It's Time to Revisit How Talent Is Valued

​A resetting of strategy and metrics that values talent as an asset rather than an expense is critical for companies under pressure to operate more efficiently, build resilience and create value from their workforce investments.

That's the argument behind a new white paper from Willis Towers Watson and the World Economic Forum titled Human Capital as an Asset: An Accounting Framework to Reset the Value of Talent in the New World of Work.

Ravin Jesuthasan, managing director at Willis Towers Watson and co-author of the paper, said that for a long time, many organizations like the World Economic Forum have been troubled by "the perverse incentives" in how businesses account for their assets.

"Under current accounting systems, workforce investments are reported as a direct hit to earnings with no recognition of the value created, while reductions receive favorable treatment and are excluded from core earnings," he said. "This creates incentives that encourage management to reduce investment in the workforce and treat talent as disposable. There are more incentives to automate work rather than invest in upskilling or reskilling, for example."

Robin Erickson, a principal researcher in human capital at the Conference Board and a thought leader in talent acquisition, agreed that organizations must pivot toward viewing talent as the sum of their people, their people's skills and their productivity, and as a valuable resource with significant worth, now and in the future.

"Most organizations view voluntary turnover as a way to save money, as hiring and onboarding a new employee costs less in hard dollars than the interim reduction in labor costs," she said. "However, that calculation doesn't take into consideration more intangible outcomes, such as lost productivity, lost institutional knowledge, lost client relationships, lowered employee morale and sunk investment in training. If organizations monetized those intangible outcomes, they'd realize that if they were able to reduce voluntary turnover, they could add millions of dollars to their bottom line."

Moreover, workforce experts believe that now is a perfect time to adopt a new talent framework.

"While organizations are being required to reset their human capital processes due to COVID-19, it is a particularly opportune time to reset HR strategy and monetize the ROI [return on investment] of talent," Erickson said.

Jesuthasan added, "Many of our clients are talking about how to build more resilient enterprises and recalibrate for a future that looks very different than before, as opposed to just being interested in growth and efficiency. That's a pretty significant pivot from where corporate America has been for the last 30 years."

From Expense to Asset

The Willis Towers Watson and World Economic Forum report outlines seven guiding principles to help organizations shift their thinking on how employees and their work are valued.

1. Performance measures should focus not only on shareholder returns, but also on how an organization achieves its broader purpose of creating shared value for all stakeholders, including its talent—contingent workers as well as salaried employees.
2. With the increasing focus on corporate social responsibility, employers and employees will be expected to uphold corporate values in both the workplace and the community.
3. Businesses will thrive as active participants in ecosystems that include partners, suppliers and the broader community. "The way we account and report financials in companies is almost like the company is an island unto itself," Jesuthasan said. "So much value is being created off the balance sheet, through the relationships and networks that companies are a part of. We need to start to figure out how to capture all of the value that accrues from a company and the value, in turn, it provides to the communities in which it lives."
4. Work being performed primarily by employees in jobs should give way to a broader focus on skills. "Increasingly, we recognize that the way that people engage with the organization takes on a variety of forms, from employees, gig workers, contractors and volunteers," Jesuthasan said. "Work is done through many more means beyond jobs. Companies need to think about the value of skills as opposed to jobs and how that shift can change the way we measure value."
5. Workforce development investments should be capitalized and recognized on the balance sheet as an asset instead of expensed costs with no recognition of value.
6. Companies should rely on forward-looking, broader measures of value creation instead of backward-looking financial measures.
7. Employ metrics based on a longer-term view, from quarterly to generational. "There's so much emphasis placed on quarterly earnings among public companies," Jesuthasan said. "A longer-term view will help inform human capital decisions around building versus buying talent, investing in employee upskilling and reskilling, and reinventing jobs to make the best use of technology and alternate ways of working."  

Need for New Metrics

Jesuthasan said there's currently a lack of adequate metrics for valuing talent and the long-term return on human capital investments.

"Given the changing nature of work, companies need a holistic measure that accounts for today's many options for getting work done," he said. "This requires capturing the cost and productivity of all types of talent, including employees, gig workers, outsourced work and automation on a like-for-like basis and using the resulting output to measure the value gained."

He added that it is also essential to have a metric that captures the total value of the workforce and accounts for factors that can cause a shift in that value. "This metric will help organizations achieve this objective by first determining the market price of all talent and then assessing factors that can add value, such as training and development, as well as factors that can reduce value, such as skills redundancy," he said. "Business leaders must understand that the value of the workforce is not static. Investments in upskilling and reskilling add value."

Chief human resource officers would be responsible for encouraging organization leaders to use the metrics, and boards of directors would ensure that the measures are included in their reports to shareholders.

"If properly integrated into an organization's decision-making process, this framework and its underlying principles will help a company manage the return on its investment in human capital in much the same way it measures returns on financial capital, while building resilience and a more equitable relationship with all its stakeholders," Jesuthasan said.