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Need for Evaluation
Methods for Evaluation
This paper was generated with international help and contribution and will provide a thought-provoking impulse for the examination of the employees and their worthiness for company value. Accordingly we will consider the impacts of the increasing interest in human capital in the expanding knowledge and information society and the ensuing demand for quantifying intangibles, including some approaches and critical questions .
How does it come that a firm is going to be sold at a prize higher than its listed book accounting value? The cause for this phenomenon is due to the fact that the prevalent standards for the evaluation of the company are nearly almost referred to finance and real capital, intangibles are mostly discounted or incomplete. Even the inclusion of intangible assets like brand, image, customer and supplier relationships counts not for the total value because the surplus caused by the worker’s skills is disregarded. The reason therefore is potentially up to the fact that the current approaches itemized in literature lack of suitability for daily use. This will however change in the near future, given that the issue of human capital valuation is taken more and more serious from the part of the company itself as well as from analysts and media.1
Precisely in present times of a knowledge society human capital is gaining in value since the company’s success is in the long run contingent on the performance of its employees. This becomes apparent by considering the proportion of information processing and switching services which increased by some 30% in the last three decades.
This so called human capital of an organization consists of individual skills such as knowledge, motivation, creativity, innovativeness and their utilization by the corporate strategy and organization.
The driving force in this connexion is globalization and the increasing information and communication technologies. The firm’s value creation chain is now based on the ability of organizing and developing world-wide productive teams. Determing in this process is the knowledge about the products and services as well as the structure and efficiency of information and communication networks. Added value (and thus enhancement in company value) is now obviously based on the staff’s potential, motivation and identification just as much as the acquisition and activation of adequate human capital.
This assumes an alteration in the consideration of the employee as an anticipating factor (and so a cost factor) to the worker as an intangible asset. He is now both owner of capabilities and, at the same time, important resource for the organization.2
By the declining emphasis on physical resources and manufacturing processes and, in return, increasing importance of human capital the employee gains in value the more he or she has a share in the company’s knowledge netting. The value-adding ken is bound to and moulded from its bearer. Differently form physical assets human capital is not tied to the firm everlasting, in the event of a notice the organizations resource embodied in the employee just vanishes with him. In addition to making knowledge available to production the entirety of employees is part of creating and carrying outward the corporate identity which provides in times of homogenous goods the ability to stand out of the crowd and so securing competitive advantage.
Right human resource interventions and investment can so add value to the business in the future. Henceforth the function of management is to create productivity (and so competitive advantage) by the proper utilization, development and preservation of the employees’ specific excellence and knowledge.
Human resource management is so becoming integral part of corporate governance (Hilb, 1995); organizational planning now requires the integration of human capital approaches with strategies for accomplishing organizational missions and program goals. This new focus will also call for an expansion of the role of human capital professionals from largely paperwork processors to functioning as advisors to and partners with senior leadership and managers as well as technical experts who ensure that merit principles and other goals are upheld. With these newly skilled human capital professionals as trusted members of the management team, the company can be provided with the knowledge of strategic human capital management that will allow it to incorporate such principles into the overall strategic and program plans of the organization (e.g., David M. Walker, 2002).
This change claims a value-oriented (personnel) management for improvement and so for staying competitive. For this purpose the evaluation of the employees seems to be necessary.
Need for Evaluation
This new stage of economic development which is characterized by the growth of digital and informational technology, innovations, intangibles and network organizations forms the framework companies have to deal with today.
To reach the right decisions concerning the new “soft resources” a value-oriented (personnel) management claims the need for chalking up a value to human capital. One the one hand the management is so in a position to conduct personnel duties and responsibilities like acquisition, assignment, development, etc. efficiently, as well as evaluating and optimizing them via target/actual comparison. The conversion of knowledge into business profit is here of particular interest. On the other hand it provides an opportunity to supplement the financial statement with a quantitative specification of the intangible assets and that’s not to be sneezed at. In matters of external activities this is a significant advancement: through neglect of the immaterial benchmark the listed company value is understated what can have serious consequences referring to takeovers or raisings of credit. This also holds for investment decisions which are maybe miscalculated by disregarding human capital as a value-creating. Knowledge enterprises are thus appreciating by rating their intangibles and are opened up for external analysis through visualizing the entire assets.
And even the employees can profit by quantifications of intangibles. They are not only loosing their role as cost-causer but are also encouraged as they pose as knowledge carriers. They are now acting as provider of their skills; they are marketable, what leads to a form of business labor relation.
In the following we will limit to the evaluation of the whole staff since they are acting as a unit with a collective know-how for the company’s business success and its value enhancement.
