Human Capital Index®

Watson Wyatt’s Human Capital Index®

Human Capital As a Lead Indicator of Shareholder Value

2001/2002 Survey Report

WWW.WATSONWYATT.COM

“Superior human capital management is a leading — rather than lagging — indicator of improved financial success. This finding is more important now, during times of economic uncertainty, than in boom times. Why? Lead indicators help you get ahead of the curve.”

INTRODUCTION

Can the way a company manages its they are, in fact, a leading indicator of human capital significantly affect its increased shareholder value. Further, we financial performance? found that superior HR management leads financial performance to a much greater Two years ago our Human Capital Index extent than financial outcomes lead good (HCI) study confirmed that the two are HR. We were also able to identify certain clearly linked. We developed a simple set of HR practices as value drivers and throw a measures quantifying exactly which HR prac- cautionary flag in front of some conventional tices and policies have the greatest correlation practices actually associated with a decrease to shareholder value. Using those to assign a in financial performance. single HCI “score” to each surveyed company allowed us to deliver conclusive, ground- The results of this study are more meaning- breaking results: Where there are superior HR ful now than ever before. While the state of practices, there is higher shareholder value. the economy is largely uncertain, companies cannot escape demographics. There is no Yet a crucial question remained: Do better doubt that the labor shortage will continue people management strategies actually create well into the next decade and that superior higher market value? Or do financially success- HR practices are a key to attraction, retention ful companies simply have more resources to and, more and more, business outcomes. It’s allocate to human capital initiatives? also a certainty that executives will now, more than ever, look to HR to justify expenditures Human Capital Index: As a Lead Indicator of Shareholder Value 1 We now have powerful insight into the and demonstrate the economic value of an answer. Our second Human Capital Index organization’s people practices. study allowed us to compare one set of companies at two points in time to analyze the The overriding message: If a company’s goal is correlation. The results are in and they are to improve shareholder value, a key priority

dramatic. Superior human capital practices must be its approach to human capital. Wyatt Worldwide Watson are not only correlated with financial returns, ABOUT THE SURVEY In the first HCI study, conducted in 1999, In 2000, a European HCI survey was con- Watson Wyatt surveyed more than 400 U.S.- ducted to gain a more global perspective on and Canada-based companies that were these issues. More than 250 responses from 16 publicly traded, had at least three years of countries were received. The survey included shareholder returns and had a minimum of 200 questions in six languages and covered $100 million in revenue or market value. companies of all sizes and from all sectors of We asked a wide range of questions about the economy — more than a third of partici- how the organizations carried out their human pants were in the Euro 500 and more than a resources practices, including pay, people quarter were in the Global 500. The findings development, communications and staffing. from the European study were similar to the North American results, with improvements Responses were matched to objective financial in 19 key HR practices associated with a measures, including market value, three- and 26 percent increase in market value. five-year total returns to shareholders (TRS), and Tobin’s Q, an economist’s ratio that mea- In early 2001, the HCI research was con- sures an organization’s ability to create value ducted again, this time including responses beyond its physical assets. Publicly available from more than 500 North American com- data from Standard and Poor’s Compustat panies. In this most recent research, the database were used to access the financial participants reflected a broader view of information needed. business and included some larger, more prominent firms — with average annual To investigate the relationship between human sales of $4.68 billion, $8.45 billion in mar- capital practices and value creation, a series ket value and 18,697 employees on average. of multiple regression analyses were conducted, Fifty-one of these companies participated in identifying a clear relationship between the both the 1999 and 2001 surveys.

Human Capital Index: As a Lead Indicator of Shareholder Value effectiveness of a company’s human capital practices and shareholder value creation. The European and new North American data Thirty key HR practices were associated were then merged. The result is a complete with a 30 percent increase in market value. respondent base of more than 750 companies Summary HCI scores were created for indi- in the United States, Canada and Europe with vidual organizations so that results could be at least three years of shareholder returns, expressed on a scale of 0 to 100. An HCI 1,000 or more employees and a minimum of score of 0 represents the poorest human capi- $100 million in revenues or market value. tal management, while a score of 100 is ideal.

