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HR Balance Sheet Do you have one ? If not, can you build one ? Ramakrishna Krovvidi, Senior Vice President – OD, du. Supported by Mahesh, Senior Director – Total Rewards, du
HR Balance Sheet
Do you have one ? If not, can you build one ?
Ramakrishna Krovvidi, Senior Vice President – OD, du.Supported by Mahesh, Senior Director – Total Rewards, du
Pay‐for‐Performance ?
What can’t be measured can’t be managed!!
Then……
Are we really managing well our Human Assets??
Pay‐for‐Performance ?
Pay‐for‐Performance ? Agenda
• HR Effectiveness
• Predictive Organization Performance
• HR Balance Sheet
Pay‐for‐Performance ? Key Topics
• HR Effectiveness
• Predictive Organization Performance
• HR Balance Sheet
Pay‐for‐Performance ?
• Does your HR Head report to CEO?
Structural Requirements to be effective HR ?
• How much time your HR head spends with CEO and on what topics?
• Is your HR Head at same job level and pay as of any Business UnitHead reporting to CEO?
• Does your HR Head interact with Board/Remco?
Pay‐for‐Performance ?Do you Evaluate effectiveness of your HR
Frameworks ?
Strategic HR
HR Philosophy
Employee Value
Proposition
Life Cycle Mgmt
People Capabilities
Systems
Pay‐for‐Performance ?Customer Centric Measures to Focus on…
• Employee Engagement Score
• Attrition Rate
• L&D ROI
• End to End cycle times
• Critical Roles Analysis & Succession Identification
• Growth Opportunities per Person
Pay‐for‐Performance ?A Check to ensure HR effectiveness
• HR is seen as Human Asset Developmentand not a cost center
• All Compensations are seen asinvestments (not as costs) and measuredas % of value share.
Pay‐for‐Performance ?BSC of Strategic HR’s, always ensures the balance
Less of More of
Pay‐for‐Performance ?
Pay‐for‐Performance ? Key Topics
• HR Effectiveness
• Predictive Organization Performance
• HR Balance Sheet
Pay‐for‐Performance ?Organization Architecture
Organization Architecture
Shareholding
Strategy
Structure & Sizing
Systems & Processes
Pay‐for‐Performance ?People Architecture
Leadership
Managers
HR Infrastructure & Culture
Pay‐for‐Performance ?
Pay‐for‐Performance ?Understand your Organization’s Unique Performance Model
Organization Performance
Organization Architecture
People Architecture= X
+‐Environment
impact
Pay‐for‐Performance ? Key Topics
• HR Effectiveness
• Predictive Organization Performance
• HR Balance Sheet
Pay‐for‐Performance ?Tangible Assets: How important are they?
In today’s context most of many companies market value is “Intangible Asset”
Pay‐for‐Performance ?Before we evaluate Human Capital….
If people are most important “Asset”….
Where are they on your Financial Statements?
• Expense side in Income statement!
• Liabilities (pensions..) in Balance sheet!!
Pay‐for‐Performance ?Before we evaluate Human Capital….
One Should exercise caution of the following:• Be clear of the “purpose”
• There is no right or wrong method but some principles prevail
• Some of the Accounting principles might not be valid in Human Asset Valuation
• Not Making it too complex
Pay‐for‐Performance ?Some Complexity….How does the equation work?
Equation PrincipleOlder the Asset = Lower the book value
Always true in Accounting
Newer the Asset = Higher the book value
Generally experienced employees value is higher than fresh recruits…
Pay‐for‐Performance ?Some Complexity….How does the equation work?
Equation Principle
5 $ note = Each note worth the same
Always true in Financial Accounting
Is value of each employee the same?…..
Pay‐for‐Performance ?Some Complexity….How does the equation work?
Equation Principle
10 Employees Leaving Company = Headcount & cost less by 10 heads
Always true in Financial Accounting
What if these 10 employees are the most critical talent?…..
Pay‐for‐Performance ?Some Complexity….How does the equation work?
Equation Principle4 + 4 = 8 Always true in Mathematics
& Accounting4 ‐ 4 = 0
Does this hold true in the context of Human Capital Dynamics?? (team dynamics, multiplier effect, environment & culture impact!)
Pay‐for‐Performance ?Some Complexity….How does the equation work?
Equation PrincipleNon Performing Asset = Write‐off by same value
Always true in Accounting
DISENGAGED employee destroys value by many folds… also cost of disengagement is not linear…
Pay‐for‐Performance ?Some Complexity….How does the equation work?
Equation PrincipleFuture Value of Asset = Apportioned @rate of interest or cost of capital
Always true in Accounting
Human POTENTIAL is unlimited…….also INNOVATION breakthrough can enhance value exponentially…..
Pay‐for‐Performance ?Few Models for HC Valuation in Practice
• Historical Cost
• Replacement Cost
• Opportunity Cost
• The Lev‐Schwartz (PV of Future Earnings) Method
Pay‐for‐Performance ?Few Models for HC Valuation in Practice
Historical Cost
• All costs related to Acquiring, T&D and capitalized and
amortized
Major Limitations: Doesn’t take into effect value
created, not all costs of employee are considered (salaries!)
