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Valuing Employees as Assets: Human Asset Investments

Valuing Employees as Assets: Human Asset Investments

“People are our most important asset.”

How many times have you heard that aphorism from Senior Executives? But while people (i.e. employees) are often spoken of as assets, the reality of business is they are generally treated as costs – particularly by financial departments who categorize them as “liabilities.”

Since value is driven by people more than any other factor, categorizing employees as financial liabilities is a major problem for businesses in today’s knowledge-based organizations.  Because of this “out-dated” approach, the manager’s mindset is inherently, and significantly, out of focus. You don’t manage liabilities the same way as your assets! Current best practices in Human Capital Management aim to correct this fundamental flaw by connecting or correlating the value of employees’ talents and attributes, with the value they produce in both financial and non-financial terms.

Valuing People as Assets

Defining employees as an asset is easy, since they meet the three key criteria:  1) They possess future service potential.  2) This future potential is measurable in monetary terms. 3) They are subject to the control of the company, or (their time) can be rented or leased.

Measuring the intangibles, such as employees’ competencies, skills, or talents – these types of valuations are frequently excluded from appearing in the management monitoring and control systems in any serious way.  This the true challenge that we focus on overcoming at HireSmart.

Generally, the traditional human asset valuation methods utilized at HireSmart include the following:

  • Cost-based Valuation. This method looks at acquisition or replacement cost. The costs of recruiting and hiring an employee can be assessed. Alternatively the person’s annual gross remuneration can be used as a base.
  • Market-based Valuation. The price to be paid in an open market must be a reflection of the value of a person. Value is very difficult to assess, and it does not take account of the value of service continuity in itself.
  • Income-based Valuation. The cash inflows expected by the organization related to the contributions of the human asset, calculated as the present value of the expected net cash flows. This is good for individuals whose efforts are directly related to identifiable income (like sales talent).

Of all the business levers available to Senior Managers, the greatest potential to build value is offered by investments in human assets (i.e. employees).  It is time to recognize this, and demand a measurable approach to both valuing this most significant asset, and linking that value to the outcomes and benefits for stakeholders.  What gets measured gets managed!

 

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