1999 2000 2001 2001/2002 HCI First North First European Second North Survey Report American HCI Study HCI Study American HCI Study 2 Watson Wyatt Worldwide

The majority of the combined findings from these surveys were consistent, making it a logical and useful tool from which to draw conclusions. It is important to point out, however, that there were notable differences in emphasis between the European and North American studies. For instance, certain questions about benefits and HR service delivery were included only in the North American survey. In addition, the database is weighted nearly 2 to 1 to North American companies, so the generalized findings should be considered with that in mind. Watson Wyatt will publish more about the similarities and differences between the studies in the future. SURVEY HIGHLIGHTS Results Link Superior Human Capital Practices to Higher Shareholder Return The results from the 2001 HCI study are just FIGURE 1: Five-Year Total Returns to as definitive as those from 1999: The higher Shareholders (April 1996 – April 2001) a company’s HCI score, the higher its share- 64% holder value. In other words, the better an organization is doing in managing its human capital, the better its returns for shareholders. We broke the companies into three groups 39% based on their summary HCI scores. Those in the low group averaged a 21 percent five-year return. The medium group aver- 21% aged 39 percent. Those with high HCI scores returned 64 percent over five years (Figure 1).

In addition to providing dramatic evidence Low Medium High HCI Score that good human capital management mat- (0-25) (26-75) (76-100) ters, the HCI study shows precisely which HR practices — amid the ever-increasing FIGURE 2: Key Links Between Human Capital and portfolio of options — have an impact on Shareholder Value Creation

the bottom line. This year’s study identifies Practice Impact on Market Value the 49 specific HR practices that play the Total Rewards and Accountability 16.5% greatest role in creating shareholder value.

We have divided those practices into six Collegial, Flexible Workplace 9.0% dimensions (Figure 2). The research quanti- fies exactly how much an improvement in Recruiting and Retention Excellence 7.9% each practice could be expected to increase Communications Integrity 7.1% a company’s market value. For example, a company that makes a significant improve- Focused HR Service Technologies 6.5% ment* in all of the practices categorized Prudent Use of Resources -33.9% under “Total Rewards and Accountability” should see its value improve by 16.5 percent Expected change in market value associated with a significant one (Figure 2). And a significant improvement standard deviation (1 SD) improvement in HCI dimension. in 43 key HR practices is associated with an increase of 47 percent in market value. Additionally, one dimension, “Prudent Use of Resources” identifies six practices that * What constitutes a “significant improvement”? A one standard deviation increase. Most answers to HCI questions are on a 1 – 5 scale, so a significant diminish shareholder value. change is a one-scale-point movement from a 1 to a 2, a 2 to a 3, and so on. Human Capital Index: As a Lead Indicator of Shareholder Value 3 Watson Wyatt Worldwide Watson Data Over Time Show Human Capital Practices Lead Value Creation The first HCI study confirmed that there was To see which way the relationship truly runs, a positive relationship between the quality of we simply compared two different correlations: a company’s HR practices and its economic results. But it did not offer resolution to the ❙ Correlation A represents the relationship debate that has raged for years: Do effective between the 1999 HCI score and 2001 HR practices drive positive financial results financial performance. or do positive financial results lead to better HR practices? ❙ Correlation B represents the relationship between 1999 financial performance and Two years ago, we noted that the best- 2001 HCI scores. performing companies did not simply have better-funded programs, they had entirely If better financial performance is what creates different programs than the poorly performing superior HR practices, Correlation B should companies. The high performers employed be larger. If, in fact, the way companies certain programs (e.g., broad-based stock manage their human capital is what drives options) that low performers did not. They financial success, Correlation A should stayed away from certain programs (e.g., be larger. training employees for future jobs) that low performers embraced. If it were true that Our results were dramatic. Correlation A, good financial performance simply afforded .41, is statistically significantly larger than rich companies the ability to implement Correlation B, .19. Our analysis demon- elaborate HR programs, one would expect to strates that HR practices are not only associ- see the same types of programs across the ated with business outcomes, but also create

Human Capital Index: As a Lead Indicator of Shareholder Value board. We did not. Yet it was still not proof them. Moreover, a careful inspection of that superior HR management was causing all the data shows that for every available high market value. The best we could offer correlation calculated over time, the relation- at the time was that the relationship probably ship between past HR practices and future moved both ways. financial performance is stronger than the relationship between past financial outcomes But our latest study yields the missing cru- and future HR practices. We will be follow- cial data. Fifty-one companies participated ing this data prospectively in longitudinal in both the original and the follow-up studies, but for now the weight of the evi- HCI studies. We have HCI scores and dence clearly favors human capital practices financial performance information for 1999 as a leading — rather than a lagging — and 2001. indicator of business success.

