Cafe Classic: Are Employees "Costs" or "Assets"?

Editor's Note:  We often hear leaders cite the "employees are assets" but often do they walk that talk?  Jacque Vilet, channeling Josh Bersin, shares some Classic information and insights about the economic value an organization's people bring to the table.

“Our people are our most important asset”.  It has been said so many times now that it’s become a cliché.  Such statements are usually a prelude to large executive bonuses, layoffs or plant closings. 

Unfortunately employees are still viewed as a cost both on the balance sheet and, more importantly, in the minds of most executives.  Costs are something you want less of – not more of.

Josh Bersin, of Bersin by Deloitte, helps us see the economic value of employees over time.   He has outlined factors a business should consider in calculating the "real" cost of turnover.

• Cost of hiring a new person (advertising, interviewing, screening, hiring)
• Cost of onboarding a new person (training, management time)
• Lost productivity (a new person may take 1-2 years to reach the productivity of an existing person)
• Lost engagement (other employees who see high turnover disengage and lose productivity)
• Customer service and errors (new employees take longer and are often less adept at solving problems). 
• Training cost (over 2-3 years you likely invest 10-20% of an employee's salary or more in training, that is gone)
• Loss of tacit knowledge/corporate memory (this one is mine)

Consider the following chart from Bersin. It simply shows that initially most employees are a "cost” and that over time, with the right talent management, they become more and more valuable. They become an “appreciating asset”. 

Would companies be willing to invest more time and money in employees in an effort to increase their value to the company?

Company assets fall into two categories: tangible and intangible. Tangible assets are the ones you can touch: buildings, equipment, inventory, etc. Intangible assets are the ones that you can’t touch. They include intellectual property such as patents, trademarks, copyrights, company brand, market share, customer loyalty and employee talent/skill/ability.

Let’s take a look at the similarities between employee value and company brand.  Both are intangibles and both contribute to the value of the company.

Brand value can make up a sizeable portion of a company’s stock value.  And they are intangible, just like employee value.  Ask yourself what McDonalds would be without its brand – or Pepsi?

When a company offers itself for sale, the sale price is higher than the company's net tangible assets because the buyer is paying for intangible assets too. The difference between the sales price and the value of tangible assets is an intangible asset called “goodwill”.  A company brand is part of “goodwill”.  And if we could count employees as an intangible asset, they would be part of “goodwill” as well.

So are you convinced now that employees need to be viewed as investments? If so, then someone needs to change management’s mindset.  And who do you think can best make the case?  Compensation, of course.

"The main “sticking point” here is that HR in most companies doesn’t keep cost information.   So,  the real employee cost  is unknown: turnover, recruiting, interviewing, hiring, orientation,  training, lost productivity, potential customer dissatisfaction, reduced or lost business, administrative costs, lost expertise, corporate memory, etc.

First, Compensation has to gather all the cost information from the different parts of the company that track it.  Some data can be found in Recruiting and some in Learning/Development.  The rest of the actual costs can likely be found with Accounting's help.  They can also help estimate costs where data doesn't exist.

Second, Compensation needs to prepare for the monumental task of convincing management that employees are an asset.

Here are a few arguments that Compensation should expect to hear and some possible responses:

Argument:   If we don’t reduce costs we’ll reduce our competitive edge or go out of business.

Response:  Guess what?  People are your competitive edge.

Argument:  When unemployment increases, it’s easy to find people.

Response:  When unemployment increases, it’s easy to find bodies.  Real talent is always in short supply.

Argument:  Of course we want long-term success, but we have to survive in the short-term for there to be a long-term.

Response:  And if we don’t retain people short-term there won’t be a long-term.  We need to retain people for both short-term and long-term success.

The ball is in your court Compensation.   What are you going to do about it?

Jacque Vilet, President of Vilet International, has over 20 years’ experience in Global Human Resources with major multinationals such as Intel, Texas Instruments and Seagate Technology. She has managed both local/ in-country national and expatriate programs and has been an expatriate twice during her career. Jacque has the following certifications: CCP, GPHR, HCS and SWP as well as a B.S. and M.S in Psychology plus an MBA. She belongs to SHRM, Human Capital Institute and World at Work. Jacque has been a speaker in the U.S., Asia and Europe, and is a regular contributor to various HR and talent management publications.

Comments

[Chris Dobyns]

Interesting and timely relevance tangential to the concepts of product and brand loyalty and the intangible value of goodwill.

Coincidentally, since I'm writing a series of internal articles in an effort to increase employee participation in our defined contribution plan, I got to thinking more about this cost/asset equation question. While I agree about the need to better quantify the full spectrum of employee costs, the part that looked like it was missing, was quantifying the asset "value".

I think we've got a problem if we're unable to better quantify the added-value an asset contributes. We can do that pretty well for a rail car full of coal or an automated machine that makes waffle cones - but not quite as well for an employee. The machine will eventually depreciate in value, but the employee should continue to appreciate in value (well, theoretically).

I have a good (and bad) feeling that ability to better "value" employees is coming, probably in another 3-5 years.

[Joseph M Thompson]

A true "classic" Classic. I'd like to offer three points:

First, regarding "people are our most important asset!" Someone once told me that if you want to put that chestnut to the test, look at who the company has in its HR team. If people are truly an organization's most important asset, then it should have some of it's best people in HR. Present company excluded, how often do we see that borne out?

Second, we talk about the cost of attrition, but do we understand the real cost of retention any better? We know, intuitively, that it can cost you more to retain an awful hire than to prematurely lose a great hire. But, the cost of that retention is harder to quantify. And, if your retention is too high in a field or occupation that is rapidly evolving, what is the cost of losing out on the influx of new ideas, new innovations, or new ways of working? Or what if you need to overhaul the organizational culture? How much does retention cost then?

Third, if we look at the Cost-to-Value chart, wouldn't that suggest that we should view onboarding as an investment that should be used to minimize time-to-engagement? Yet, don't we see too often that onboarding is little more than an enervating parade of paperwork and poor presentations?

Just food for thought while we wait for Chris's employee value decoder to arrive!