Building Human Assets
A greater proportion of the added value created by corporate entities is increasingly dependent on intangible assets. Since human assets account for a significant proportion of company expenditure and company value, a company's real value must incorporate the value of its human assets. Through compensation management, investments, and by appealing to the minds and hearts of employees, a company's human assets can be built to become a significant source of competitive advantage. However, this is not without risk, as there are uncertainties posed by the dynamic nature of companies, markets and employees. Carefully planned human resource initiatives can help reduce these uncertainties.
Keywords Competitive Advantage; Firm-Specific Employees; Human Assets; Human Capital; Organizational Capability; Uncertainties of Combination; Uncertainties of Costs; Uncertainties of Returns; Uncertainties of Volume
Management: Building Human AssetsOverview
Every company has both hard assets and soft assets. Hard assets, also known as physical or tangible assets, include items such as buildings and machinery, and soft assets include intangible assets like human beings. Business success requires a combination of hard and soft assets.
Human assets consist of a company's employees and their value in terms of the quantity and quality of their knowledge, skills, abilities, competencies, talents, experience and attitudes. Another term for human assets is human capital.
The concept of human assets or human capital initially originated in the field of economics, where it was first used to explain the economic growth of countries. This concept has only in recent decades entered the field of management, thanks to the realization that a greater proportion of the added value created by corporate entities is not dependent on physical assets alone, but is increasingly dependent on other assets.
Companies make investments in human assets: They buy human assets by hiring employees, and they 'make' or 'build' human assets through training, job experience, and so on. A company's human assets are its main sources of 'competencies' and 'capabilities,' and as such, they constitute a valuable strategic asset which is necessary for creating and sustaining competitive advantage. As income generating assets, employees are a form of organizational wealth, with a potential for impacting shareholder value. The actions and professionalism of employees also have an affect on customer perceptions of a company. Given that human assets account for a significant proportion of company expenditure, it is surprising that managers tend to know less about their human assets than they do about other assets of their company.Human Resource Accounting
Due to the vast significance of human assets, coupled with the recognition that human resources are assets with value, recommendations have been made for human assets to be incorporated into company accounts, a move which gives investors and all stakeholders a better valuation of a company. In response to these recommendations, academics and practitioners in the fields of economics, accounting, human resource management and general management, have been involved in striving to define, evaluate and measure human assets. Their efforts have led to the creation of a sub-field known as human asset accounting or human resource accounting, which is concerned with determining the value of the human resources employed in an organization, to that organization.
Apart from gaining a realistic appraisal of their corporate worth, companies that are able to place value on their human assets enjoy a myriad of additional benefits, including the measurement of the return on investments they make on their employees, and improved decision-making. In addition, valuing human assets helps companies to plan their future employment needs, and it also helps them to generate objective information for making projections for training and management development activities. Once they know the value of their human assets, human resource managers will be able to enlighten managers about the real value of lost skills, knowledge, and expertise. Both companies and investors will be able to understand the factors that drive corporate performance; and companies will be able to identify future sources of value in a competitive business environment. They will also be able to understand how investing in people creates value.Methods for Determining Human Asset Value
There are several means of determining the value of human assets to an organization. These include the following:
- Economic Value: This approach defines the value of human assets as the present value of that portion of the future earnings of the company, attributed to human resources. Economic value can be calculated through the use of the Discounted Cash Flow model, which tries to predict the future earnings employees will generate, by discounting these cash flows to the present.
- Opportunity Costs: In this approach, the value of human assets is defined as their value (or worth) in their best alternative use.
- Value to the Undertaking: When a company has several cost centers (be they plants, divisions or departments) competing for a particular employee, the employee is assigned to the highest bidder, and the bid price denotes the value of the employee to the company and to the cost center.
- Total Contribution: This approach measures the performance of the company, and the contribution of its human assets to this performance.
- Historical Costs: This approach considers the costs of acquiring, developing, maintaining and utilizing personnel. Personnel expenses are treated as investments and the costs are treated as costs of long term assets, spread over the expected useful period of the investments. If an employee leaves the company before this period is over, the balance when he or she leaves is considered to be a loss.
- Replacement Costs: This involves calculating the estimated cost to the firm for replacing employees with other people of equivalent talents and experience. Like the historical cost approach, this approach also considers the costs of acquiring, developing, maintaining and utilizing the replacement employees.
In the area of human assets, as with all other assets, value determination must be an ongoing activity, since the value of people can appreciate or depreciate. This happens due to several factors: Firstly, people tend to move constantly within their company, as well as between companies. Secondly, the gain from employees is subject to change, as business conditions, technology, company conditions and individuals undergo change.Further Insights
As they face the challenge of increasing global competition, human resource professionals must ensure that their company's human assets are adding as much value as possible to their products and services. Human resources professionals must build on their human assets by selectively hiring and attracting employees, and motivating them to stay with the company.
Job satisfaction is a key factor for motivating employees to stay in a company. There are five dimensions of job satisfaction: Compensation, supervision, coworkers, promotion, and the work itself.Building Human Assets through Compensation Management
Pay satisfaction tends to decrease when employees perceive inequity or injustice of pay distribution within a company. Therefore, some...
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