4 FIGURE 3: Correlation Analysis Watson Wyatt Worldwide Correlation A 1999 HCI Score x 2001 Financial Performance .41

Correlation B 1999 Financial Performance x 2001 HCI Score .19 THE KEY LINKS BETWEEN HUMAN CAPITAL AND SHAREHOLDER VALUE CREATION Total Rewards and Accountability: 16.5%

Rewarding employees for good work — and FIGURE 4: Links Between Total Rewards and refusing to accept subpar performance — has Accountability and Value Creation Health benefits are important for a dramatic impact on shareholder value. By 2.8% showing an improvement in the HR practices recruiting and retention High percentage of company stock falling under the category of “Total Rewards 1.3% and Accountability,” companies can achieve a owned by employees Defined contribution and defined benefit plans, 16.5 percent increase in market value. That 1.3% combined, important for recruiting and retention makes it the most important HCI dimension, replacing “Recruiting Excellence,” which High percentage of company stock owned by senior managers 1.2% showed the highest impact on market value two years ago. Pay is linked to company’s business strategy 1.1%

High percentage of employees eligible for Making a stronger effort to link pay to per- 1.0% stock options formance is associated with a 6.3 percent increase in market value. Stock programs, Company promotes most competent employees 0.9% incentive/profit sharing plans, pay that is High percentage of employees participate in 0.9% linked to strategy and higher pay for top incentive/profit sharing plans performers all focus employees on the bottom Defined benefit plan important for recruiting 0.9% line — and our research shows it pays off. and retention In a closely related finding, recognizing variations in performance by promoting the Employees have choice regarding benefits 0.8% most competent employees, helping poor Defined contribution plan important for 0.8% performers improve and terminating chronic recruiting and retention nonperformers can boost market value by Top performers receive better pay than 0.8% 2.2 percent. average performers

Company positions benefits above the market 0.7% In the current climate, the emphasis is on using rewards to keep top talent in place. Company helps poor performers improve 0.7% In doing so, our research shows that the role of benefits should not be underestimated: Company positions pay above the market 0.7% A company must not only offer an above- Company terminates employees who continue market benefits package, but must make sure 0.6% employees understand its value. Companies to perform poorly that improve their selection of health and Total rewards and accountability 16.5% retirement benefits as an important tool for recruiting and retention can increase share- Expected change in market value associated with a significant (1 SD) holder value by a total of 4.3 percent. improvement in HCI practice. Human Capital Index: As a Lead Indicator of Shareholder Value 5 Watson Wyatt Worldwide Watson Collegial, Flexible Workplace: 9.0% Great leadership and a less hierarchical the trust and integrity associated with culture that encourages employee contribu- company leadership builds shareholder value tion combine to produce a “Collegial, Flexible by 2.3 percent. Workplace” — and a 9 percent increase in shareholder value for any company making a Titles, closed doors and formality can significant advance in this area. impede the flow of ideas. Our data show that minimizing status distinctions also has Companies that show more flexibility in a significant impact on market value. By work arrangements — supporting flextime, encouraging teamwork and avoiding the use working from home and job sharing — are of titles and office space to designate author- able to capture the skills and knowledge of ity, companies can increase shareholder value a wider range of talent, and it pays off in a by 1.9 percent. 3.5 percent increase in value. Finally, making a stronger effort to Leaders play a key role in the establishment keep employees satisfied can result in of a collegial company culture. Improving a 1.3 percent increase. Human Capital Index: As a Lead Indicator of Shareholder Value FIGURE 5: Links Between a Collegial, Flexible Workplace and Value Creation Company shows flexibility 3.5% in work arrangements Company has high 1.3% employee satisfaction

Trust in senior leadership is 1.2% actively engendered Managers demonstrate 1.1% company’s values Company culture encourages 0.5% teamwork and cooperation

Company avoids using titles to 0.5% designate status and authority Company avoids varying 0.5% perquisites by position 6 Company avoids varying office

Watson Wyatt Worldwide 0.4% space by position

Collegial, flexible workplace 9.0%

Expected change in market value associated with a significant (1 SD) improvement in HCI practice. Recruiting and Retention Excellence: 7.9% While still a critical element for business efforts to use formal strategies, align them success, “Recruiting and Retention Excellence” with business plans, bring coworkers into has dropped from its slot as the strongest the hiring process and then offer new hire dimension in 1999. With less hiring taking orientation can be rewarded with 2.0 percent place and a greater emphasis on doing higher market value. more with less, companies enjoying a stable, seasoned workforce find themselves at When it comes time to choose the candidate, an advantage. Doing a better job of keeping the HCI results are clear: Select the one who voluntary turnover low rewards 3.2 percent can hit the ground running. Companies that higher shareholder value. Companies with a significantly improve their record of hiring stronger commitment to job security earn an people who are well equipped to perform their additional 1.4 percent. duties can achieve a 0.8 percent increase in market value. And when it comes to recruiting, which is undoubtedly still critical, the research shows Finally, establishing a reputation as a great that an investment of time more than pays place to work is rewarded with a 0.5 percent for itself. Companies that step up their increase in shareholder value.

