Human Capital Value Added (HCVA)
Organizations are always focused on measuring financial performance using various indicators and it’s often thought numbers are mostly related to financial world or should we say tangible assets. When it comes to employees for instance it is very common to hear them to be referred to as ‘intangible assets’. And anything intangible is unmeasurable (at least that’s what the status quo tell us). OK enough discussion about the tangible and intangible. The point is we are going to see in this article to what extent do employees (people) add value to your bottom line.
Why does it matter?
Well, employees (people) in any business are damn important and they enable the success (or failure) of a business. They are also an important investment you make every day that you payout bi-weekly or monthly in the form of compensation, benefits etc. Within the financial reports you will find ‘employees’ are often missing but we can actually find some space for them in there.
Now HR for many reasons has different indicators that measure performance and what not but they don’t often track the impact employees have on financial performance. This mostly happens because there has always been an argument about the methodology to calculate such indicators.
If organizations are to understand the real financial impact from employees then they must calculate Human Capital Value Added (HCVA).
How is it measured?
The data needed for this KPI can be extracted from standard financial reports and statements. You can calculate HCVA by subtracting all corporate expenses except for pay and benefits from the revenue generated and dividing the adjusted profit by number of full time employees(FTE). Total costs are the difference between revenue and profit before taxes, employee costs are pay and benefits, and FTE is the average number of full-time employees
The formula is as follows:
HCVA = Revenue — (Total Costs — Employment Cost) / FTE
Example Calculation for Company A wth following figures:
- Revenue = $1,000,000,000
- Total Costs = $800,000,000
- Employee Costs = $300,000,000 ($200,000,000 in pay & $100,000,000 in benefits)
- FTE = 5,000
HCVA = $1,000,000,000 — ($800,000,000 — $300,000,000) / 5,000
HCVA = $500,000,000 / 5,000
HCVA = 100,000
How often should you measure it?
It is recommended that you measure it on quarterly basis.
What does the result tell us?
The bigger the profitability per employee the better. You may want to measure this indicator over time once you have a benchmark and aim higher.
Some suggest that the profit before tax figure is not the correct profit item as foreign exchange losses are included in it.
Can I automate this KPI?
Sure you can depending on what type of information system or tool you use. We at CORPA recommend our customer to use a CORPA REPORT to do this. Since reports in CORPA are real-time and dynamic you can aggregate revenue and cost figures along with FTE from your micro apps and then add a calculator tool to key in the formula. When any of the figures changes HCVA will change as well.
Not sure how to create a report. Check this out
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