Nice Assets: Fair Market Value of Employees

On May 21, 2012, in Editorial Advisory Board, HRExaminer, Paul Hebert, by Paul Hebert

Paul Hebert | Founding Member, HRExaminer Editorial Advisory Board

Paul Hebert | Founding Member, HRExaminer Editorial Advisory Board


by Paul Hebert

We continue to hear the C-Suite talk about employees as their most important asset.  Expensive placques line mahogany walls all over corporate America engraved with the company’s commitment to its associates, employees, team members, (insert buzz word for worker here).

Everyone talks the talk when it comes to the employees being the fuel that drives the engine of profit.

We are in a new business age right?  We’ve moved from the Industrial Age to the Knowledge Age.  We’re supposed be working in a new economic model where what’s between the ears of employees is more important than the machine in front of them.  Innovation and growth come from the discretionary effort of the workers – not the investment in capital on the production floor.  The company’s real value is its employees.

Except it still isn’t.

Stock prices can increase after layoffs. Investors see layoffs as the company getting more aggressive with costs  – making investors happy, and in many cases, the C-Suite rich.

Would investors think it’s a good idea if Ford suddenly announced it was removing the robots that make cars?  Would investors think it wise if google started shutting down its massive server farms?  Probably not.  Those assets drive the businesses.

Unfortunately for HR – employees are still viewed as a cost item – 0n the balance sheet, and in the minds of most managers and executives.

Costs are something you want less of – not more of.

What if you could put a value on the employees – a real value – one you could list on your balance sheet as an asset?  What if you could show some sort of positive relationship between those “expenses,” called employees, and the stock value everyone on Wall Street is so interested in?

It’s possible  if we treat employee value like brand value?

Brand Valuation – A Short History

Marketing departments spend a lot of money building and supporting a brand.  Brands are expensive – and they are valuable.  And they are intangible, just like employee value.

Valuing a Brand

According to BrandChannel.com the history of determining “brand value” sprung from a wave of acquisitions in the late 1980s. In the process of establishing a “selling price” for a company, finance folks were having a hard time valuing and accounting for the “goodwill” associated with the brands the company owned.  In some cases a buyer is really more interested in the brand than the hard assets such as machinery or property. But how do you determine the price of a brand?

In the early 80s accounting practices and financial reports had no way to put a number on what a branded company was worth over and above the traditional tangible assets and earnings,

But they found a way…

Once the challenge was set, many companies stepped up.  Rankings for brand financial value can now be had through Interbrand;Millward Brown BrandZ;Credit Suisse Great Brands.  One can estimate brand equity with Equitrend. And for those of us on the cutting edge of social marketing – you can measure brand word-of-mouth buzz/promoting through McKinsey or the Net Promoter Score.

Whenever money – big money – is at stake, the market finds a solution.  Brands are big money.  Brand values can make up a sizeable portion of a company’s stock value.

Ask yourself what McDonald’s be without its brand – or Coca-Cola?

For the Real Thing – 50% less valuable.  For McDonalds, about 70%.

The contribution the Coca-Cola “brand name” has to shareholder value is about 50%.  As of May 18 Coca-Cola is trading at roughly $75 a share – without the “brand” it would be trading at $37 a share.  The brand makes a big difference.

HR needs to find its Interbrand.

Brands – and the marketing expenses that create them have value.  And the smart people in the marketing and finance world have figured out how to put a real number (or a sorta real number) on brand value – the intangible value a brand has on a company’s stock price.

Why Can’t HR?

How did marketing (and their financial friends) find a way to link their expenditures to the balance sheet and the price of the stock?  They played ball with the folks that do the books and learned their language.  They told them that marketing is not a cost but an investment in branding.  And branding has value.

If McDonald’s came out tomorrow and said it was cutting marketing by 50% to reduce cost and be more strategic the markets would pummel the stock.  Investors know that 70% of their investment is related to marketing efforts.  Reducing marketing for McDonald’s would be the same as reducing manufacturing at Ford.  Those things drive business value.

HR Needs To Create Their Own Equity Model

This is not a new idea.  I’ve found discussions and white papers on the web discussing the how to value employees as assets on the books.  But unless someone finds a way to connect the dots, promote it – and show that it works – HR will be relegated to admin tasks and making sure HRSA forms are completed.

Who should take up this challenge?  Who should spend money to develop a model – or models – of Employee Equity that can finally be discussed side-by-side with brand equity?

SHRM of course.

They are uniquely positioned to provide the oversight and the money to give HR what it needs most:  Value on the balance sheet.