FIGURE 6: Links Between Recruiting and Retention Excellence and Value Creation Company has low voluntary turnover 1.7% of managers/professionals Company has low voluntary turnover 1.5% of employees in general

Company emphasizes job security 1.4%

Formal recruiting strategy exists for 0.6% critical-skill employees Recruiting efforts are aligned with 0.5% the business plan

Employees have input on hiring decisions 0.5%

Company has established reputation as 0.5% a desirable place to work

Systematic new hire orientation exists 0.4%

Hourly/clerical new hires are well

0.4% Human Capital Index: As a Lead Indicator of Shareholder Value equipped to perform duties Professional new hires are well 7 0.4% equipped to perform duties

Recruiting and retention excellence 7.9%

Expected change in market value associated with a significant (1 SD) improvement in HCI practice. Watson Wyatt Worldwide Watson Communications Integrity: 7.1% The ideas and solutions that come from top But technology itself is only half of the picture. talent are the key success differentiators in Companies also need to create an environment the knowledge economy. Creating an envi- where the sharing of thoughts, ideas and ronment where employees can and will share knowledge is encouraged, rewarded and their knowledge is crucial. A company that viewed as “the way we do things.” When improves its “Communications Integrity” companies increase the level at which they can experience a 7.1 percent growth in share business plans and financial informa- market value. tion with employees, they are rewarded with 1.1 percent higher market value. The same Capitalizing on technology is the practice 1.1 percent increase can be gained when a that holds the greatest potential for financial higher percentage of the workforce partici- payoff. Companies that give employees easy pates in opinion surveys and the company access to basic communications, like e-mail takes action based on that feedback. When a and voicemail technology, can see an impressive company makes a significant improvement 4.2 percent gain in shareholder value. in creating a culture where employees at all levels can offer input to senior management, it is associated with a 0.7 percent increase in shareholder value.

Human Capital Index: As a Lead Indicator of Shareholder Value FIGURE 7: Links Between Communications Integrity and Value Creation Employees have easy access to 4.2% technologies for communication Employees at all levels give ideas and 0.7% suggestions to senior management Company shares business plans and 0.6% goals with employees High percentage of workforce 0.6% participates in opinion surveys Company shares financial information 0.5% with employees Company takes action on employee 0.5% survey feedback

Communications integrity 7.1%

8 Expected change in market value associated with a significant (1 SD)

Watson Wyatt Worldwide improvement in HCI practice. Focused HR Service Technologies: 6.5% One of the most interesting findings from Why? Because the basics come first. Part of our HCI research involves the use of HR successful HR service delivery is understand- service technology. Our research shows that ing the crucial balance between day-to-day if HR groups use new technology for the operations and big-picture initiatives. That fundamentals — improving accuracy, service means streamlining the payroll process and and cost-effectiveness — it pays off in 6.5 getting new hires well integrated before percent higher shareholder value (Figure 8). concentrating on shaping the organization’s But when HR service technology is imple- culture. When HR groups capitalize on new mented with less clear, less quantifiable goals technology to address their fundamental in mind — enhancing communication and responsibilities, it pays off in a stronger promoting culture — the technology is actu- financial picture for the company. Clearly, ally linked to a large decrease in market enhancing communication and promoting value (Figure 9, p.10). culture are inherently positive practices. But they should not be the key goals of an HR technology strategy.

FIGURE 8: Links Between Focused HR Service Technologies and Value Creation Improving service to employees/managers is a 2.3% key goal in implementing HR service technology Reducing cost is a key goal in implementing 2.3% HR service technology Increasing transaction accuracy/integrity is a key 1.9% goal in implementing HR service technology

Focused HR service technologies 6.5%

Expected change in market value associated with a significant (1 SD) improvement in HCI practice. Human Capital Index: As a Lead Indicator of Shareholder Value 9 Watson Wyatt Worldwide Watson Prudent Use of Resources: –33.9% The HCI research steers companies toward is already in place. It succeeds when partici- the most financially rewarding HR practices. pants have been well trained to give and It also throws a cautionary flag in front of receive feedback. It succeeds when there is some practices applauded by conventional valid and reliable instrumentation and appro- wisdom. We found that three practices in priate follow-up. When one or more of these particular — 360-degree review, longer-term elements is missing, multisource feedback developmental training and implementing HR can be a lengthy distraction that interferes technologies with “softer” goals in mind — with teamwork and reduces productivity were often associated with a decrease in and, ultimately, shareholder value. market value. Our hypothesis is that, while there is nothing inherently wrong with these For the second time, the HCI research has practices, many organizations implement turned the spotlight on training by finding them in misguided ways. In these areas, that some types are actually associated with companies must pay special attention to a decrease in shareholder value. Our studies strategic alignment and appropriate execu- show that developmental training — prepar- tion, and for that reason, we have categorized ing workers for their next job, instead of the these practices into those that require “Prudent current one — is linked to a 5.6 percent Use of Resources.” decrease in value. Our hypothesis is that this type of investment is recouped by competing Multisource feedback continues to enjoy companies, as the newly skilled workers mass popularity, and many, if not most, busi- walk out the door when a promotion is not nesses report that they feel it is successful. immediately forthcoming. Also ill-advised is Yet, when the impact on market value for the maintenance of training during economic Human Capital Index: As a Lead Indicator of Shareholder Value evaluating superiors and evaluating peers is downturns. Again, it may be that the competi- combined, our research suggests it is linked tors cancel their own programs, subsequently to a decrease of 10.6 percent. The truth is to capture the value by hiring newly knowl- that it is a challenge to get multisource feed- edgeable workers away. back right. It succeeds when an open culture

