- The current framework for valuing human capital is outdated and insufficient.
- Companies should create a framework for monitoring and assessing the return on their investments in their employees in the same way that they would measure financial and intellectual capital.
Over the last few years, we’ve seen a seismic shift in how human capital is valued.
COVID-19 added impetus across the field: a rise in automation and artificial intelligence, growth of ESG and stakeholder capitalism, an increase in intangible assets as primary sources of value, and increased emphasis on employee wellbeing.
It became clear that people are their organizations’ biggest assets. What remains, though, is to update the framework for valuing human capital to reflect this.
nd change is on the horizon. A company’s intangible assets, including its human capital and its culture, are estimated to comprise more than half of a company’s market value on average. Efforts to introduce robust measures of human capital into financial reporting have accelerated in recent years as there is clear and growing market interest in understanding how companies manage and measure human capital to uphold the principles of stakeholder capitalism.
An example is Willis Towers Watson’s and the World Economic Forum’s recently published Human Capital as an Asset: An Accounting Framework to Reset the Value of Talent in the New World of Work to provide organizations with a model to reshape human capital accounting as part of the Great Reset.
Four major groups are driving the demand for change: regulatory bodies, international organizations, investor communities and policy-makers.
Last year, the US Securities and Exchange Commission (SEC) proposed expanding reporting requirements to include training hours, worker productivity and turnover. The agency recently released a final rule requiring companies to disclose a description of their human capital resources and any human capital measures or objectives that are a focus of managing the business when they are material.
The International Financial Reporting Standards (IFRS) and US Financial Accounting Standards Board (FASB) both have requirements in place for reporting employee-employer transaction information related to employee benefits, retirement plans and compensation.
In late 2018, the International Organization for Standardization (ISO) specified 23 core metrics – including costs and worker productivity; health and well-being; and leadership trust – for organizations to track and report.
The World Economic Forum’s recently released report, Measuring Stakeholder Capitalism Towards Common Metrics and Consistent Reporting of Sustainable Value Creation, sets out core metrics for diversity and inclusion, pay equality and wage levels.
For example, the Human Capital Management Coalition (HCMC), representing 26 institutional investors, has been instrumental in petitioning the SEC to move in the direction of requiring human capital metric reporting.
The US Congress is examining the topic of human capital reporting. In addition, the EU’s non-financial disclosure requirements are designed to promote greater transparency in organizational efforts related to social responsibility and the treatment of employees as well as board of director diversity.
A company’s intangible assets, including human capital and culture, are estimated to comprise more than half of a company’s market value on average.
A new paradigm for workforce management
Getting the operations up and running for a principled approach to workforce management requires thinking about human capital measurement in a way that goes beyond current mindsets and practices.
Companies are, happily, accustomed to understanding the value of their people. But to go beyond this, they can be mindful of four key areas:
1. The metrics themselves
Metrics are often chosen based on the availability of data. Headcount and employee turnover can be relatively straightforward to track and trend but are insufficient. We need an approach attuned to specific principles such as fulfilling purpose, prioritizing upskilling requirements, investing in the workforce and optimizing corporate ecosystems.
In addition, metrics need to be relevant to a wide range of internal and external stakeholders. Relevant metrics will inevitably involve qualitative as well as quantitative elements, including traditional measures of investment, profit and employee engagement and more innovative sources, such as social media or email sentiment.
As we consider the relevant metrics, it is important to distinguish the purpose for each metric; is it for investor/external disclosure or is it to enhance management of the business?
In order to organize metrics and bring their value to life, frameworks are needed that align metric choices with company purpose. Measurement frameworks provide an organizing principle that can integrate disparate measures, conceptually or even analytically. When done well, such a framework can tell an overarching narrative about human capital value and promote a balanced view of performance.
Measurement dashboards can be used to communicate that performance narrative. Regardless of the form, their intention is to appeal to and represent the input and influence of multiple stakeholder groups – from human resources to operations and customer service, and even oversight boards and regulators.
In a world marked by generational time horizons, metrics also need to balance immediate feedback on results with long-term trends that reflect progress towards an eventual goal.
For instance, sales results and even email and social media sentiment can be regularly examined to signal immediate shifts in service performance. In contrast, pay equity measures or even rates of employee volunteering can be tracked to monitor progress towards longer-range goals of gender equality and positive community relations.
Underlying all of these considerations is the ultimate purpose of the measurement process itself. Data points are of most value if their input into decision-making is readily apparent. Organizations can be particularly successful if they limit their focus to metrics for which they have action plans in place or for which they intend to introduce such plans.
In turn, it is easier to determine what those actions should be when the available data permits the analysis of root causes of shifts over time. A best-practice model thus includes comprehensive measures that are fit for purpose, are tied to ongoing change initiatives and enable smart analysis to direct improvement efforts.
If such principles could be brought together to underpin a framework for measuring and accounting for human capital, it would enable companies to monitor and assess the return on its investments in its employees in the same way that they measure financial and intellectual capital.
This article was adapted from Human Capital as an Asset: An Accounting Framework to Reset the Value of Talent in the New World of Work, produced by the World Economic Forum in collaboration with Willis Towers Watson. The report is a component of the Forum’s HR 4.0 initiative, an approach to shaping people strategies in the Great Reset to collectively build a more fair, sustainable and resilient future.
Queenie Chan, Senior Consultant, Talent Management, Willis Towers Watson
Ravin Jesuthasan, Managing Director and Global Practice Leader, Willis Towers Watson
This article was first published in World Economic Forum
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