President Obama said in a recent interview on Face the Nation that the most critical quality for a good President is to form an effective team because the job is simply too big without great support (7/24/2016). His comment is actually the Key Performance Indicator for anybody who is leading a company.
Your job is to choose wisely, lead the team, and solve team disputes!
It’s critical to know if you have chosen staff wisely. Most companies now spend more on service and administration than manufacturing. The balance sheets of older days focus on hard assets but most of your company is likely to be service and administrative. You need a balance sheet that measures whether your staff are building your company or wrecking it.
The literature on determining the asset value of employees is still emerging. While various models each have their benefits, it’s easy just to set up parameters and starting thinking in this new way.
I will present 12 elements of an Employee Asset Based approach. I follow that with three examples of a new staff hire, a valued older staff member, and a problem staff.
Elements of Employee Asset Based Value
- Value of Job Ability -Training and certification which leverage effectiveness
- Determined DNA – to complete company mission
- Continuing Education
- Historical Knowledge of Company and Culture
- Network
- Ability to contribute to team with justice and peace (honesty, harmony)
- Willingness to accept accountability
- Impact on Profit of Company and Retention of Students
- Impact on Critical Number
- Is the compensation too high for this position?
- Would you enthusiastically rehire this staff member?
- Check for liabilities. Does the new staff member destroy value because of poor performance on one of these scales?
How would this look in the real life examples of Jim, Elisa, and Beth?
Jim – The New Hire
Assume that you pay market rate for Jim who is capable of fulfilling the position description for teacher. That is all expensed as payroll. Assume pay of $40,000 per year. Debit that amount to payroll expense (just as normal)
Review the list of 9 Elements –
- Value of Job Ability -Training and certification which leverage effectiveness
- Training and certification which leverage effectiveness
Jim has a Masters in Bilingual education and the DOE would pay $52,000 for this. Credit $24,000 to Equity Professional Added Capital and Debit $24,000 to Professional Assets. Since you expect the teacher to stay for 2 years before the DOE discovers the difference, credit a depreciation account for Professional Assets for $1,000 a month (2 year schedule) and debit expense for Professional Expense.
- Determined DNA
Add nothing because there is no history to indicate
- Continuing Education
Add $6,000 because he will take CLASS Professional Development and depreciate over two years – his expected tenure
- Historical Knowledge of Company and Culture
No addition because there is no knowledge of history and culture
- Network
Add nothing because he has no network
- Ability to contribute to team with justice and peace (honesty, harmony)
Change nothing because he is not yet part of a team. You need his truthfulness, compassion to others, and willingness to live for company results more than his own. If he steals, lies, cheats clients – these will all reflect badly. If he has a reputation for peace and justice, then it adds value.
- Willingness to accept accountability
Change nothing because you do not know about accepting accountability
- Impact on Profit of Company and Retention of Students
Add $9,000 in expected future profit because you believe that the presence of a Dual Language UPK teacher will add two seats to the three year old program and 2 retention effect students in After School programs. Add this in the same manner as # 1 and Depreciate over 5 years to account for the final residual effect.
- Impact on Critical Number
Add nothing because this will be established by Jim’s performance
- Is the compensation too high for this position?
No, subtract nothing as the compensation is correctly established.
- Would you enthusiastically rehire this staff member?
Change nothing because you don’t know. This score is the sum total of all the desired attributes fitting into a package that adds value
- Check for liabilities. Does the new staff member destroy value because of poor performance on one of these scales?
Change nothing because there is no history to indicate
Summary for Jim:
You hired him at $40,000. He adds $39,000 of value to the balance sheet. That amount will be depreciated over the remaining expected time of employment. The balance sheet should be adjusted in the yearly appraisal with Jim. He should see his value to the company and propose how to increase it. He correctly may feel that his compensation should be adjusted in Year Two.
On the surface, you have made a smart opening choice. The continuing months are critical as they will add or destroy value.
Elisa – Hired 10 Years Ago at Age 40
Assume that you pay less than the market rate of $50,000 for Elisa who is capable of fulfilling the position description for Human Resources. Assume pay of $40,000 per year. Debit that amount to payroll expense (just as normal). The $30,000 remaining is added to Professional Assets and Professional Added Capital and depreciated over 3 years)
Review the list of 9 Elements –
- Value of Job Ability -Training and certification which leverage effectiveness
None, so no added asset
- Determined DNA
Elisa is totally committed to the mission of the company and stays late and takes work home. She is a model for younger employees. Add $60,000 and depreciate over 3 years.
- Continuing Education
You will propose a certificate course online for $5,000 because it will give her more skills and increase her expected date of departure by one year. Add to Professional Assets and depreciate over 3 years.