FIGURE 9: Links Between Prudent Use of Resources and Value Creation Enhancing communication is a key goal in -7.7% implementing HR service technology Culture change is a key goal in implementing -6.6% HR service technology Employees have opportunity to -5.7% evaluate superiors Employees have access to training needed -5.6% for career advancement 10 Employees have opportunity to evaluate peers -4.9% Watson Wyatt Worldwide

Training programs maintained even in difficult -3.4% economic circumstances

Prudent use of resources -33.9%

Expected change in market value associated with a significant (1 SD) improvement in HCI practice. CONCLUSION

There’s no question that it pays to manage The business case has been building and people right. Watson Wyatt’s Human Capital Index research makes it airtight. The linkage between supe- Organizations have long focused resources on rior human capital management and superior other aspects of their companies, including shareholder returns has been proven. infrastructure, R&D, sales and advertising, Moreover, proof that superior HR practices just to name a few. These things can increase drive financial results more than superior shareholder value creation in measurable financial results drive HR practices supports ways. Some — but certainly not all — tried our theory: If you hire the right people, create to use their human capital to increase returns an environment that supports creative think- to shareholders. But even these companies ing and increased productivity, leveraged by were taking a shot in the dark, because no technology, you’ll reap the rewards. one could quantify which human capital programs were linked to good outcomes.

LIST OF PARTICIPATING COMPANIES

3M Applied Innovation, Inc. Borders Group Inc. Chemical Bank Shoreline ABB Inc. Applied Terravision Systems Boston Properties, Inc. Chick-fil-a, Inc. Acceptance Insurance Aramark Canada Ltd. Bowater Pates et Papiers Cisco Systems Companies Inc. Archer–Daniels Midland Company Canada Inc. Citgo Petroleum Corporation Activision Arista Corp. Brinker International Clear Channel Advanced Neuromodulation ArQule Brocade Communications Communications, Inc. Systems, Inc. Arrow Electronics, Inc Systems, Inc. Clearly Canadian Advanced Power Technology ArvinMeritor Brookfield Beverage Corporation ADVO, Inc. Ashland Brown & Brown Cobra Electronics Corporation Affiliated Computer Services, Inc. Astral Media Inc. Brown and Sharpe Colgate-Palmolive Co. AirTran Airways ATCO Gas Brush Engineered Materials, Inc. Colonial Properties Trust Alaska Airlines, Inc. Aurora Foods, Inc. Bryan Foods (division of Sara Lee) COM DEV Albemarle Corporation Avado Brands, Inc Buckeye CompuCom Systems Inc. Alberta Energy Company Ltd. Avaya Communications Buffets, Inc. Computer Sciences Corp. Allen Telecom Inc. Aventis Behring Burlington Northern Concurrent Computer Corp. Aloha Airlines Aviall, Inc. Santa Fe Corporation Conductus, Inc. Alstom, Inc. Avnet, Inc. Burntsand Cone Mills Corporation Amcast Industrial Corporation AXT, Inc. Cambrex Corporation Conestoga Enterprises Inc. America West Holding Corp. Baldwin Piano & Organ Company Camco Constellation Energy Group

American Axle & Manufacturing Ball Park Brands/ Cameco Cooper Tire & Rubber Company Human Capital Index: As a Lead Indicator of Shareholder Value Holdings, Inc. Sara Lee Corporation Campbell Soup Company Cott Corporation American Express Company Baltimore Gas & Electric Company Candlewood Hotel Company, Inc. CPAC, Inc. 11 American International Group, Inc. Bank North Group Capstone Turbine Corporation Creo Products Inc. American Micro Devices Bank One Corporation Caraustar Industries, Inc. Cross Timbers Oil Company American Standard Banque Nationale Du Canada CE Franklin Ltd. Crossroads Systems, Inc. American Woodmark Corporation Beckman Coulter, Inc. Cendant Corporation CyberOptics Corporation AmeriPath, Inc. Belden Inc. Centocor, Inc. Cymer, Inc. AmerUs Group Bentall Corporation Central Arizona Project DaimlerChrysler Corporation Anchor Bank Best Buy Company, Inc. Central Garden & Pet Company Dal-Tile Corporation Andres Wines Ltd Best Kosher Foods Corporation CF Industries, Inc. Danzas AEI, Inc. Anexsys BIC Corporation CGU Insurance Company Dayton Power & Light Company

