- There is a lack of adequate metrics available to companies for measuring the human capital value and return on investment in employees;
- Investments in the workforce are often misrepresented as detrimental to budgets with no recognition of the value they create;
- A new framework for valuing human capital that takes into account the shape of work in a post-COVID-19 world can help change this.
As companies look to reset their people strategies in response to the COVID-19 pandemic, they must grapple with the lack of adequate metrics for valuing talent and return on human capital investment. Such metrics matter for deepening stakeholder engagement and to help drive and track decision-making in companies under pressure to operate more efficiently and become more resilient.
Under current accounting systems, workforce investments are reported as a direct hit to earnings with no recognition of the value created, while reductions receive favourable treatment and are excluded from core earnings. This creates a perverse set of incentives that encourages management to reduce investment in the workforce and treat talent as disposal.
Willis Towers Watson and the World Economic Forum have 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.
From this new publication, here are seven guiding principles to help organizations shift their thinking on how human capital is valued:
- From profits to purpose. Performance measures should focus not only on shareholder returns but also on how an organization achieves its broader purpose of creating shared value for all stakeholders. A critical element of stakeholder capitalism is a company’s responsibility to its talent, including contingent workers as well as salaried employees.
- From corporate policy to social responsibility. With the increasing focus on corporate social responsibility, employees will be expected to uphold corporate values in both the workplace and the community.
- From stand-alone to ecosystems. In the future, successful businesses will thrive as participants in systems that include partners, suppliers and the broader community. The pandemic highlights the need for stronger partnerships and alliances between unrelated companies. Consider, for example, how furloughed baggage handlers were successfully redeployed to supermarket chains.
- From employees and jobs to people, work and skills. The traditional notion of work being performed primarily by employees in jobs is giving way to a broader focus on work and skills, and the growing plurality of means for getting work done. Consequently, organizations require metrics that measure the plurality of work options on a level playing field.
- From the workforce as an expense to the workforce as an asset. Instead of having workforce development costs expensed when incurred with no recognition of value, these investments should be capitalized and recognized on the balance sheet as an asset.
- From backward-looking financial measures to forward-looking, broader measures of value. In addition to relying on traditional measures of past performance, it is important to consider measures that have the potential to create value in the future. To drive a sharper focus on the workforce, such measures should be reported on an ongoing basis.
- From quarterly to generational. Because the results of a company’s workforce investments are often realized in the mid to long-term, metrics based on a longer-term view are needed. This will help inform human capital decisions around building versus buying talent, investing in employee upskilling and reskilling, and reinventing jobs to make the best use of technology and alternate ways of working.
A framework for valuing human capital
An accounting framework for human capital that incorporates these guiding principles needs to go beyond existing metrics. We propose a three-part framework that can help companies better understand how work and talent can create value in a post-COVID-19 workplace. Here are the
1. Assess the employee experience
The employee experience plays a vital role in motivating all talent, from full-time employees to contingent workers, to create value for an organization and its stakeholders. Willis Towers Watson has developed an evidence-based model of employee experience based on organizational surveys of workers that identifies the most important experience factors, including connection with company purpose and colleagues, and contribution to work and rewards.
Using this model, it is possible to gauge employee sentiment regarding the quality of specific experiences at work in comparison to those of high-performance companies. Willis Towers Watson research shows that companies with a high-performance employee experience outperform their peers in top-line growth and bottom-line profitability.
2. Determine the value generated by all sources of work
Given the changing nature of work, companies need a holistic measure that accounts for today’s many options for getting work done. This requires determining the “Total Cost of Work” by capturing the cost and productivity of all types of talent (e.g. employees, gig, outsourced) and automation on a like-for-like basis and using the resulting output to measure the value gained or “The Return on Work”.
3. Assess the value of the workforce
If the workforce is to be treated as an asset rather than an expense or liability, it is essential to have a metric that captures the total value of the workforce and accounts for factors that can cause a shift in that value. The “Total Workforce Value” metric will help organizations achieve this objective by first determining the market price of all talent (employees and non-employees) and then assessing factors that can add value, such as training and development, as well as factors that can reduce value, such as skills redundancy.
These three metrics should be tracked and reported with senior leaders and boards held accountable for their investment in people.
Mainstreaming the framework
Policy-makers, chief human resources officers (CHROs) and boards all have a role to play in incorporating these metrics into their business decision-making.
- Policy-makers must focus on transforming accounting principles so investments in the workforce are recognized as a source of value creation.
- CHROs must encourage the use of the proposed metrics among leaders within HR and the broader organization to help facilitate the optimal combination of talent and technology.
- Boards must ensure that human capital measures are included in their reported metrics to accurately communicate the return on human capital investments to shareholders and hold executives accountable.
If properly integrated into an organization’s decision-making process, this framework and its underlying principles will help a company manage the return on its investment in human capital in much the same way it measures returns on financial capital, while building resilience and a more equitable relationship with all its stakeholders.