The past year has shown us just how valuable and adaptable our workforce is. As we look to 2021 and getting back to the new normal, whatever that may be, reconsidering how we view employees should be at the forefront. Valuing our human capital as an asset rather than an expense is important for creating value, improving efficiency, and expanding resiliency.
Recently, the World Economic Forum and Willis Towers Watson released a white paper on this topic, Human Capital as an Asset: An Accounting Framework to Reset the Value of Talent in the New World of Work. The purpose of the paper is to help companies understand how they can use a new framework for human capital accounting.
The approach provides a lens to, “monitor and assess the return on its investments in its employees – in the same way as it measures returns on financial and intellectual capital. The paper also provides guidance for how chief human resources officers, boards and policy-makers can mainstream this framework in order to shape a better approach to human capital,” according to SHRM.
Per Ravin Jesuthasan, managing director at Willis Towers Watson and co-author of the paper, “Under current accounting systems, workforce investments are reported as a direct hit to earnings with no recognition of the value created, while reductions receive favorable treatment and are excluded from core earnings,” he said. “This creates incentives that encourage management to reduce investment in the workforce and treat talent as disposable. There are more incentives to automate work rather than invest in upskilling or reskilling, for example.”
Another perspective that is often missed is noted by Robin Erickson, a principal researcher in human capital at the Conference Board, “Most organizations view voluntary turnover as a way to save money, as hiring and onboarding a new employee costs less in hard dollars than the interim reduction in labor costs,” she said. “However, that calculation doesn’t take into consideration more intangible outcomes, such as lost productivity, lost institutional knowledge, lost client relationships, lowered employee morale and sunk investment in training. If organizations monetized those intangible outcomes, they’d realize that if they were able to reduce voluntary turnover, they could add millions of dollars to their bottom line.”
The paper provides seven guiding principles to shift how human capital is valued:
- From Profit to Purpose
- From Corporate Policy to Social Responsibility
- From Stand-alone to Ecosystem
- From Employees and Jobs to People, Work, and Skills
- From Workforce as an Expense to Workforce as an Asset
- From Backward-Looking Financial Metrics to Forward-Looking Value Metrics
- From Quarterly to Generational
Adopting the seven principles requires companies evolve from the traditional “mindsets and practices” of human capital management. The first step is reconsider the metrics you’re using, and find relevant qualitative and quantitative metrics that support the seven principles. The second step is to align the metrics to the company’s purpose through the use of frameworks. The third step is to expand the time horizon on which you consider success. Instead of being driven by short-term goals, that can often work against long term growth, take a longer view. And the fourth step is make sure the updated measurement process meets the purpose you are trying to achieve.
For the full details on the seven principles and recommended steps for CHROs and Boards, we recommend downloading the article. And if you have questions on how you can build a culture that values human capital as an asset and not an expense, let us know, and one of our executive recruiters will be happy to engage in a deeper conversation on this topic.