Angiotech Pharmaceuticals, Inc. Biomira Inc. CH2M HILL Del Webb Corporation Wyatt Worldwide Watson Anixter International Inc. Biovail Corporation Chateau Communities Inc. Delphi Automotive Systems Applica Incorporated Bombay Company, Inc. CheckFree Corporation Devon Energy Corporation DeVry, Inc. Guardian Capital Group Limited Manor Care, Inc. Pinnaclewest Capital Corporation Tecumseh Products Company Diebold, Inc. Guiness UDV North America Mariner Post-Acute Network Pioneer-Standard Electronics, Inc. Teknion Corporation Digital Impact, Inc. Gulf Canada Resources Limited Maritrans, Inc. Plantronics, Inc. Tektronix, Inc. Diversa Corporation Gulf Mark Offshore, Inc. Marshall & Ilsley Corp PPG Industries, Inc. TeleCorp PCS, Inc. Dole Food Co., Inc. H.J. Heinz Company Massey Energy Company PPL Corp. Teledyne Technologies Douwe Egberts Coffee System Hallmark Cards Inc. McCormick & Co. Premdor, Inc. Incorporated Dow AgroSciences Hancock Bank McLeodUSA Prime Hospitality Corp. TeleHubLink Corporation Ducommun Incorporated Handspring, Inc. MDU Resources Group, Inc. Prime Retail Tellabs Inc. Duke Energy Hawaii Medical Service Meade Instruments Corporation ProNational Insurance Company Telus Quebec Dun & Bradstreet Association MedStar Health Protective Life Corporation Tenet Health System E.W. Scripps Company Hawaiian Electric Industries, Inc. Medtronic, Inc. Quebecor World, Inc. Terra Industries Inc. East Group Properties, Inc. Helix Technology Corporation Mercury Air Group, Inc. R J Reynolds Tobacco Tesco Corporation Edison Schools Inc. Heller Financial, Inc. Merrill Lynch Holding, Inc. Textron Inc. eFunds, Inc. Hewlett Packard Company Metro Inc. Ralcorp Holdings, Inc. The Ascent Group, Inc. El Paso Corp. Hexcel Corporation Metro-Goldwyn-Mayer Studios Inc. Ralston Purina Company The Dial Corporation Elcor Corporation Highliner Foods Inc. MFS Investment Management Rand Worldwide The Longaberger Company Electro Rent Corporation Hillshire Farm & Kahn’s MicroAge Reader’s Digest Association, Inc. The Marmaxx Group Elizabethtown Water Co. Herman Miller, Inc Microsoft, Inc. Regency Centers Corporation The Midland Company Embarcadero Technologies, Inc. Hormel Foods Company Middlesex Water Co. Regent Communications, Inc. The Mills Corporation e-MedSoft.com Hudson’s Bay Company Mindspeed Technologies Reliant Energy The North West Company Encompass Services Corporation Hughes Electronics Corporation Minnesota Power, Inc. Reynolds & Reynolds The Oath-A Health Plan for Enerflex Systems Inc. Huntington Bancshares Inc. Mirant Corporation Richmond Times-Dispatch Alabama, Inc. Entergy Corporation Hutchinson Technology Molson Quebec Atlantique Ridley Inc. The Penn Traffic Co. EPIX Medical, Inc. Hybrid Networks, Inc. Montrusco Bolton, Inc. Ritchie Bros. Auctioneers The Sportsman’s Guide ePresence, Inc. Hyseq Inc. Moody’s Investor Service (Canada) Ltd. Thomaston Mills Inc. Equitable Resources Inc. IBM Corporation Moore Medical Corp. Roadway Express, Inc. Thoratec Corporation Equity Office Properties Trust ICI Paints Mortgage Guaranty Rogers Communications Inc. Toll Brothers Inc. Erie Insurance Group Imagex.com, Inc. Insurance Corp. Roseburg Forest Products Co. Trans World Entertainment Esterline Technologies Imation Corp. Mosaid Technologies, Inc. Rosemount Inc. Transamerica Insurance & Fairview Health Services IMPATH Networks Inc. MTD Products Inc. Ryan Energy Technologies Inc. Investment Group Fairview Northland Independence Community Multiactive Software SAFECO Corporation Tredegar Corporation FBL Financial Group, Inc. Bank Corp. Multiactive Technologies, Inc. Safeway Inc. TriQuint Semiconductor, Inc. FelCor Lodging Trust Inc. InfoInterActive Corp. Murphy Oil Corporation Sallie Mae Trism Inc. Ferrellgas ING Canada N W Natural Sara Lee Corporation Trojan Technologies Inc. Ferro Corporation