Valuation of Assets(Human Resources)


Published on

It is well known that employees and their skills, abilities represent a significant asset for organization. It is an serious issue for any organization to measure this value as well as its contribution to the organization.

Published in: Education, Business, Technology
  • Be the first to comment

  • Be the first to like this

No Downloads
Total Views
On Slideshare
From Embeds
Number of Embeds
Embeds 0
No embeds

No notes for slide

Valuation of Assets(Human Resources)

  2. 2. There are basically five(5) kinds of assets/capital that organization can leverage to aid in performance and add values to operations  Financial assets/capital.  Physical assets/capital.  Market assets/capital.  Operational assets/capital.  Human assets/capital. Jayant Isaac,Asso.Professor – Mkt.,Sys.,& HRM
  3. 3. Ease of measurement Easier Examples • Equity •Securities & investments •Account receivable • Financial • Physical •Plant •Land •Equipment •Raw materials • Market •Goodwill •Branding •Customer Loyalty •Distribution Networks •Patents,trademarks,copyrights • Operational •Management Practices •Structure of work •Technology • Human More difficult -Education -Knowledge Jayant Isaac,Asso.Professor – -Skills Mkt.,Sys.,& HRM -Competencies -Work habits & motivation -Personal relationships
  4. 4.  Financial & Physical assets are relatively easy to measure via accounting practices. Most of these assets are tangible and having clear market value.  Market & Operational assets are bit more challenging to measure, but accounting practices have been developed that generally can place subjective value on such assets.  Human assets are very difficult to measure as education, knowledge ,skills, competencies etc have no boundaries and thus to measure Human assets/capital is very difficult Jayant Isaac,Asso.Professor – Mkt.,Sys.,& HRM
  5. 5. Understanding Human and Measuring Capital It is well known that employees and their skills, abilities represent a significant asset for organization. It is an serious issue for any organization to measure this value as well as its contribution to the organization. This relationship was first demonstrated by HUSEILD in the mid 1990s.This study identified what were called HPWS i.e. High Performance Work System. Jayant Isaac,Asso.Professor – Mkt.,Sys.,& HRM
  6. 6. HPWS According to HPWS the integrated, strategically focused HR practices were directly related to Profitability and market value . Jayant Isaac,Asso.Professor – Mkt.,Sys.,& HRM
  7. 7. Watson Wyatt W Philosophy According to Watson the primary reason for organizational profitability is the effective management of human capital/assets. This shows that rewarding the employees involved in profit making and on the other side ensuring that the investments in employees are not lost to the competitors by actively managing employee retention. Jayant Isaac,Asso.Professor – Mkt.,Sys.,& HRM
  8. 8. Various study in the effective management of Human Resources leads to the conclusion that it result in the increase in market value of the organization Extending to these findings Dyer & Reeves attempted to define what can be called as HR “Value Chain” According to this the performance could be measured in via four(4) different sets of outcomes: Employee, Organizational, Financial, Market Based Jayant Isaac,Asso.Professor – Mkt.,Sys.,& HRM
  9. 9. HR Value Chain Employee Outcome Attitudes, Behavior Organizational Outcome Productivity, Quality Financial Outcome Expenses, Revenues, Profitability Jayant Isaac,Asso.Professor – Mkt.,Sys.,& HRM Market Based Outcome s Stock Price (+ / -- )
  10. 10. HR Value Chain. The HR Value chain is based on cause and effect relationship. Each outcome ignite success in a subsequent outcome, establishing a casual link between HR Practice and an organizational market value. Jayant Isaac,Asso.Professor – Mkt.,Sys.,& HRM
  11. 11. Given this proven link between INTEGRATED & STRATEGIC HR PRACTICES and bottom line performance, HR practitioners have developed HR Metrics which specifically illustrate the value of HR Practices and activities , particularly related to Accounting profits & market valuation. This task has proved so far to be very much difficult to measure the Human capital/asset as evaluating an HR with respect to Accounting Profits & Market valuation is bit complex procedure. Jayant Isaac,Asso.Professor – Mkt.,Sys.,& HRM
  12. 12. Most of the TOP companies in the WORLD evaluate their HR operations on the basis of 3 limited metrics:1.Employee Retention and Turn over. 2.Corporate Moral. 3.Employee Satisfaction. Jayant Isaac,Asso.Professor – Mkt.,Sys.,& HRM
  13. 13. Such Staffing metrics simply document the extent to which HR Performs traditional Job functions without necessarily illustrating how HR impacts company profits and shareholder value. Moreover a focus on such Staffing Metrics involves a demonstration of how employees can be treated as assets that can be managed, invested in and leveraged for profit. Jayant Isaac,Asso.Professor – Mkt.,Sys.,& HRM
  14. 14. Some Senior HR Executives of the fortune 500 companies still believe that it is very hard to measure accurately the Human Capital/assets as valuation of the Human capital is value laden and hence it is ignored by many organization. As the complex nature of valuation of Human capital/assets and hard tasks are involved to measure the value of Human Capital/assets one helpful model is developed by Mercer that allow to study the Measurement of HR Capital/assets. Jayant Isaac,Asso.Professor – Mkt.,Sys.,& HRM
