The challenge
Last week we looked at the statement “people are our greatest asset” and found that it was more than a cliché. The definition of assets substantiates the claim that employees are assets. Unfortunately, we also discovered that an “awful accounting mismatch”, actually reinforced by generally accepted accounting principles (GAAP), perpetuates your accounting for people as costs rather than as assets, making you an inadvertent, and even involuntary, hypocrite whenever you refer to them as assets, simply because accounting for them as costs inevitably means managing them as such.
The remedy is simple. You have to start accounting for people as assets. Only then will you start managing them as such and so rectify the anomalies that this “accounting mismatch” creates. So our first challenge is to figure out what accounting for people as assets entails, before we embark on changing GAAP!
The starting point
The definition of an asset as “an item of value” or “a valuable resource” inexorably brings you to the issue of value. So that has to be your starting point.
Even the ideal of valuing people can be contentious. Many HR professionals seem to object to the term human capital and think it is too difficult, not practical and even dehumanising to try to place a value on a person. Yet you implicitly do that every time you identify a “high-pot” or conduct an appraisal or assessment or determine an employee’s wage or salary. Why is the idea of formalising a process to determine value so different?
Once again the major obstacle seems to be the complexity. People are not homogenous and even if they have the same talents, competencies and skills, the way they apply them will be different and often shaped by their unique experience. It would seem that the “variables of value” are too numerous, too varied and too individual to enable “proper” – i.e. constant, consistent and empirical – ways of valuing people, not least because they can be so abstract. Thus even achieving consensus as to what the variables are seems an impossible task. This is perhaps why the CIPD has shelved it “Valuing your talent” programme.
Daunting though this complexity appears, it does not mean that we should be like the CIPD and not attempt to find answers. It is too important and there is too much at stake.
Reducing the complexity
It seems self-evident that in order to begin to find a way to value people as assets you have to eliminate much of this complexity. This is possible when you, discretely and/or simultaneously:
- Look at the person as a whole rather than “a talent” or an amalgamation of talents;
- Reduce the number of variables; and
- Factor in the time aspect of value.
Let me explain what I mean.
Firstly, regardless of the role, you employ a person to fill that role. So when you assess their suitability you look at their knowledge, their experience and their competency. Yet when you recruit a person, you are looking at more than just this. You are also assessing their potential: how they will fit into the organisation and how they are likely to develop and progress. Taking all these “qualities” together you thus have the capability to assign a value to the person as an employee.
This gives you your starting point. Thereafter the person’s value will increase or decrease according to the manner in which they develop and in which they apply themselves. You already have a value, so what additional knowledge, experience or skill are they manifesting – or failing to manifest – that increases or decreases their value.
This enables you to leverage the time aspect of value and gives you a solid foundation for identifying and empirically measuring the person’s value on an ongoing basis.
I don’t think that is so difficult, do you? It is simply a process and, for a species that, amongst other things, can turn coal into diamonds that should not be an insurmountable challenge. So, are you up for it?
If so and to find out more about accounting for people as assets, download our free paper here or simply pick up the phone and talk to us: we would love to help you realise the value of your human assets!