VALUATION OF HUMAN RESOURCES has various advantages by itself and is followed by most of the leading organizations across the globes. To start with the discussion i have put some of the advantages along with its description which will give you a clear insight.
Valuation of the Human capital
ESTABLISHING INVESTOR CONFIDENCE
In the service sector, the performance of any enterprise depends mainly upon the quality of its human capital, as they are the main product delivering assets. Just like an industrial unit’s tangible fixed assets like Plant & Machinery, any deterioration in the quality of the human capital assets of a service provider will clearly reflect on the enterprise’s performance. So, in the current competitive scenario, it is pertinent to communicate to investors how efficient their personnel is to deliver returns on investments. Even in other sectors with heavy capital investments, the investors need to be assured that the personnel is capable enough to be trusted with the former’s investments.
GUARANTEE TO CUSTOMERS / CLIENTS
A human resource valuation will assure customers quality and consistency. An HR valuation is a means of guarantee available to customers and outsiders that the enterprise is through its personnel efficient to honour commitments.
PLANNING OUTGOAn HR valuation study assists management to project the future outgo of personnel costs like training and development costs, salary and benefits, compensation costs, retirement benefits etcetera.
EMPLOYEE MOTIVATION
Depicting the value of human resource in the balance sheet and other reports can achieve a high level of motivation in the personnel and can thereby communicate to them that the management perceives them as assets and not merely expenses.
MONITORING PERFORMANCE
An HR valuation report help immensely in monitoring efficiency of personnel and in designing the HR strategy. The company can analyse if its investment in human capital has paid off. Such a valuation tabulates a database on personnel details, which serves as a basis of MIS reports on returns on personnel cost, return on human capital.
COSTING EXERCISE
An HR valuation report helps the management to make a conscious move to capture its costs related to HR department by developing a human resource accounting system, which compliments the HR valuation exercise. The system can provide a cost clarity in all relevant areas related to the human resources of the company.
I have also pasted a article that has been published on Valuation of the Human capital and that will really help you in understanding.
the link of the site is
http://www.taleo.com/research/articl...cle1.php?id=18
A Review of Human Capital Valuation
by Yves Lermusiaux
“Our employees are our greatest assets, and the ability to attract and retain them is the key driver of our future success.”
Sound familiar? This is now a routine sentence for any company reporting on its health and its future. But for many of those companies, its meaning and implications are limited to that sentence. Let’s step back to quantify more precisely what it means to have human capital, to attract and retain it.
Why is Human Capital Key?
The new economy is often called the knowledge economy. Emerging from an industrial age, this new economy distinguishes itself by a large amount of the value of the company residing in the head of the employee instead of in the tangible assets of the company.
This realization was made very clear in a 1999 Business Week article that showed the valuation of Microsoft was superior to GM + Ford + Boeing + Lockheed-Martin + Deere + Caterpillar + USX + Weyerhauser + Union Pacific + Kodak + Sears + Marriott + Safeway + Kellogg. Yet, the only value at Microsoft resides in the heads of its employees!
By their essence, software companies represent the structure of the new economy because they create new entities called software codes, which are totally digital. Software is however very powerful to optimize the physical world and provides tremendous value (an example is supply chain optimization software).
Another illustration of the intrinsic value of intangible and human capital is the historical evolution of the ratio of the S&P 500 between the market value and the book value. The ratio of book value to market value was approximately 1 in the early 1980s. In 2000 it had risen to about 6; in the last 20 years it increased 6 times. Among those companies, current employees are now perceived as a key element, along with the ability to attract and retain talent. Faced with this issue, many academics started to review and suggest some new models to give a better account of a corporation’s worth.
Human Capital as a Foundational Asset
At Taleo, we suggest that Human Capital valuation should be required by analysts in order to give them more tools to objectively assess company viability. An Ernst &Young study1 has shown that financial analysts give around one-third (35%) of their estimations based on non-financial data. Without those metrics, this work is mere guesswork.
The human intellectual asset is, like many physical assets, hard to value. An insurance company will value your hand if you lose it, but how much is it really worth to you? Similarly, those attempts to value human assets of corporations are only approximate and not supposed to be a true science.
In software companies and many business services firms, the financial capital comes from the ability of the firm to transition the human capital into a structural capital that will be shipped out and consequently transition into financial capital.
It is beyond the scope of this article to analyze the ability of corporations to make those transitions happen. However, it is important to notice the critical factors that the human capital plays as the foundation of the financial capital. And if competence is the base of the structural capital, assignment is its skeleton. Based on management, vision and monitoring, structural capital is critical and is one explanation of the high rewards given to CEOs.
In corporations today there is a lack of competency management deployment in order to achieve the structural capital. Certainly, competency-based management systems do not insure a structural capital, they are though, a foundational tool that could enable the structure to take place faster and facilitate competitive positioning.
Human Resource Accounting
Any discussion of human capital implies that the people in the organization represent more than just expenditure; that they are not to be seen only in the income statement but more in the balance sheet as an asset.
Several models have been developed to try to quantify the intangible and specifically the human component.
Cost models (Brummet, Flamholtz and Pyle) are based on the acquisition cost, including replacement and training costs and opportunity cost of human asset.
The Lev & Schwartz model, more monetary-centric, is based on the likely future earnings of an employee till his retirement.
Instead of basing a model on age till retirement, we recommend basing a model on turnover rate and capitalizing salary expenditures. Therefore, to compute the value of human capital multiply the number of employees by their salaries; multiplied by the average length of tenure per employee; multiplied by the average increase in wages per year; all discounted back to year one. The resulting figure represents the human capital value of the firm.
However, it is not the absolute value of human capital that is critical; but more its significance as an indicator of the importance that management should pay to it. Employees have moved from being a cost to becoming a resource and today they are considered to be an asset or a capital. Any careful management must take care of its assets and try to maximize the return on them. So the question now is how to maximize the human capital in a corporation?
Human Capital Maximization
The framework developed here helps explain the importance of human capital as a key component. Retention as well as optimization of skills can be seen as key differentiators to sustain business and financial viability.
Tools and technology are available to use in pursuit of those goals. Careful usage of skill-centric automation technology is a proven method to increase retention by better redeployment. Perhaps even more importantly, it also is a proven method for cost optimization of external human capital acquisition and real time skills inventory and enhancement.
Metrics and measurements, and use of technology are the first steps to maximize human capital, but also are the best methods to fill the gap between human capital acquisition execution and executive sponsorship.
Yves Lermusiaux is president of Taleo Research (
www.taleo.com). The specialty research practice analyzes the best practices and economics of talent management. Taleo Research focuses on critical issues and key trends in talent management that impact organizational performance. Taleo Research is the strategic research division of Taleo, which provides talent management solutions for organizations of all sizes, worldwide.
hope you have got a little insight.....
reply me about your comments and clarifications
life is full of joy, enjoy it
09894805856
feel free to mail me
[Login to view]