Wall Street analysts evaluate which business to invest in

Wall Street analysts evaluate which business to invest in, based on stock valuation and financial metrics. Very few evaluate a company based on its human capital. The quality of people is a differentiating factor for an organization’s profitability and efficiency. This paper will highlight why Wall Street analysts are not interested in human capital and the research to support a change in this approach. Finally, profit per employee as a human capital measurement will be reviewed as an effective metric for my organization.
Human Capital
Human capital consists of employees’ skills and knowledge that are relevant to their organization’s success. It is also a key element to improve a company’s assets and remain competitive. Organizations are investing in developmental programs geared to train, educate and increase the level of knowledge for employees. Research has shown, this improves employee satisfaction and organizational performance (Marimuthu, 2009). A study completed by the University of Southern California found that companies who supported employee-involvement practices boasted a 66 percent higher return on sales and 20 percent higher return on investment (Caudron, 2002).
The model of human capital theory was created by Swanson (2001), which linked investment in education and training to increased learning. Learning is associated with higher productivity rates and increased earning potential for a business. As a result, human capital does contribute to an organizations effectiveness and performance. Eighty percent of a company’s worth is tied to its human capital, yet when analysts make investment decisions, human capital plays a small part in the evaluation. Wall Street analysts have not leveraged this approach due to the lack of accepted metrics supporting human capital analytics (Grossman, 2005). Companies lack a consistent method of evaluating human capital, making it difficult for a Wall Street analyst to compare organizations from an investment perspective. If organizations could include human capital as an intangible asset on the balance sheet, it would provide the relative information required for an assessment. Offering human capital information on financial documents could serve well for analysts, but could expose an organizations strength to its competition. The Conference Board (2002) conducted a survey and found many organizations are reluctant to publicly report human capital metrics.
Profit per Employee
Each business operates to generate a profit of some value, this includes both for profit and not for profit organizations. My organization is a not for profit entity who negotiates medication and medical surgical commodity contracts on behalf of hospitals across Canada. Our organization is sales driven, but our human capital is our largest expense. Human Resources (HR) provides training, education and developmental opportunities for staff but employee productivity in relation to company profitability is not measured. Human capital is an investment to the organization as it is these individuals who are driving company wealth. Profit per employee is an effective measurement of human capital.
Measuring profit per employee will allow my organization the ability to understand its revenue and expenses in relation to the number of full-time equivalents on payroll. This metric provides an indication of productivity and expense control efforts, which are important to an organization’s financial health (Grossman, 2005). Determining how much profit each employee generates creates an output-based measurement which can be used for strategic growth and by HR departments. HR will use this metric to determine the number of positions to recruit based upon corporate profit targets. Profit per employee will assist to determine the optimal amount of training employees require to meet or exceed the corporate average. Finally, managers are able to build profit per employee metrics into yearly performance appraisals and provide coaching to help employees meet their target (Poddar, 2015).
Literature supports the notion of investing in employees through developmental programs. Training and development should not be considered an expense on the income statement, rather an investment asset tied to human capital who have been proven to increase productivity and corporate profitability. Organizations currently lack clear global performance standards which will make it difficult for Wall Street to add human capital into their financial analyses (Allen, 2016). For my organization, measuring profit per employee creates an output-based metric which can be utilized in a number of HR areas. It allows current employees to have an objective target to attain, it supports HR to determine how much and what type of training new employees require to help facilitate attaining the metric of profit per employee and finally, it can be used in performance appraisals to provide coaching to those employees who maybe struggling to maintain the corporate average.