- Historical Knowledge of Company and Culture
Significant knowledge of history and culture. It will take 3 months of compensation to replace. Add $10,000 to Professional Assets and Professional Added Capital and Expense over 3 years.
- Network
None, so no added asset. It is carried with Historical knowledge
- Ability to contribute to team with justice and peace (honesty, harmony)
Elisa has age and experience and a kindly manner. She works in the background with you to keep the team together and let you know quietly about unresolved issues. It’s worth $30,000.
- Willingness to accept accountability
Elisa rarely makes an error. She knows that her value to you is in being correct. Her determination not to disappoint relaxes you to focus on the leadership job. It raises your effectiveness by $60,000 over 3 years.
- Impact on Profit of Company and Retention of Students
Not a consideration since she has little effect in Marketing or Program
- Impact on Critical Number
Add nothing
- Is the compensation too high for this position?
No, subtract nothing as the compensation is correctly established.
- Would you enthusiastically rehire this staff member?
She is highly valued and the overall fit with the team is worth $45,000 over three years
- Check for liabilities. Does the new staff member destroy value because of poor performance on one of these scales?
Change nothing
Summary for Elisa:
You hired her at $40,000. She adds $240,000 of value to the balance sheet. That amount will be depreciated over the remaining expected time of employment. The balance sheet should be adjusted in the yearly appraisal with Elisa. She should see his value to the company and propose how to increase it. She correctly may feel that her compensation should be adjusted in Year Two. She may have other proposals because she understands the appraisal and company very well.
You have made a smart choice in Elisa and retained her. Your leadership skills will be tested to retain her but it’s worth the struggle.
Beth – Hired 20 Years Ago
Assume that you pay less than the market rate of $40,000 for Beth who is barely capable of fulfilling the position description for Secretary. Assume pay of $28,000 per year for 10 years. Debit that amount to payroll expense (just as normal). The $120,000 remaining is added to Professional Assets and Professional Added Capital.
Review the list of 9 Elements –
- Value of Job Ability -Training and certification which leverage effectiveness
None, so no added asset
- Determined DNA
Beth is unfocused. She isn’t determined to accomplish the job because it’s all hazy in her mind. Showing up is her idea of determination. Unless she has a critical errand for her family. Debit $10,000 per year to Professional Added Capital and Credit Professional Assets. Unfortunately, you assume she will work until retirement in 10 years so the total debit and credit is $100,000
- Continuing Education
Ha. The last thing that she learned was where a new restaurant opened for lunch
- Historical Knowledge of Company and Culture
$1,000 ($12,000 over 10 years). Beth knows how the boiler works when there is a problem
- Network
None, so no added asset.
- Ability to contribute to team with justice and peace (honesty, harmony)
Beth has disappointed many employees over her career. They see that she gets paid for doing very little. She actually accounts for $100,000 ($10,000 per year) in reduced effort by others because they see that hard effort does not pay.
- Willingness to accept accountability
Beth always has a reason that a phone call was lost or mail that wasn’t sent. She costs about $120,000 over 10 years.
- Impact on Profit of Company and Retention of Students
Not a consideration since she has little effect in Marketing or Program
- Impact on Critical Number
Add nothing
- Is the compensation too high for this position?
No
- Would you enthusiastically rehire this staff member?
No, She destroys about $5,000 of value annually ($50,000)
- Check for liabilities. Does the new staff member destroy value because of poor performance on one of these scales?
See above
Summary for Beth:
You hired her at $28,000. The sum total of credits and debits to the Balance Sheet is a negative $238,000. Debit to Professional Added Capital and Credit to Professional Asset. That amount will be depreciated over the remaining 10 years of expected time of employment.
You have a choice to make and your leadership skills will be tested to fire her and replace. Beth has one skill and that is to keep this position. She knows a Board member or she scares people or she is older and can’t get another job or she has an alcoholic husband and pays the bills. You can only remember that you’re not her father, mother or banker. You have a responsibility to the company and the people who receive its benefits.
Conclusion
Notice in these three examples (drawn from real life examples) that the real value is added by longer term employees who are effective (+$240,000). The biggest effect is not firing those who are destroying your company (-$238,000). New employees typically add the least (+$39.000)
In this example, you can increase the asset value by $279,000 or $41,000. The non performing staff member will kill your business.
What will you do this week to add Professional Capital to your company?
Notes
Russ, Meir. Management, Valuation, and Risk for Human Capital and Human Assets: Building the Foundation for a Multi-disciplinary, Multi-level Theory. N.p.: n.p., n.d. Print
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