Corporations have struggled for years to try to quantify human capital and its impact on organizational performance. While there has been a great deal of debate, one fact has remained constant:
For most firms, human capital represents one of their largest investments and presents one of the most difficult resource management challenges. How can a company maximize its return on human capital investments? People Equity can be a powerful framework for examining investments in human capital and for determining their impact on customer and shareholder value.
The value the market places on an organization — and affords to its shareholders — is based on a number of different factors. The consistency of past earnings, revenue growth and earnings are all important. But, there are also intangible factors related to the current and future earning potential of an organization that investors consider in fixing its value, such as new patents, brand equity and the firms existing customer base – to name just few.
The marketplace also evaluates the human capital of an organization. For example, the 50% premium price/earnings multiple that the market has given to Southwest Airlines compared to its competitors is based to a large degree on the company’s quality of its leadership, commitment of its employees and the long history of positive labor relationships the company has experienced. If any of these human factors were threatened the value the marketplace gives the company would quickly decline.
People equity, then, is the value shareholders gain from the human capital invested in their business. This includes the premium (or penalty) a company receives in the marketplace as a result of such things as intellectual capital, culture, and leadership quality as well as customer and labor relationships.