Other Resources:

Value Drivers Intangible Assets: Do We Need a New Approach to Financial and Management Accounting? (http://www.juergendaum.com/articles/IA_Controlling__e.pdf )

Are Employees Intangible Assets? (http://smallbusiness.chron.com/employees-intangible-assets-44349.html )

Employee Value: An Accounting Paradox (http://www.newwork.com/Pages/Opinion/Raynor/Employee%20Value.html )

Putting the People Component of the Business Entity on the Balance Sheet (http://donaldhtaylor.files.wordpress.com/2007/03/puttinghumanassetsonthebalancesheet.pdf )

Exploring the HRM/Accounting interface on human assets:  The case for artefact-based asset recognition criteria ( http://www.emeraldinsight.com/journals.htm?articleid=1852536&show=html )

Valuing Brands and Brand Equity:  Methods and Processes (http://www.huizenga.nova.edu/Jame/articles/brand-equity.cfm)

Brand Valuation:  The financial value of brands. (http://www.brandchannel.com/papers_review.asp?sp_id=357 )

About the author

Paul Hebert

Paul Hebert is the Managing Director and lead consultant for I2I, an influence consultancy that helps companies align the behavior of their employees with the goals and objectives of the company. He is widely considered an expert on motivation and incentives. Over the course of 20 years, Paul has worked closely with clients to design their influence, marketing, motivation, incentive and reward programs to increase effectiveness and reduce costs. Through the use of proven motivational theory, behavioral economics and social psychology he has driven extraordinary company performance. Paul has been interviewed by the BBC, quoted in USATODAY, published in Loyalty360 magazine, published whitepapers and articles for HRM Magazine, is a contributing author on the Fistful of Talent blog, a contributing author on the site Making Work Meaningful, is a monthly columnist for Incentive Magazine, and is the Social Media Editor for the Enterprise Engagement Alliance. Paul's website Incentive Intelligence can be found here. Paul's posts on HRExaminer can be found here.

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  • Sue

    Great piece.   I think SHRM is doing something — see the draft Investor Metrics standard that’s out for comment. http://hrstandardsworkspace.shrm.org/apps/group_public/document.php?document_id=6504&wg_abbrev=mamt02 It’s a first attempt to create a common vocabulary/metric that investors can use in deciding where to invest.  Analysts now look at the financials of a business; this would give a standard approach for looking at the human capital practices to help make even better investor decisions.  While it’s a first step only, and already causing some controversy, until there is some common vocabulary, it will always be difficult to value people as an investment — and not a cost — on the financials.  

  • http://www.wphebert.com Paul Hebert

    Thanks for pointing that out Sue,  I had not seen it.  I think it is in general, a good start.  

    What I got out of the document is a “measurement” that can summarize a company’s approach and how they leverage of their talent to use as a comparison to other companies.  A single metric for comparison.  Needed but not where I saw some opportunity.

    What would be even better – and the direction I hope we can go is to create a percentage of value based on the way in which a company captures, retains, educates, allows for innvotion, etc – that can actually be put on a balance sheet.  

    When a company is purchased, many times the “brand value” is included in pricing discussion.  The services I mentioned do just that for marketing and the brands they developed and maintain.  HR needs similar connections to the actual balance sheet.Right now – one the huge benefits to buying say a zappos – isn’t necessarily their technology or supply chain – but their customer service process and employees – where would that show on the balance sheet?  I like the direction of the SHRM document but they need to add a section that connects that measurement into $ – then people will take notice.

  • http://www.wphebert.com Paul Hebert

    Had another thought too – controversy still surrounds the brand value discussion but it is now included in a lot of acquisition discussions.  It will only take one company that uses their employee value in the merger/buyout discussions to give it some validity.  

  • http://www.hrexaminer.com John Sumser

    apply

  • http://www.hrexaminer.com/ Heather Bussing

    I think this is a reasonable proposition– employees are valuable and essential to operations. So if we could quantify that value, it would demonstrate their importance in a language that decision makers really understand.

    What I find disquieting is the idea that we have reached a point that, unless it translates into money, it doesn’t count. 150 years ago, the 13th Amendment to the US Constitution outlawed treating people as property. 

    That said, lawyers ask juries to put monetary values on things that can’t ever be measured or truly compensated-like the value of emotional distress, pain or suffering. How much is it worth when a child dies? And regular people quantify that in courtrooms everyday. But any trial attorney will tell you, it’s based on the jury’s emotional connection to the story, and is in may ways, completely arbitrary.

    So while I understand the importance of demonstrating the value of people and employees in an organization, I’m not convinced that making them look like property is the right approach. It wasn’t so long ago that everyone but white men were exactly that–chattel. And there are some who still wish that was true.

  • http://twitter.com/One_Page_Talent Marc Effron

    So I’m not sure what question is answered by looking for better asset valuation for people. Has the investment community been clamoring for this?  No. They directly say that they do not care.  Have CEOs or CFOs?  I haven’t heard them and I believe they have enough GAAP and IFRS issues to worry about without another fuzzy question related to asset valuation.  Has HR?  Oh, right.  Ever insecure about our self-worth, we think “This will make them finally care about us!  They’ll see the value of people and they’ll have to care!  They’ll HAVE to!”  

    The SHRM suggestion is unfortunately, IMHO, really, really horrible. Does SHRM really expect that companies will disclose their number of ready nows?  Their turnover numbers?  Really?  Do they understand the additional reporting burden this would place on companies already spending millions on SOX compliance?  They think that demanding this will enhance HR’s reputation? And they really expect that companies will voluntarily release stats like % of ready nows?

