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 )
