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ROI of Human Capital in accounting and finance

The Value of Human Capital

Most organizations use standard accounting rules to place a value on things like plants and equipment when completing their financial statements. As our economy has moved from industrialization to one based on information—along with the knowledge workers who operate in it—an issue often debated is how to place a value on those people.

Many CEOs proclaim in speech after speech that employees are their most important assets. That then begs the questions: what is each employee worth, and how much more valuable is one employee versus another?

In their now famous study The War for Talent, McKinsey & Company demonstrated that "Talent is now a critical driver of corporate performance. A company’s ability to attract, develop and maintain talent would be a major competitive advantage in the future." In fact, through analysis of their Talent Management Index tool, McKinsey was able to quantify that companies with employees who scored in the top quintile delivered on average a 22 percent higher return to shareholders than their industry peers.

How to Compare Top Employees from Average or Subpar Performers

There are countless books, each with its own complicated formula for trying to quantify the value of an A-level player versus a B or C player. For simplicity, the following chart outlines what value each of these employees brings to the workplace every day:

A-level Employee

  • Quick learners; figures out before being told
  • Becomes independent quickly
  • Requires less management and support
  • Consistently achieves objectives
  • Always on time and on budget
  • Works well with team
  • Future Leaders

B-level Employee

  • Have basic learning curve
  • Higher comfort level as team member
  • Seeks management direction before action
  • Regularly meets objectives
  • Might not lead, but won't hold team back
  • Requires time to ascend to leadership

C-level Employee

  • Competent but requires too much pushing
  • Weak people skills
  • Inflexible
  • Listens too little
  • Learns too slow
  • Gets by on personality vs. hard work
  • Tends to suck the engergy out of team

The Bottom 10%

  • Lack of ability
  • Lack of motivation
  • Bad attitude

Can Cs and Bs be groomed into Bs and As?

"In the accounting and finance area, what we are seeing at Kelly Services today are consistent requests from clients for an upgrade to the skills requirements of new employees, as compared to the same positions we filled for them just a few years ago," said James Mack, Finance Product Manager for Kelly. As finance teams have stepped from the shadows of simply providing data for others to analyze, the financial professionals of today are taking center stage alongside operating units, and participating as never before in strategic decision making.

"We are being asked to find people not only skilled in technical aspects of their trade, ut ones who come to the party with qualities like strong communications ability, critical thinking skills, customer service, change management, strategic agility, or a capacity for dealing with ambiguity," said Kristina Drobocky, Finance Product Manager for Kelly. Not your standard debits and credits, to say the least.

In their book Topgrading, brothers Brad and Geoff Smart discuss some of these issues. Their analysis suggests that certain competencies are very easy to change in an existing staff. With proper training, an employee can become more customer-focused, or a better communicator. Although more challenging, we might even envision teaching a person to use better judgment, or become a stronger negotiator.

What becomes even more challenging though is ensuring many of the qualities that the A-type Finance and Accounting employees of today require. Traits such as being more intelligent, having energy and passion for your profession and your company, or possessing integrity are often considered to be part of one’s DNA that can’t be learned in the classroom. When today’s finance leaders need those traits and can’t identify them among their own staff, then it might be time to bring talent in from the outside. Many experts in talent management would advocate a strategy that brings in a percentage of staff from outside of a company every year—to help recalibrate the team and benchmark against industry peers.

How to Determine the ROI of an A-level Employee

Assuming that a good, or average, B-level staff member’s work output might equal a value of 1.0—then by virtue of their qualities, and A-level employee should product at an output of 1.5, and a C would perform at 0.5.

Taking an annual challenge posed to any accounting or finance function, like taking $3 million of expense out of the operating budget, you can do the math and refer to the chart below when calculating how many staff members might be required to get the job done. In fact, paying a smaller number of A employees a premium compensation still nets a lower operating cost than if staffed with all Bs or Bs and Cs.

A Good Rule of Thumb

Each manager has to determine their own criteria for what they consider to be the work output of an A versus a B or C employee. A good rule of thumb that many follow is:

  • B Employees pay for themselves every year
  • C Employees result in a net loss equal to their salary
  • A Employees result in a net gain equal to their salary

Savings Goal of $3,000,000

If a B employee can save the company $500,000 (x1), an A employee can probably save the company $750,000 (x1.5), and, the C employee may save the company $250,000 (x.5).

Then, the number of employees required to reach the $3,000,000 goal is 4 As, 6 Bs, and 12 Cs.