Companies Should Quantify Employees’ ‘True’ Value On Financial Statements

Chief Solutions Architect for Visibility Corporation. Ex-CFO, now helping Engineer-to-Order companies learn about Visibility’s ERP system. 

People often claim that employees are a company’s most-valued assets, and I agree. However, why don’t balance sheets reflect that? I was in the audience when this point was discussed at FInEx Summit 2021 by author and business valuation expert Dave Bookbinder, in his talk “Human Capital — Evaluating Our Most Valuable Resources.”

During his talk, Bookbinder said that how businesses value human capital doesn’t tell the whole story as the common methodology for valuing employees is based on how much it would cost to replace them. He noted that this turns employees into commodities, rather than individuals, from an accounting point of view.

Employee salary expenses, including fringe benefits, are shown on a profit and loss (P&L) statement as expenses and are often a company’s largest expense. U.S. generally accepted accounting principles are in conflict with the idea that employees are intangible company assets.

In light of the “Great Resignation,” many employees feel undervalued. There is a trend of employees looking for employee-oriented, positive work environments. As a prospective employee looks for this metric, it would be nice for them to see it in a financial statement.

I attempted to put a succession plan together at a former employer to identify and reward employees who were seen as critical to the company. This is a strategy to prevent resignations, but having a strong employee-supportive culture is more important.

Layoffs are often a cold mathematical exercise combined with a biased projection of a future employee’s worth to the business by people with a fixed mindset. Maybe the business model changed, maybe the whole company fails if employee compensation is too high, maybe not. I have had to lay off staff before, and it is the most difficult task I had to complete as a servant leader and someone who genuinely cares about people. I see layoffs as a company failure that often could have been avoided. Employees depend on companies, and companies depend on employees. Both sides make investments in resources to keep the normal harmony of this relationship. Many times, there is an emotional bond between a manager and the staff members who are being asked to find other means of financial support. Good employees often voluntarily leave their employers, which may also upset this balance.

How can you quantify the value employees bring to your company? One way would be to score employees on attributes such as empathy, customer service (internal/external), positive attitude, problem-solving, culture adoption, product knowledge, relationship building, trust, respect, leadership, accountability, how well they work with others, etc. You could then value employees with these qualities higher because other employees may want to work with them more, customers may want to buy from them more, banks may want to lend to them more, etc. This does mean there would be bias and subjective grading for this intangible asset. You could use salary and benefits as a baseline financial standard for all employees, adjust up or down based on the grading of the attributes above, and then assign a value.

Just because it is difficult to quantify employee value does not mean you shouldn’t try to. The purpose of financial statements is to show the true value of a company. Are you misleading the people who read your financial statements by hiding the intangible asset value of your employees?

I applaud the UN Sustainability Goals for supporting a global effort to help solve world problems such as poverty, hunger, ocean pollution, unclean water, etc. I have seen companies take action and change their financial reporting to include how they are supporting these efforts. Environmental, social and governance (ESG) is a new reporting trend as people who read financial statements want to know whether a company is supporting societal goals. Reporting a metric of employee worth, on a company balance sheet, should be the next change.

Forbes Finance Council is an invitation-only organization for executives in successful accounting, financial planning and wealth management firms. Do I qualify?