An Investment Perspective of Human

Resource ManagementPete mendiola

IntroductionAdopting an Investment Perspective

Effective organizations are increasingly realizing that of the varied factors that contribute to performance, the human element is clearly the most critical.

This is regardless of size and nature of an organization, the activities it undertakes, and the environment in which it operates.

Managers are becoming increasingly aware that a critical source of competitive advantage often comes from:• Ingenious product design or service,• Best marketing strategy,• State-of-the-art technology,• The most savvy financial management, and• Appropriate systems for attracting,

motivating, and managing the organization’s human resources.

Adopting a strategic view of HR involves considering employees as human “assets” and developing appropriate policies and programs as investments in these assets to increase their value to the organization and to the marketplace.

Employees as assets would mean: Something of value and worth.

Human Resource is considered an investment.

Sources of Employee Value

Valuation of Assets Five major kind of assets or capital

that organizations can leverage to aid in performance and add value to operations are:

Financial Assets Physical Assets Market Assets Operational Assets Human Assets

Types of organizational Assets/capital

Understanding and Measuring Human Asset/Capital

Given that employees and their collective skills, knowledge, and abilities represent a significant asset for organizations, measuring its value and contribution is a critical issue.

Related HR Studies Huselid (1990’s) – identified what

were called “high performance work systems” (HPWS) and demonstrated that integrated, strategically focused HR practices were directly related to profitability and market value.

Related HR Studies, cont’d

Watson Wyatt Worldwide – found that the primary reason for organizational profitability is the effective management of human capital.• This involve providing employees with

rewards that are commensurate with their contributions and a well managed employee retention.

Becker, Huselid, and Ulrich – examined that a variety of human resource management quality indices, they found that the top ten percent of the organizations studied enjoyed 391 percent return on investment in the management of their human capital.

Dyer and Reeves – attempted to define the HR value chain.

Related HR Studies, cont’d

HR Value Chain

EMPLOYEES OUTCOME

•Attitudes•Behavior

ORGANIZATIONAL OUTCOMES

•Productivity•Quality

FINANCIAL/ACCOUNTING OUTCOMES

•Expenses•Revenues•Profitability

MARKET BASED OUTCOMES

•Stock Price

Value Chain - The processing, converting, improving or adding value to a particular product, from its original state, thereby giving more appeal, utility or value to a new product that promises a level of satisfaction to prospective clients or customers.

Common HR Metrics Absence Rate Cost per Hire Health Care Cost per

Employee HR Expense Factor Human Capital Return

on Investment Human Capital Value

Added Labor Costs as a

Percentage of Sales or Revenues

Profit per Employee Training Return on

investment Turnover costs Turnover Rate Workers’ compensation

cost per employee Workers’ compensation

incidents rate. Workers’ Compensation

Severity Rate

Sample Formulas

How ‘Investment Oriented’ is an Organization

The extent to which an organization can be characterized as investment oriented may be revealed through answers to the following questions:

Does the organization see its people as being central to its mission/strategy?

Do the company’s mission statement and strategic objectives, both company wide and within individual business units, espouse the value of or even mention human assets and their roles in achieving goals?

Does the management philosophy of the organization encourage the development of any strategy to prevent the depreciation of its human assets or are they considered replicable and amortizable, like physical assets?

Factors Influencing an Organization’s Investment Orientation

Factors impacting an organization’s willingness to invest in its people.

Management values – Management values and actions determine organizational investment in assets. It is critical to understand how the organization’s strategy mandates the investment in particular assets relative to others.

Attitude Toward Risk – Higher-risk investments are generally expected to have a greater potential return; lower-risk, safer investments are generally expected to have modest return.

Nature of Employee Skill – Certain organizations require employees to develop and utilize very specialized skills that might not be applicable in other organization; with this idea it becomes less risky.

Utilitarianism - Organizations evaluate investments by using utility analysis, a.k.a. cost-benefit analysis. The cost of any investment are weighted against its benefits to determine whether the prospective investment is either profitable or achieves target rate of return.

Availability of Outsourcing – The final factor impacting an organization’s willingness to invest in its people is the availability of cost-effective outsourcing.

Factors Influencing an Organization’s Investment Orientation cont’d

Homework Obtain the annual report for a

Fortune 500 company of your choice. Review the material presented and the language used in the text. Write a one-page memo that assesses how investment oriented the organization appears to be toward its human assets.