    Most importantly, when a CEO says people are the company’s most valuable asset, he’s not lying.  He’s simply not talking about ALL the people.  The truth is that only a few employees in most companies are tremendously valuable assets. The CEO knows who those assets are and likely does value them highly.  The bulk of the other employees add a little value each. That’s absolutely fine since all that little value combined can create wonderful things. But, it also means that 10% of them can likely go any at time without significant disruption to the business. 

    Finally, we should be careful what we wish for.  If corporate America awakens tomorrow morning believing in the monetary value of their human assets, they might seek out a better class of asset managers . . . . . 

  • http://www.wphebert.com Paul Hebert

    Thanks Heather for helping move the discussion along.

    I think in business it almost always comes down to
    money.  At least in some form or
    fashion.  Even non-profits have to worry
    about money to maintain and grow their efforts.

    It’s not that employees don’t count if they don’t translate
    into money – it’s that they don’t count in same way and therefore aren’t
    treated the same way.  That’s the problem
    in my mind.

    Layoffs will always be seen as a positive move as long as
    they are a cost item with no asset value. 
    At least until the point that there are no employees to work the assets
    that have been counted.

    Our economic base is changing and I think we need to explore
    how we can change with it.

    I agree that defining employees as property is a poor
    solution and putting them on the balance would definitely communicate that –
    but – what is the value of the way they are trained and the way they are
    managed?  What is the value of the
    systems and processes one company has over another as it relates to finding and
    developing employees?  Can those be
    considered assets?  Not today – but maybe
    they should.

    Is the Coca-Cola formula an asset?  The value isn’t in the ingredients – but in the
    way in which the mix those various ingredients and in what proportions.  The raw material is the same for everyone –
    the combination is unique and has a value. 
    Same to with people practices in my mind.

    I think there needs to be some way to create a formula based
    on the way in which employees are “used” within an organization that allows a company
    to be able to find a value number for them.

    That is different than just “valuing employees” like chattel
    – which I don’t think is where my head was when thinking about the value of
    employees. 

  • http://www.wphebert.com Paul Hebert

    Marc – love your closing statement!  And I do think we should be looking at a
    better class of asset managers.  In many cases the real root cause of employee problems can be found in the way they are managed.  Which goes to the heart of this discussion I think.

    First, to your point that no one is clamoring for this and that only HR is worried about it.  It was the same in the early 80s when they first started valuing brands.  No one was clamoring for it and only marketing cared.  At first.  Brand valuation on the balance sheet wasn’t an issue until the mergers and acquisitions folks started wanting to get more money out of the sale of companies with big brand names.  They knew intuitively that a company with a
    great brand is worth more than just the book value of the assets they had.  They knew it and they found a way to value it.  The investment people will say they do not care until someone gets a higher valuation or price for their company based on their “employee equity value.”  Then they will care because it means more money for them.  The first couple are always the tough ones.

    I also get that in general only a few employees may be considered “highly valuable” or be valued more highly but I’m thinking this isn’t just about the “people” value – but the value of the process/system that deploys those people assets.  The secret sauce so to speak – or to take your asset manager comment to the next logical step – the company’s “Human Asset Management Capabilities.”

    I’m just trying to be creative with the way in which we look
    at the value driver in our organization today – and that is people.

    We have a situation IMHO where the business environment has outstripped the ability to value and measure the business itself.  I don’t think we should wait for the accounting folks to do the hard work.  HR needs to be doing it.

    Social media is worthless until we find ways to measure and monetize it no?  But we intuitively knew that Social Media has value and there are plenty of folks finding ways to measure it and quantify it.  Some are potentially valuable some not.  Same with the way we measure and account of people – it’s changing and we’ve got to find a way to change how we value and measure it.  Accounting didn’t take on that challenge – marketing did. And progress is being made.

    As far as SHRM doing it, I think if any progress is going to be made it has to be done by a group supporting all companies – not just a few.  Accounting has GAAP to ensure all companies are playing the same game with the same rules. 
    I see SHRM playing that role during the development before handing it over to GAAP for final interpretation.

    As far as handing over numbers and making public things like turnover – sure – at first they won’t like it. But like all things in business – it’s a cost/benefit discussion.  If the cost of putting in the extra reporting (which may be less of an issue than you indicate) equates to higher valuations ongoing – or at time of sale – it will happen.  Remember – this isn’t government mandated – it’s about better business.

    I’m not sure this is THE answer – but it is a discussion that might lead us to AN answer. 

    The value of employees is growing – and the value of how we manage that asset is becoming more important each day/month/year.

    The business value of finding, developing, managing and retaining employees has to be quantified.  

    We can’t simply continue to look at our greatest value driver as a cost.

  • http://www.hrexaminer.com/ Heather Bussing

    What a great discussion.

    Okay. Let’s set aside the question of whether anyone wants it, and even whether it’s a good idea. How would you do it?  What factors/metrics would go into the valuation? And then how would you use the valuation? What’s it good for?  

    If you’d rather answer this in a Part 2 post, go for it.

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