA and report co-author. “As the talent crisis worsens, those who don't make a commitment to attracting, developing, and retaining talent put their future performance at risk.”