Human capital as an asset

The lack of adequate metrics for valuing talent and the return on human capital investments is a critical issue for companies looking to reset their people strategies in response to the global pandemic. Today, the need for these metrics is urgent, as companies are under pressure to operate more efficiently, build resilience and create value from their investments in talent.

Under current accounting systems, workforce investments result in a direct hit to earnings with no recognition of the value created, while reductions in force receive favorable 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 disposable.

This calls for a new human capital accounting framework that values talent as an asset rather than an expense and enables boards and management to be held accountable for their investment in people.

Guiding principles

The following principles can help organizations shift their thinking on how to value human capital:

1. 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 among all stakeholders.
2. From corporate policy to social responsibility. With the increasing focus on corporate social responsibility, employees will be expected to live corporate values not only in the workplace but in the community.
3. From stand-alone to ecosystems. Successful businesses in the future will thrive as participants in ecosystems that include partners, suppliers and the broader community.
4. 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 (e.g., gig workers, automation) for getting work done.
5. 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.
6. From backward-looking financial measures to forward-looking, broader measures of value. In addition to relying on traditional measures of past performance, it’s important to consider measures that assess the future potential for value creation.
7. 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 to inform human capital policies.

A framework for valuing human capital

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 three-part model that incorporates these guiding principles and reshapes human capital accounting.

1. 01

   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 Total Rewards including employee benefits.

   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. 02

   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 (TCoW^TM) 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 then using the resulting output to measure the value gained or the Return on Work (RoW^TM).

3. 03

   Assess the value of the workforce

   If the workforce is to be treated as an asset rather 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.

Policymakers, chief human resources officers (CHROs) and boards all have a role to play in incorporating these metrics into their business decision-making. 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 a more equitable relationship with all its stakeholders.

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