Labor unions fought for the rights of workers to protect them and create an environment where they had safety & security. In the late 1800’s Labor Day was created as a holiday to celebrate the American worker and the triumph of labor organizations. Today we know that human capital valuation can produce business results and good employees are key to success. While businesses have made great strides to recognize the value of their personnel, many opportunities remain to make human capital valuation even more successful. Here are some trends and opportunities relevant to businesses today when it comes to what works and what’s coming.
Trend 1: Businesses Are Increasing Their Investment in Human Capital
For the past few years, there has been a political effort to raise minimum wages to $15/hour at the federal level by 2025. While some in the business community believe this is an unrealistic ideal, other companies have chosen to embrace it. The proposed advantages for business include greater employee retention increased employee engagement, and better customer service.
Costco has been a leader in making moves towards $15/hour and now many others are following the trend. Target, Disney, and even Amazon have made big announcements in an effort towards a minimum wage of $15/hour. This is especially timely as 231 members of the House of Representatives just voted in favor of the Raise Wage Act in July 2019, taking one step closer to bringing change at the federal level.
The restaurant industry and some smaller businesses have been slower to support these efforts. Recent research has worked to address these concerns and put to test the idea that higher wages for workers could stagnate business growth or result in loss of jobs. A working paper published recently by U.C. Berkeley found, “positive wage effects but (did) not detect adverse effects on employment, weekly hours or annual weeks worked.”
Major brands are also beginning to prioritize non-traditional investments in human capital like wellness programs and leadership development. Asana, the project management software team, offers its employees unlimited PTO, daily yoga, free gym memberships, spaces to nap on-site, and an onsite kitchen with 3 meals a day. Outside of wellness, Asana offers its employees free executive coaching and monthly development workshops focused on health and work-life balance. Brands like Accenture, Intuit, Jet, Walgreens, and many others have been recognized for their efforts to ramp up wellness and/or professional development programs, and many more brands are starting to follow suit.
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Trend 2: Businesses That Value Human Capital Are Realizing the ROI
Mounting evidence demonstrates that when brands prioritize employees, they reap the benefits. According to a study conducted by Russell Investment Group which analyzed stock performance from 1997 to 2013, companies ranked in Fortune Magazine’s “100 Best Companies to Work For” significantly outperformed S&P companies; In fact, their annual stock market return was nearly twice as high.
Similarly, companies like Trader Joe’s, Costco Wholesale, Zappos and others, who pay their employees more, offer great employee benefits and work to increase job satisfaction, see higher profit margins than their competitors, despite the extra cost. They also see better employee retention numbers. According to Harvard Business Review, Costco experienced a 17% turnover compared to 44% at Sam’s Club.
In the tech sector, SAP has been keeping track of the relationship between employee engagement and business outcomes. Collected since 2014, their metrics have shown that a 1% increase in employee engagement can translate to an increase of 50 million to 60 million euros in operating profit. Even more impressive a 1% increase in their business health culture index adds 85 million to 95 million euros (as of SAP’s 2018 report).
Opportunity 1: Metrics and Tools for Human Capital Valuation Are Just Starting To Develop
Businesses strive to include human capital in reporting efforts; however, as an intangible asset, it is often tough to quantify and value. According to a CFO Research Services Report, though most CFOs recognize the importance of human capital for business success, only 16% of CFOs feel they truly understand the return on their human capital investments. In recent years, the Human Capital Management Institute (HCMI) has developed Human Capital Impact Statements to help quantify workforce impact on profitability, Stok has developed the Human Capital Scorecard to allow employees to assess one another and divide the company’s equity, and Integrated Reporting has a tool that helps companies report on Human Capital along with 5 other capitals. Clearly, there’s a long road ahead in figuring out practical, easy-to-use tools for businesses to understand Human Capital more effectively.
Opportunity 2: Businesses Can Really Treat Human Capital as Their ‘Greatest Asset’
The saying “employees are our greatest asset” is cited and parroted so often it almost feels cliché. And while this sentiment may have caught on in the business world superficially, the practice of viewing and treating employees as a company’s biggest asset is still a ways away. To get to the stage where businesses are accomplishing this task successfully, there needs to be a fundamental perspective shift.
Though most businesses recognize that human capital is valuable, many still view it as purely a business expense. But what if business started to treat human capital as an asset instead?
For example, Google is wielding human capital in forward-thinking ways. They trust their employees and believe in their talent and potential so much that they allow them to dedicate 20% of their office time to personal side-projects The famous 20% project gave rise to AdSense, which accounted for over 85% of Google’s revenue, or $26.6 billion of $31.1 billion in revenue, in Q1 of 2018. Had Google treated their employees as a mere expense, they would have focused on minimizing the cost, rather than unleashing the creative potential of their staff.
Google isn’t the only company to have incorporated a tactic like this. LinkedIn, Apple, Microsoft and others have followed suit with programs of their own. But the trend should percolate beyond the tech world, where it has witnessed enormous success. Don’t just say you think you value your employees, do it.
Overall, the conversations around human capital valuation are at an exciting point. Now is the time to engage!