The Lev & Schwartz (L&S) model for calculating the value of human resources has suddenly become the buzzword in HR circles, courtesy the Infosys annual report for 2004-05.
The software major has opted for the L&S model and valued its 36,570 employees at Rs 28,334 crore (Rs 283.34 billion) -- up from Rs 21,139 crore (Rs 211.39 billion) for 25,634 employees in the previous year.
While Infosys has been grabbing the headlines for this, valuation of human assets isn't unique for Indian companies. The process was started long ago by, believe it or not, public sector companies like Steel Authority of India and Bharat Heavy Electricals Ltd.
The trend caught on with the emergence of knowledge-based industries where human capital is widely considered to be the critical component that forms the basis for other forms of capital.
In an industry where attrition rates are still very high, HR valuation helps the companies know the value they would forego when they are about to lose a person.
Satyam's annual report, for instance, includes intangibles like brand and human resource valuation (based on the L&S model), which account for over 80 per cent of the company assets.
Broadly, there are two approaches to human capital valuation -- cost-based and economic approach. The cost-based approach is further classified into three -- historical cost, replacement cost and opportunity cost. The L&S model along with other methods like Likert, Flamboltz and Jaggi is part of the economic approach.
Though there is little clarity on which of the various human capital valuation models is effective, the L&S model seems to have an edge over others in India.
HR consultants say it gives an opportunity to benchmark the efficiency of their human resources as quite a few Indian companies have adopted this system. Second, the valuation is less subjective as it makes limited assumptions.
So what is the L&S model?
Developed in 1971, it is based on the likely future earnings of an employee till his retirement. L&S advocated the estimation of future earnings during the remaining life of the employee and then arriving at the present value by discounting the estimated earnings at the employee's cost of capital.
Software companies say HR valuation helps companies make investor-friendly disclosures to make them fully aware of the company's human assets. The investors can also assess the return on human capital, which is in essence the return they are getting from people who are managing their wealth/ investment.
There is also no doubt that the HR departments must develop metrics that assess how various programmes and initiatives influence the way individuals or groups operate -- for instance, how much better a particular task is performed, or how much more productive a given workforce is as a result of a specifically targeted programme.
Though there is a broad consensus that identifying and measuring the value of human capital can be a process worth investing in, its acceptance hasn't yet spread much beyond the software industry.
The reason is that most companies still find valuation of intangibles like human resources a cumbersome process. They have a point as HR valuations will be a fruitless exercise unless the performance metrics are carefully assessed by people who are trained to do the job. A half-baked HR valuation process can only be counter-productive.
Also, while most companies recognise that human resources is a key asset and the HR function a strategic partner in their growth, in practice, human resources has difficulty justifying value and continues to be viewed as a cost and the HR function a corporate expense.
What is more worrying is the feeling among a large section of Indian corporates that HR valuations are nothing but public relations gimmicks.
They would do well to answer this question posed by HR consultancy firm, Hewitt: "Your most valuable assets walk out of your office every evening. What would make them come back the next morning?"