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Don’t undervalue human capital

For decades the quality of human capital has not been high up on the agenda when financial and strategic business decisions are being made, but as the UK transforms itself into a knowledge-based economy all that is starting to change.

What employees hold in their heads is now more important than ever, and companies are increasingly hiring staff because of what and who they know.

Moreover, the worst financial crisis in living memory has resulted in an unpredictable global economy and less stable organisations, which means that it is vital that workers have good judgement.

Adrian Nicholls, who leads Ernst & Young’s Valuation & Business Modelling team, believes that while employees are not something who would be classically recognised as a tangible asset, they are absolutely critical.

“You will lose value if you’ve acquired something and lost key individuals who’ve been supporting the business. In some cases the reputation of a business is entirely linked to certain individuals,” he says.

“The focus on people by the businesses I work with is high. When carrying out their assessments, they’re often looking at what drives the business and offer incentives, such as share ownership, to keep staff.  There is no point buying a business and watching its key assets walk out of the door.”

Stephen Taylor, a senior lecturer in human resource management at the University of Exeter Business School, adds that companies have to invest in human capital like any other asset to stop it “depreciating”.

There is evidence that businesses are starting to realise more and more that they need to offer pay incentives and staff benefits to keep these assets. For example, a recent survey by the Chartered Institute of Personnel and Development (CIPD) found that more than half of employers expect their pay budgets will have increased by the end of the year.

But Charles Cotton, CIPD rewards adviser, warns that employers should be wary of an over-reliance on the conventional carrot-and-stick approach to reward.

Research has shown that “if… then” rewards, which attach financial incentives to specific behaviour or projects, can have a detrimental impact on intrinsic motivation by creating transactional relationships between employees and their organisation.

Communicating collective benefits to employees can also serve to remind them that they are part of a social endeavour with a stake in the success of their organisation, he says.

It is also imperative that firms keep these assets fresh through training and development, according to Mr Taylor. Knowledge management practices encourage people to share knowledge so if they leave the business the extent to which their knowledge leaves with them is limited.

Networking and social events in the workplace also allow people to know each other through cross-departmental boundaries so they can pass their knowledge on to others.