Insignia Financial Group National - Oilwell, Inc. Saskatchewan Wheat Pool Trustmark Insurance Company Fibernet Telecom Group, Inc. Integrated Measurement National City SAVVIS Communications Turnstone Systems, Inc. Fidelity Investments Systems, Inc. National Tech Team Corporation TVA Fifth Third Bank Intermountain Health Care Nature’s Sunshine Products, Inc. Sbarro U.S. Bancorp Finning International, Inc. International Datacasting Navigant Consulting, Inc. SBC Communications, Inc. UBS First Albany Corp. Corporation Nelvana Limited Schawk, Inc. Underwriters Laboratories Inc. First Federal Savings Bank International Multifoods NeoPharm, Inc. Schlumberger Unican Inc. First Horizon Corporation Net Creations, Inc. Schreiber Foods, Inc. Union Pacific Corporation Pharmaceutical Corporation Interpool, Inc. NetIQ Corporation SDRC Union Planters Corp. First National Bank of Long Island Intuit, Inc. NetSilicon, Inc. Secure Computing Corporation Human Capital Index: As a Lead Indicator of Shareholder Value United Space Alliance First National of Nebraska Investment Company Institute New York - Presbyterian Hospital Select Comfort Corporation Unitil Corp. First Tennessee Isis Pharmaceuticals, Inc. Newton Park Inc. Sequa Corporation Universal Forest Products, Inc. National Corporation i-Stat Corporation Nicor, Inc. Sequoia Software Corp. University of Maryland Fishery Products International Inc. Itron Nissan North America Services Pharma MDS Flow International Corporation Itron, Inc. Noranda Inc. Sheldahl, Inc. Medical Center Fonar Corp JDS Uniphase Corporation Nordstrom, Inc. Shell Oil Company Unocal Corp. Forbes Medi-Tech Inc. Jimmy Dean Foods Northeast Utilities Sierra Wireless, Inc. Upton Resources Inc. Former Clearnet Inc. John Wiley and Sons Inc. Northwest Airlines Sigma-Aldrich Corp. US Oncology, Inc. (TELUS Mobility) Jostens, Inc. NStar Silent Witness Enterprises Ltd. Varian, Inc. Franklin Templeton Investments Kellogg Company NTELOS Silgam Containers Corp. Vasco Data Security Freddie Mac Kellwood Company NVR, Inc. SITEL Corporation International, Inc. Freightliner LLC KeyCorp. NxTrend Technology, Inc. SLSC/SLD Vasogen Inc. Gables Residential Services, Inc. Kimball International, Inc. O & Y Enterprise SmartServ Veritas DGC Inc. Galileo International Kinder Morgan Inc. OAO Technology Solutions, Inc. SoftNet Systems, Inc. Veritas Software Gantz Wiley Research King Soopers Odetics, Inc. Solectron Corporation Viad Corp Gap Inc. Kmart Corp. OMI Ocean Mammal Institute Solutia Inc. Vicinity Corporation Gartner, Inc. Knight Ridder Opus360 Corporation SonoSite, Inc. Videotron Communications GBC Knight Trading Group Orenda Aerospace Corpation Southern Union Gas Viskase Corporation Genentech, Inc. KPMG, LLP. Pacific & Western’s eTrust Southwestern Gold Corporation W.R. Berkeley Corporation General Motors Corp. Kraft Foods of Canada Sparton Corporation Watson Pharmaceuticals Genesis Energy, L.L.C. L. B. Foster Co. Pacific Guardian Life Special Metals Corp. Welch’s Company Genlytc Thomas Group LaFarge Canada, Inc. Pactiv Corporation SRP WellPoint Health Networks Gennum Corporation LandAmerica Financial Group, Inc. Paradigm Genetics, Inc. Stanford Microdevices Western Multiplex Corporation Gentiva Health Services Laser Vision Centers, Inc. Parmalat Canada Stantec Consulting Ltd. Westport Innovations Inc Getty Images Le Skoupe Canam Manac Patterson Dental Company Starwood Hotels and Weyerhaeuser Company Gibraltar Steel Corp. Liberty Mutual Group PCC Structurals, Inc. Resorts Worldwide Whitney National Bank Glenayre Limited Too, Inc. PDI Stelco Inc. Wilson Greatbatch Global Thermoelectric Inc. The Loewen Group, Inc. Penske Corporation STMicroelectronics Technologies Inc. 12 Golden State Vintners LoJack Corporation Peoples Bank Stora Enso North America Wm. Wrigley Jr. Company

