Human Resource Valuation A need in the new Era


By

Dr. Devendra Singh Raghav
M.A. (Eco.), M.Com, M.Phil., Ph.D.
Reader, Dept. Of Economics
N.M.S.N Dass (P.G.) College
Budaun-243 601

Deepa Gupta
Asst. Professor
Department of Management Studies
G.L. Bajaj Institute of Technology & Management
Plot No. 2, Knowledge Park-III, Greater Noida

Mukul Gupta
Asst. Professor
Department of Management Studies
G.L. Bajaj Institute of Technology & Management
Plot No. 2, Knowledge Park-III, Greater Noida
 


"Only the investment of capital assets can increase the productivity of labour"
                                                                                           -Nineteenth-century economic theory

"People are our most important asset" is a common phrase heard from corporate executives. An August 28, 2000 Business Week editorial proclaimed that "human capital is the only asset". The Steering Committee of the Financial Accounting Standards Board (FASB 2001, 22) states "The important assets of enterprises are increasingly intangible. There is general agreement among business observers and analysts that the big contributors to business success are a company's people..." These statements highlight the increasing reliance firms place on strategic human capital in order to compete in today's global and rapidly changing economy (Lev 2001).

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. 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 (have knowledge) to be trusted with the formers investments.

Knowledge1 is a dynamic force, which supports not only the acquisition but also its application, which results in increase in the value base of the organization. Organization gains competitive advantage by possessing relevant knowledge, which makes it distinct from other organization. Every organization possesses the resources to produce the necessary output, but it is the inherent knowledge, which gives this advantage. Productivity improvements based upon machines and money have completely saturated.  Importance in knowledge productivity brings differential success to any successful organization. This inherent (tacit) knowledge is with the knowledge owners, which provides uniqueness and is difficult to be substituted. The owners of this implicit knowledge are the people and managing them is knowledge management 2.

The new economy of the world has changed the way we look at our "resources/ capital". It is no more concentrated on money; rather it has taken new dimensions in the form of H uman Capital3 and Intellectual Capital4. Thus, there is a need to define and develop methods, which measure these invisible components of a company's resources. This new economy is a Knowledge based economy. In knowledge economy people are not to be regarded as costs but rather, revenue creators and knowledge or people's competence as sources of wealth creation.

Organizations are getting differentiated on the basis of the knowledge each possesses. In a world of constant technological changes, an organization prospers from the quality of its people. People who are relevant for today's work may not be able to meet the challenges of tomorrow. We need to get them to forget some aspects of today's competency and build the requirements of the future into them. Increasingly, the investment decisions of top management will not be restricted to the acquisition of brick-and mortar assets, but of building additional competencies in people. Thus the new economy is often called as "Knowledge Economy"5. 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.

Human resources valuation has remained an academic exercise and largely ignored even in industries where the expertise of employees is the key differentiating factor. The process of valuation is complex and challenging. When human capital is a strategic resource that provides a sustained competitive advantage, the benefit from expenditures associated with human capital last longer than the current period. There has been limited research examining whether and under what circumstances human capital provides a future benefit (e.g., Lev and Schwartz 1971; Flamholtz 1971; Rossett 2001; Ballester et al. 2002). But unless we adequately assess the value of human resources, we will not be able to respond to future needs. In the knowledge economy the well being of the organization to its various stakeholders is measured by considering both tangible as well as intangible assets.

a) Trends in Evaluating Intangible Assets

* Human Resource Accounting (HRA)

* Economic Value Added (EVA)

* Environmental Accounting

* Brand Value

* Intellectual Property

b) Human Resource Valuation Scenarios

* At the beginning of the 1990s the source of value creation in   industrialized economies shifted from tangible to intangible assets6

* In 1982 the value of tangible assets, reported on the balance sheet of Standard & Poor 500 companies7in the U.S. on average made up most of the market value8 of these companies

* 62% of the market value of Standard & Poor 500 companies in the U.S. in 1982 was covered by the value of tangible assets

* In 1998 only 15% of the market value of Standard & Poor 500 companies was represented through the value of their tangible assets

* By 2000 85% was the portion of the market value that was assigned to intangible assets
 


Dr. Devendra Singh Raghav
M.A. (Eco.), M.Com, M.Phil., Ph.D.
Reader, Dept. Of Economics
N.M.S.N Dass (P.G.) College
Budaun-243 601

Deepa Gupta
Asst. Professor
Department of Management Studies
G.L. Bajaj Institute of Technology & Management
Plot No. 2, Knowledge Park-III, Greater Noida

Mukul Gupta
Asst. Professor
Department of Management Studies
G.L. Bajaj Institute of Technology & Management
Plot No. 2, Knowledge Park-III, Greater Noida
 

Source: E-mail November 17, 2006

     

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