By interest of human capital evaluation there arise ethical and moral questions at the same time. Shouldn’t one specify a worker’s usefulness according to his differentness and individuality instead of quantifying his standardized efficiency?3 It raises the question about the ethical fungibility of human capital valuation and its consequences for the single employee with regard to his exchangeability through the emerging transparency. There is also doubt about the corporate intentions and their potential misapplication to cost-calculating purposes in place of furtherance and improvement. Staff-worthiness as a figurehead in the marketing division is also not in terms of the necessity for evaluation elucidated here and holds moral objections.
The function of accounting techniques is to expose knowledge, to make it visible to internal as well as to external agencies, and to subject it to the practice of exchange against some value, money, drawing knowledge closer to the market, making its value subject to the laws of market, of competition, etc. By inventing the techniques for calculating it, managers and the corporations have become responsible for its creation and deployment. Furthermore, the invention of this category implies not only the invention of a new metrication instruments, but also a disciplining and disciplined category of managers and employees, albeit ‘manager of intellectual capital’, or ‘knowledge executive’ or ‘knowledge worker’. Managers of intellectual capital are responsible for the efficient deployment of knowledge (e.g., Salzer-Mörling/Ali Yakhlef, 1999). Thence it is indispensable to focus on future-related personnel and organizational activities at evaluating the worth of a company’s employees to eliminate the given qualms.
It becomes apparent once more that evaluation also benefits the employee who is now protected against disposal from human resource policy measurements by their transparency and predictability and even influences them where applicable.
Methods for Evaluation
But how much is the staff of a company worth? How can you measure human capital?
It may seem to be obvious to rate a worker by means of his income but by considering a firm and its profits, it quickly appears to be more than just the level of payment: Profits results form outputs which outweigh inputs in capital issues. If a company would pay exactly the amount as a wage (= input) which an employee is worth (with his human capital and the so resulting output) it would not make any profits at all. All of us know that this is not reality.
The problem of determining the value of corporate employees most probably resembles also the determination of the value of IT. The only direct contribution of employees to corporate results happens via costs (i.e., salaries, wages): The less I have to spend for salaries, the better my profitability. All other contributions of the work force to profit and results are of indirect nature, i.e., through processes (and their efficiency and effectiveness of attaining overall corporate objectives), through knowledge and creativity and through the cohesion and stabilisation of the social system "enterprise" in itself4. Therefore it is not worthwhile to evaluate a single worker but the whole workforce and the value it has for the company.
There emerged lots of different approaches orientated to market value, accounting, value added , indicator and returns but it strikes as evident that there is no right solution in this multitude which can be transferred to every company (e.g., Scholz/Stein/Bechtel, 2004).
We won’t go into detail at this point because it certainly would go beyond the scope of this paper. But one thing seems to be quite clear: the evaluating process has to be adjusted to the requirements.
Employees are becoming the most important resource for any company. How they are treated and how much they value the company they work for will have an impact on how the company performs. Diversity, health and safety, workplace conditions, personal development, work/life balance and remuneration are all contributing issues to a happy, motivated workforce.5 As in many cases in the human capital area, how you do something is as important as what you do. The involvement of employees both directly and through employee organizations will be crucial to success. Involving employees in the planning process helps to develop agency goals and objectives that incorporate insight about operations from a front-line perspective. Including employees can also serve to increase employees’ understanding and acceptance of organizational goals and objectives and improve motivation and morale (General Accounting Office, 2001).
Thus human capital management ends not in itself but presents a driving force for reaching corporate targets better and quicker.
1 Eva Taraut-Mattausch, organizational psychologist at the chair for social and business psychology, University of Munich, Germany
2 Eva Steffen, Student, University of Karlstad, Sweden
3 Dr. Dirk Osmetz, Management Consultant, Munich, Germany
4 Christoph F. Strnadl, Principal Management Consultant, Wien
5 Laura Wuertz-Barac, Management Consultant, Los Angeles, USA
Hilb, M. 1995. Integriertes Personalmanagement. Ziele – Strategien – Instrumente.
3rd edition, Berlin, Germany
Salzer-Mörling, M. & Yakhlef, A. 1999. The Intellectua l Capital: Meaning By Measure. Working Paper, University of Stockholm, Sweden
Scholz, C. & Stein, V. & Bechtel, R. 2004. Human Capital Management. Wege aus der Unverbindlichkeit. München/Unterschleißheim: Luchterhand
U.S. General Accounting Office, 2001. Human Capital: Practices that Empowered and
Involved Employees. GAO-01-1070, Washington, D.C.
Walker, D. M. 2002. A Model of Strategis Human Capital Management. Exposure Draft, U.S.General Accounting Office, Washington, D.C.