Watson Wyatt Worldwide Goodyear Tire & Lone Star Industries, Inc. Perkin Elmer Inc. Storagetek Wolverine World Wide Inc. Rubber Company Lorus Therapeutics Inc. Perot Systems Corporation StrategicNova, Inc. World Heart Corporation Great American Louisiana-Pacific Corporation Petro-Canada Stryker Corporation WR Grace & Co. Financial Resources Lucent Technologies Petroleum Helicopters, Inc. Sun Chemical Corporation Xcel Energy, Inc. Great River Energy Lynx Therapeutics, Inc. PetsMart Inc. Suncor Energy Inc. Yale New Haven Hospital Great Southern Bank Lyondell Chemical Company PFF Bank & Trust Sunquest Information Systems, Inc. York International, Unitary Greif Bros. Corp. Maax Canada Inc. Pharmacia Corporation SurModics, Inc. Products Group Groupe LGS Inc. Mackenzie Financial Corporation Phelps Dodge Corporation Synovus Financial Corp. Zoltek Groupe Transcontinental G.T.C. Magna International Inc. Pinnacle Entertainment, Inc. Talbots, Inc. Z-Tel Technologies, Inc. WHAT’S YOUR COMPANY’S HCI SCORE?

At a time when virtually all companies say that people are their most important asset, the Watson Wyatt Human Capital Index can now quantify that importance. Want to learn your organization’s HCI? Fill out our diagnostic, and we will analyze the results and provide you with:

❙ An HCI score that correlates the effectiveness of your company’s human capital management with its market value ❙ Your ratings on each of the key dimensions of human capital ❙ A customized, easy-to-understand report that outlines your organization’s strengths and opportunities for improvement ❙ “What-if” scenarios and the return on investment models associated with selected changes ❙ Ideas for prioritizing human capital practices to achieve results

F OR M ORE I NFORMATION on how your human capital can drive shareholder value, call 1-800-388-9868 or visit us at www.watsonwyatt.com.

About Watson Wyatt Worldwide

A global consulting firm, Watson Wyatt brings together two disciplines — people and financial management — to help clients improve business performance.

We provide consulting services in the areas of employee benefits, eHR and human capital management.

Our collaborative consulting approach starts with ClientFirst™ — where we work with clients to define needs and expectations and then measure our performance according to these agreed standards. Building on our research-based innovation and a deep knowledge of our clients’ businesses, we partner with them to provide tailored solutions.

Watson Wyatt has more than 6,100 associates in 29 countries. Corporate offices are in Reigate, England and Washington, D.C., USA. For more information, visit us at www.watsonwyatt.com. Consulting Offices

ASIA-PACIFIC

Auckland • Bangkok • Beijing • Calcutta •

Hong Kong • Jakarta • Kuala Lumpur •

Manila • Melbourne • Mumbai • New Delhi •

Seoul • Shanghai • Singapore • Sydney •

Taipei • Tokyo • Wellington

CANADA Divisions and Subsidiaries Calgary • Edmonton • Montréal • Ottawa •

Toronto • Vancouver • Waterloo PEOPLE MANAGEMENT RESOURCES RESEARCH AND INFORMATION CENTERS EUROPE WATSON WYATT DATA SERVICES Amsterdam • Barcelona • Birmingham • WATSON WYATT INVESTMENT CONSULTING Bristol • Brussels • Dublin • Düsseldorf • Corporate Offices Edinburgh • Eindhoven • Leeds • Lisbon •

London • Madrid • Manchester • Milan • Washington, D.C. USA

Munich • Nieuwegein • Paris • Redhill • 1/800-388-9868

Reigate • Rome • Rotterdam • Stockholm • Reigate, England Welwyn • Zürich 44-1737-241144

LATIN AMERICA

Bogotá • Buenos Aires • Mexico City •

San Juan • São Paulo WWW.WATSONWYATT.COM

Detroit • Grand Rapids • Honolulu • Houston •

Irvine • Lake Oswego, OR • Los Angeles •

Marlborough, MA • Memphis • Miami •

Minneapolis • New York • Philadelphia •

Phoenix • Portland • Richmond •

Rochelle Park, NJ • St. Louis • San Diego •

San Francisco • Santa Clara • Seattle •

Stamford • Washington, D.C.