Human Capital Externality Valuation (HCX)
Of the many goods that our present economic system does not properly value, human capital is one of the most important. Companies today meticulously value their inventories, their financial assets, their real estate etc. But one factor without which no company can run - human capital, is rarely well accounted for. Considerable academic literature exists in this subject and the methodolgy of valuation is based broadly on the following three approaches.
(1) Cost Based Approach
(2) Income Based Approach
(3) Educational Stock Based Approach
Human capital can be defined as the stock of competencies, knowledge, social and personal attributes embodied in an individual and relevant for producing economic value (Organization for Economic Co-operation and Development (OECD), (1998), Human Capital Investment, Paris). A company can be seen as ‘leasing’ human capital from each employee, which contributes value to the firm, based on his/her knowledge, skills and competence, further augmented by investments in education, training and motivation. The collective competencies of employees have direct impacts on organisational processes, company culture, relational capital (e.g., brand value, teamwork, etc.), efficiency and profitability.
Indeed, today’s system of human capital accounting does not take into consideration the entire spectrum of issues, including- the third- party positive impacts of loss of human capital. Therefore, positive human capital externalities are not duly recognized. By valuing its human capital, a company is able to properly evaluate its asset base, and is able to gauge the returns on its investment in training, and thus better develop its human resources.
GIST Advisory has designed and developed a proprietary tool which evaluates a company’s human capital and human capital externalities. Our model allows for human capital to be assessed to different degrees and we have designed our product to cater to our client’s size, structure and budget. Our clients can carry out their human capital evaluation through any of the following ways: