In order to effectively manage risk and prioritize decision and resource making decisions, it is vitally important that planners determine the value of the asset first. In this article we are going to look at the issue of accurately valuing human capital. This process will include measuring key elements such as remuneration, contribution, revenue attraction, benefits and travel value.
By the end of this article you will know how to accurately value one of the most valuable but likely least understood asset classes, your people or human capital. This improved approach will reduce your asset vulnerability, enhance safety and increase productivity through reduced wastage and inaccurate planning.
Why is it that almost all other asset classes have a specific value and investment/insurance calculation but human capital does not?
If you own a building, a car or even your home contents you have to declare a value to your insurance provider and then based on your overall percentage of contribution you determine if the value of insurance, as one of many means of protecting that asset, is worth the investment for full or partial loss in the event of an incident. Why do companies not do this for human capital? Does your company know the exact cost of each human capital unit on a temporary or permanent loss basis? If not, how are you basing your risk management and resources allocation decisions?
The following will address the key elements for inclusion to accurately value your unit cost per human capital element to make a more informed investment decision as to appropriate risk management options for your human capital.
Remuneration and Benefits
Many human resource (HR) departments have graduated scales or processes for measuring the position of an individual within a company such as E1, F3, B9 and so on. However, these are often exclusively only derived from salary/remuneration and benefits calculations which in reality constitute only a small percentage of the overall “value” associated to any one person.
While you can harvest this information or compile your own from scratch, remember it is only part of the final assessment.
The final number should include salary, benefits, holidays, cost of living allowances, fringe benefits, perks, shares and any other basic payments made on a regular basis as per their position and function within the company.
Final money paid to the individual is one matter but a more compelling and vital calculation is just how vital is their contribution to the company or product/service?
Contribution and Utility
Each department is different but in essence they can be viewed as a cost center or profit center. The question is which one? The unit valuation of any one person is also inclusive of their contribution to the company based on role and expertise.
Your critical processes may include production, billing and executive management therefore they have a higher priority within your business continuity planning and attract a greater weighting on the contribution scale.
On the other hand, back office activity such as cleaning, administration and marketing may not be as high a priority in a critical situation therefore attract a lower overall contribution value.
The cumulative score for both salary and contribution is compiled and added to the next component, replacement and recruitment.
Replace and Recruit
You know how much it costs to recruit, train and even replace a senior executive and other high yield human capital. Some forecasts for a failed international assignment put this in the vicinity of USD$150,000 per executive position. To accurately calculation the loss and value of your human capital as an asset class you need to include replacement and recruitment.
The reason this is necessary is that if your processes are inadequate and your protection of your human capital assets are poor you can expect too loose (injury, strike, absence, avoidance and even death) some of your people or at best reduce their availability (sickness, absence, recovery) at various times or in single catastrophic events.
The replacement and recruitment value is then added to the proceeding categories before moving to the next area, revenue attraction.
Revenue Attraction Specific To Human Capital
Revenue attraction is a very important, and none-the-less ignored, component for your human capital calculation because it can be sizable in number and catastrophic in lost earnings if the person/s in question are not available for any period of time.
If you have a sales team whereby your entire revenue figure is derived from just 1 or 2 people then the value attributed to those people is much, much higher than others in the same department or even in the entire company.
While the number may fluctuate over the course of the year, it needs to be an annual figure (consistent with all the other calculations) but must also be reviewed/amended annually also.
Revenue attraction is typically a single element if fixed earnings are known in a static location but you may need to include an additional factor for those that travel to close or generate business as this figure can also be sizable if forgotten or overlooked.
Many senior executives and revenue all-stars travel regularly. This travel element therefore warrants inclusion or calculating too.
If for example, a new business opportunity presents in the vicinity of $10 million and a team/single person is dispatched to close on this opportunity then this occasional business figure needs inclusion as it is underpinned once again by key human capital exposure.
Rarely do companies consistently value such business travel activities but it is both lucrative for the company and costly should it fail or loss of human capital access is experienced.
Travel value is the final and optional component to a baseline evaluation of human capital within an organization. Companies vary wildly as to their human capital distribution but this final number is far from an even bell curve result either.
Now you have your final number you can determine your time loss component on an hourly, daily, weekly and even annual basis. You can now appreciate why generic “one policy fits all” approaches don’t work. This is largely due to the fact that your policy is aimed at 100% of the workplace population but 80% of your human capital value comes quite possibly from less than 10% of your overall employees/staff. ￼
This time loss calculation (sometimes used in single and annual loss expectancy planning) now becomes the foundation of your decision making process or your risk based decision planning. Use it, at a group and individual level to truly determine the value of the task and asset and plan accordingly.
If you have a situation where you have millions at risk and you’re economizing on a few dollars, re-evaluate your strategy. Alternatively, if you have a relatively small asset exposed and your expending millions based more along the lines of fear, uncertainty and doubt, then go back to the start of this article and do your calculations and question your sensibility in this latter approach.
Now you can appreciate the necessity for a more consistent methodology for valuing your human capital. They’re an asset, treat them as such. Use this consistent and effective approach to remove the emotional or abstract processes that are likely to be plaguing your organization.
You now have the various elements such as remuneration, contribution, revenue attraction, benefits, replacement, time loss and travel value to make a much more accurate assessment as to the true nature and value of your asset. Compare this to your other asset classes such as buildings, product, information and you may get a very rude shock as you have been apportioning your attention and concerns in totally the wrong area.
Make risk based decision on understanding all the factors, inclusive of the true value of the asset at risk. Overcome historical avoidance or HR dominant processes to value the asset and most importantly the true cost of permanent or temporary access denial of such asset/s.