The websites of global companies like Goldman Sachs, Scania Group, and Alstrom all say that employees are their firm’s greatest asset. Looking at the annual reports on my desk shows that many CEOs agree. Yet, we are deep into this quarter’s earnings calls and I have yet to hear a single CEO discuss their management of their greatest asset. Since payroll is often a firm's largest expense, investors need to know how firms are managing their human capital.
Economists say companies have 2 basic inputs; labor and capital. There are many metrics to help investors understand how well a company manages its financial capital. But when it comes to the management of human capital, there is not so much.
Last Monday, I had dinner with most of the people on the human resources panel at the Forbes Thought Leadership Summit. I had a front row seat as Dr. Katie Thiry, a program chair at the Forbes School of Business & Technology, prepped her panelists.
Listening to them talk about the points they planned to make the next day, I could not help but wonder why the management of human capital does not get as much scrutiny from investors as the management of financial capital.
For example, I have long used return on assets as a gauge of how well a CEO manages a firm’s financial capital. But earnings cannot be attributed 100% to financial capital. Human capital also plays a big role in generating those earnings. I am starting to believe it would be just as useful for investors to calculate return on payroll as a way to gauge a CEO’s management of human capital.
It’s a simple calculation; earnings divided by total payroll. Investors could easily calculate this number if companies told us their total payroll instead of lumping it into a bigger category of expenses and then not providing enough detail to break it out.
When you look at payroll as something that produces a return, it changes how you look at your payroll. Panelist Katie Howard, Senior Director of Human Resources at Camden County Board of Commissioners, said "the cost of employees to an organization creates an asset that if managed well can be a durable competitive advantage that does not depreciate over time."
This thought has grown on me ever since she said it. You see, financial capital is fungible. A dollar invested in one company confers the exact same buying power as a dollar invested in any other company.
But human capital is not fungible. An employee in a firm that encourages and rewards productivity is worth more than the same employee in a firm where productive employees are encouraged to stop making everyone else look bad.
A company that enables employees to be more productive has a large advantage over their competitors that is not easy to copy, and which does not lose value over time as other assets do.
Generally accepted accounting principles, however, do not recognize that payroll can create an asset. Panelist Jeff Hunter, CEO and Founder of Talentism, said "it has long seemed to me that when you take your most important asset and account for it as an expense you are creating a strong incentive to manage people for risk, not opportunity."
Providing investors the data to calculate a company’s return on payroll is just the first step to demonstrating good management of human capital. I asked panelist Louis Efron, the founder of Purpose Meets Execution, to come up with a list of questions investors could ask CEOs at their quarterly earnings calls. Here are three questions he would ask:
- How does your average employee tenure compare to the average employee tenure of those leaving the organization?
- What is your percentage of internal promotions versus external hires?
What is your voluntary and involuntary employee turnover?
- If high, why are people leaving or having insurmountable performance challenges?
- Is this a recruiting or leadership challenge or both?
These seem like reasonable questions to me but after participating in a great many earnings conference calls I realize I have never once heard these questions asked or addressed.
I believe people should have to prove themselves before they can manage other people's money and the best evidence of investment skill is a track record.
Ken Kam, Contributor