Pay‐for‐Performance ?Few Models for HC Valuation in Practice
Replacement Cost
• Costs of hiring similar qualified resources if the organization
were to be built from scratch
Major Limitations: Doesn’t take into effect value created,
each employee value is different hence the replacement cost
Pay‐for‐Performance ?Few Models for HC Valuation in Practice
Opportunity Cost
• Divisional heads bidding for the services of various people
they need
Major Limitations: value of a person on a particular job is
different than another job in other division, Management costs
Pay‐for‐Performance ?Few Models for HC Valuation in Practice
The Lev‐Schwartz Method
• Present value of employees future salaries till retirement
Major Limitations: it’s only input oriented, value creation
is not considered, Innovation & future potential not considered
Pay‐for‐Performance ?However, today we will discuss 2 Models
(potential alternatives)
Model 1 ‐ Inside Out Model• A Bottom‐Up approach based on earnings
generated and replacement costs.
Model 2 ‐Market Value Model• An External Value perceived by the market
based on Share Price appreciation and opportunity cost of alternate investment.
Model 1 (Inside Out Model)
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Pay‐for‐Performance ?Model 1 – Human Capital Value
Area Value (AED in Million)
1. Retained Earnings
2. Dividends Paid
3. Replacing Costs of Current HC
Total Human Capital Value = 1+2+3
Pay‐for‐Performance ?1. Retained Earnings of the Company
For the Model, Lets take it as 1,000 Million
Source: Annual Reports
Pay‐for‐Performance ?2. Dividends Paid till date
Year Dividend (AED 000)
2011 @ 685
2012 @ 1,371
2013 @ 1,874
2014 @ 1,462
Total @5,392
Source: Annual Reports
Pay‐for‐Performance ?3. Replacing Cost of Current Human Capital
Category % of Head Count
HeadCount*
Average Annual Gross
Replacement Cost as % of Annual Gross
Total(AED Mill)
Key Talent 5% 75 @ 0.75 Mill 200% 112.5
Senior Mgmt 10% 150 @ 1 Mill 150% 225.0
Middle Mgmt 25% 375 @ 0.5 Mill 100% 187.5
Others 60% 900 @ 0.3 Mill 70% 189.0
Total 714.0
* On an Assumed Head Count of 1500
Pay‐for‐Performance ?Model 1 – Human Capital Value
Area Value (AED in Million)
1. Retained Earnings @1,000
2. Dividends Paid @ 5,392
3. Replacing Costs of Current HC @ 714
Total @ 7,106
Pay‐for‐Performance ?Human Capital Asset Value Trend
0
1
2
3
4
5
6
7
8
HC Value
Y1 Y2 Y3 Y4
Model 2 (Outside‐In)
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Pay‐for‐Performance ?Model 2 – Human Capital Value
Area Value
A. Current Shareholder’s Investment Worth
(Less:) B. Opportunity Cost
(Less:) C. Shareholder Investment
Total = A – (B+C)
Pay‐for‐Performance ?1. Shareholders Investment
Area Value
Total Number of Equity Shares @ 4,571 Mill AED
Face Value of 1 Share @1 AED
Total Shareholder Investment = 4,571 Million AED
Pay‐for‐Performance ?2. Opportunity Cost of Shareholder’s Investment
Area Value
Amount Invested @4,571 M AED
Potential Interest Rate @ 2%
Number of Years till 2014 9
Interest Gain = 4,571 M * 2% * 9
= 855 M AED
Pay‐for‐Performance ?3. Current Shareholder’s Investment Worth
Area ValueCurrent Share Price @5.15 AED
No of Shares @4,571 M
Shareholder Investment Worth @ 23.5 Billion
Pay‐for‐Performance ?Model 2 – Human Capital Value
Area Value
A. Current Shareholder’s Investment Worth @ 23.5 Billion
(Less:) B. Opportunity Cost @ 0.85 Billion
(Less:) C. Shareholder Investment @ 4.57 Billion
Total @ 18 Billion AED
Pay‐for‐Performance ?The Range of Human Capital Value
Model 1
AED 7.1 Billion
Model 2
AED 18 Billion
Pay‐for‐Performance ?Human Capital Valuation can be used for…
• Decisions in Investing in People
• Designing Pay for Performance Programs
• Business Cases for Retention Schemes
Pay‐for‐Performance ?Some Constraints for not reporting HC
• Companies don’t “Own Human resources”
• Is it because GAAP/FASB or IFRS doesn’t “Mandate”
• No established/widely accepted principles
• Not sufficient “R&D” to advance this topic
• Lack of intent from CFOs/CHROs/CEOs/Boards
Pay‐for‐Performance ?
Let us be “Roughly Right” by starting HC valuation & HR Balance Sheet
rather than….
“Grossly Wrong” by not measuring it
Pay‐for‐Performance ?Next Steps….
Can you Champion this cause?
and
Will your Company publish Human Capital Value & Balance Sheet??
Pay‐for‐Performance ?The Future : 3 ‐ Ps
Profit
People
Planet
Thank You….
