The Value of People in Organisation

Mon, 13 Jun 2011 Source: Baafi, Alex Bossman

By Alex Bossman Baafi

More often than not, we hear from the President, the Chief Executive Officer (CEO), the Managing Director or the Human Resource Director of the organisation making the statement “Our People are the Most Important Assets”. There is no iota of a doubt about the fact that they are absolutely and justifiably right so long as the Human Resource of the organisation is concerned. The difficulty however is that, in reality the people in the organisation do not always experience policies, procedures and decisions in their everyday work life that supports such a wonderful belief.

According to Andrew Mayo, a consultant, speaker, writer and a facilitator in International Human Resource Management, an Accountant once described employees in his workplace, as “Costs walking about on legs” which I think perhaps is closer to the reality of an organizational experience. In view of this when an organisation is striving for efficiency with the view to improving the bottom line (increase profitability) for the benefit of the shareholders, the people become the easy target in the name of downsizing or redundancy. Such decision often times suffers from shortsightedness and tunnel vision and has not the long-term interest of the organisation at heart. This is because, among other things, many leaders who are pushed with the desire to build powerful system of financial results tend to forget to measure the important intangibles such as employees’ capability, commitment, loyalty and customer loyalty in the process.

From the financial point of view, people do not fit the absolute definition of an asset and that is probably why their value tends to escape management. For example, people cannot be exchanged at will; their contribution is individually distinctive and subject to motivation and environment. They cannot also be valued according to the traditional financial principles. However, if we view ‘assets’ as value creating entities, then in this 21st century where knowledge and its application becomes the key competitive advantage, we will inevitably accept the crucial fundamental roles that people play in organisation.

In our work places, the vast majority of people who are value adding, must be seen as investments, and not costs by the leaders and financial administrators. I must hasten however to add that perhaps the greatest difficulty is lack of credible measures acceptable to relate people to their value. Though no standardized measurement approach has been widely accepted yet, one of the various systematic measurements that have been applied is the attempt to value people financially as assets. That is Human Resource Accounting or Human Asset Accounting whichever way you look at it. This approach recognises three criteria for defining any asset and they are Cost – based, Market – based and Income – based.

The cost – based typically looks at the acquisition or replacement cost. That is the cost of recruiting an employee can be assessed and then depreciated vis-à-vis the expected future service of the person. Alternatively, the person’s gross pay or remuneration can be used as the base. In the case of the market – based, the price to be paid in an open market must be a reflection of the value of the person. Value is very difficult to assess and does not take into account of value of service continuity in itself. The income – based however looked at the cash inflows expected by the organisation related to the human asset calculated as the present value of the expected net cash flows. This is viewed to be good for individuals whose efforts are directly related to identifiable income.

The above approach of valuing people in the workplace was primarily developed in the United States by one professor Eric Flamholz. Though it is seen as a bold attempt, as other approaches, it has a number of difficulties not least of which is the estimation of the potential future service of an individual. It also leads to lower values for older and more experienced people who have less time to render future service to the organisation as not necessarily the reality. The truth is that the search is still on to arrive at a realistically, generally accepted absolute financial formula that will be adopted by the financial and human resource management community. Notwithstanding the difficulties in this, and other well-known approaches such as the Performance Management System, the Kaplan and Norton’s Balanced Scorecard, they all aimed at building measurement system to value people or human capital. The fact remains that people are often said to be the most valuable assets but are still treated as costs because we have no credible system of valuing them.

In conclusion, I want to emphasise that in our contemporary Human Resource Management, the valuation of companies has progressively changed, putting a much higher proportion on intangible assets like knowledge, competencies, brands and systems known as intellectual capital of the organisation. The naked truth is that people than any other factor drive value more. The value that a company creates results from the way people apply their skills, energies and expertise to the capital and raw materials to produce goods or services that customers want. Among all the levers available to leaders, the greatest potential to build value is offered by people. Therefore, the time has come to recognise the value of people through demanding rigorous, fair and credible system to valuing this most significant asset and linking that value meaningfully to the benefit of the stakeholders. We know in detail what people cost but we feel reluctant to know their value to balance it with their cost. We feel the value when it has been lost; but often too late. Our employees deserve better.

Email: abkbossman@yahoo.co.uk

Columnist: Baafi, Alex Bossman