  15. 15.       The Model developed by MERCER involves Six(6) Steps Identification of Specific Business Problem Calculation of actual cost of problem to the organization. Choose HR Solution that addresses all or part of the problem. Calculate the cost of solution. After 6 to 24 Months calculate the value of the improvement for the organization. Calculate ROI (Return on Investment). Jayant Isaac,Asso.Professor – Mkt.,Sys.,& HRM
  16. 16. As the returns on other types of assets/capital, the ROI in human assets/capital are often not realized until some point in the future. The Key decisions makers should wait for these result conclusion. have to be patient before reaching to and any The HR Executives should also need to have a good communication with the Chief Financial Officers as the valuation of HR can be send to the cost centre and the data provided by the HR Executives will help the CFO during Cost Cutting operations. Hence measuring Human Resource capital/assets is an challenging job which is difficult but possible as it provides the senior management with the value added feedback of their HR assets. Jayant Isaac,Asso.Professor – Mkt.,Sys.,& HRM
  17. 17. Factors affecting an organizational investment orientation There are basically five(5) major factors that affect the Investment oriented Company in its management of Human Resources 1. Management Values 2. Attitude Towards Risk 4. Utility theory 3. Nature of Employee Jayant Isaac,Asso.Professor – Skills 5. Outsourcing Mkt.,Sys.,& HRM
  18. 18. Management Values  Management may or may not have appreciation of the value of it Human assets relative to other capital assets such as Brand names ,Distribution Channels etc.  Senior management values and action determine the organizational investments in the human assets.  Management values its people will be a critical Jayant Isaac,Asso.Professor – factor in its willingness toHRM Mkt.,Sys.,& invest in the HR.
  19. 19. Attitude towards Risk  This is the second factor, the most fundamental lesson that a trade exist between risk and return.  If the risk is higher then it is expected to have higher potential of return, lower risk or safe investment are expected to have moderate rate of returns.  But investment in HR is far more risky then investment in physical assets as HR cannot be owned by the organization.  An organization can attempt to gain some ownership through long term contracts ,incentives as well as additional professional development opportunities etc. Jayant Isaac,Asso.Professor – Mkt.,Sys.,& HRM
  20. 20. Nature of the Employee Skills  This is the third factor: Certain organizations will require Employees to develop and utilize very specialized skills that might not be applicable to another organization: another Employer might have employees utilize and develop skills that are highly marketable. For Example :if an employee have custom made Information system to handle administrative HR functions, employees using that system might not transfer those skills to the other employer. However ,if an employer uses a popular software program for which there is high demand for skilled employees among the competitors ,the investment in employees becomes more risky. Jayant Isaac,Asso.Professor – Mkt.,Sys.,& HRM
  21. 21. Utility Theory  In consideration of Investments in HR in terms of Hiring or development of current employees . Utility Theory attempts to determine the Economic value of Human Resource Programs activities and procedures . It is also known as cost-benefit analysis : here the cost of any investments are weighted against the benefits to determine whether the prospective investment is either profitable or not.  Example: To heir managers for specific jobs on the basis of selection test Hired with test Hired without test Productivity Higher Lower Investment More Less  Jayant Isaac,Asso.Professor – Mkt.,Sys.,& HRM
  22. 22. Outsourcing    Outsourcing is an alternative to the investment in HR. When the specialist who perform specific functions much more efficiently exists outside the organization the Outsourcing is encouraged. Example: McDonalds invest little in their people, as organization in this industry tends to invest more in new products rather HR and that is the reason the fast food chains go for outsourcing Jayant Isaac,Asso.Professor – Mkt.,Sys.,& HRM
  24. 24. INVESTMENT IN DISABLED EMPLOYEES  This HR investment involves providing support programs that return disabled employees back to work place.  Company relies on Long term disability insurance policy.  The law also favors on the investment in Disabled employees.  Disabled workers may become even more attractive source of labor when there are labor shortages. Jayant Isaac,Asso.Professor – Mkt.,Sys.,& HRM
  25. 25. INVESTMENT IN EMPLOYEE HEALTH  Investment in employees health increase the productivity of the employees.  Companies provide nutritious food and good medical care to its employees.  This results in the feeling of commitment and thus it increases productivity of the employee. Jayant Isaac,Asso.Professor – Mkt.,Sys.,& HRM
  26. 26. COUNTERCYCLICAL HIRING  Hiring the workforce during the economic downturns.  The Employer gets better workforce in less pay packages. Jayant Isaac,Asso.Professor – Mkt.,Sys.,& HRM