HOW TO CALCULATE AND ENHANCE HUMAN ECONOMIC VALUE ADDED IN TRADITIONAL COMPANIES

In today's competitive business landscape, companies are constantly searching for ways to maximize their efficiency and profitability. One often overlooked aspect of this quest is the value that human capital brings to an organization. Human Economic Value Added (HEVA) is a concept that sheds light on this crucial element, allowing companies to understand and enhance the true worth of their employees.

Human Economic Value Added (HEVA) measures the economic contribution of human capital to a company. It goes beyond the traditional financial metrics and recognizes the impact that employees have on the organization's overall performance. HEVA takes into account factors such as skills, knowledge, experience, and productivity, providing a more comprehensive evaluation of the value employees bring to the table.

Calculating and enhancing Human Economic Value Added is crucial for several reasons. Firstly, it allows companies to accurately evaluate the contribution of their employees, enabling them to make informed decisions regarding recruitment, training, and compensation. Secondly, it provides a benchmark against which companies can measure their performance and identify areas for improvement. Lastly, by recognizing and valuing human capital, companies can boost employee morale and engagement, leading to increased productivity and overall organizational success.

To calculate Human Economic Value Added, several key components need to be considered. These include the revenue generated by employees, the cost of their compensation, and the capital invested in them. By analyzing these factors, companies can determine the economic value added by their workforce and gain insights into the return on investment in human capital.

There are various methods to calculate Human Economic Value Added, each with its own merits. Ultimately, the choice of calculation method depends on the specific needs and objectives of the organization.

One commonly used approach is the "contribution margin" method, which subtracts the cost of goods sold from the revenue generated by employees. The contribution margin approach focuses on determining the contribution of an individual employee or a group of employees to a company's profitability. It measures the difference between the revenue generated by employees and their costs :

HEVA (Contribution Margin Approach) = Total Revenue Generated by Employees - Total Costs of Employees

Another method is the "residual income" approach, which is used to assess the economic value of an employee by calculating how much they contribute to a company's residual income. It measures the difference between a company's net income and the total cost of the employees.

HEVA (Residual Income Approach) = Company's Net Income - Total Costs of Employees

In both approaches, a positive HEVA value indicates that employees contribute to the company's profitability, while a negative value suggests that employees may not cover their costs with their contributions.

The precise aims and usage scenarios of the HEVA (Human Economic Value Added) calculation will determine whether the amount obtained after deducting the cost of the employee from the company's net income should be divided by the number of employees. This procedure is frequently referred to as "Average HEVA" or "HEVA Per Capita".

The net profit of the company is deducted from the total cost of employees to determine the average HEVA computation, which calculates an employee's average contribution. This expresses the average economic value per employee and illustrates how much each employee adds to the net profit of the business.

This statistic can be especially relevant in circumstances where employers seek to compare an employee's economic value to other employees or firms. However, the goals of HEVA computation may vary depending on each usage case, hence several calculation techniques may be used.

From a different angle, HEVA is the expanded idea of EVA from the viewpoint of human capital. HEVA is EVA divided by average headcount. It is originated from the concept of economic value added. EVA is a measure of financial performance which considers true economic profit. It shows how much true profit is available after paying off all expenses, taxes and also the cost of capital.

HEVA = (NOPAT - Cost of Equity) ÷ Average Headcount

These methods help businesses assess the financial impact of their employees and make informed decisions regarding performance evaluations and resource allocation.

Aside from HEVA, additional metrics that assess human capital efficiency include HCVA and HRROI. HEVA focuses on individual employee contributions to profitability, HCVA assesses the overall impact of human capital on the company's value, and HCROI measures the return on investment of HR-related expenditures and activities. Each concept serves different purposes within human resources and financial management.

HCVA is used to show the contribution of employees to profitability

HCVA = [Sales - (Total Costs - Employee Costs)] / Average Headcount

HCROI considers Return on Investment (ROI) in terms of profit for monies spent on human capital employment costs.

HCROI = (Operating Profit + Employment Cost) / Employment Cost

These financial based HC metrics require the support of a set of humanbased metrics. There should be complete data on workforce demographics, number of exempt and non-exempt workers, number of regular and contingent employees etc. Information about workforce turnover and performance of different departments, treated as separate profit centers are necessary. All these metrics have their base on operating profit without any consideration for value added. But it should be made clear that it is value added which contributes to the operating profit. As such there should be a clear interrelationship between value added and profitability. The more the value added the more will be the operating profit.

Enhancing Human Economic Value Added requires a strategic approach that aligns the objectives of the company with the development of its employees. One strategy is to invest in comprehensive training and development programs that equip employees with the skills and knowledge needed to excel in their roles. Another approach is to create a positive work environment that fosters employee engagement and motivation. Additionally, implementing performance-based compensation and recognition systems can incentivize employees to go above and beyond, further enhancing their economic value added.

Implementing Human Economic Value Added in traditional companies may pose certain challenges. Resistance to change, lack of data, and the complexity of measuring intangible factors like employee knowledge and skills are common obstacles. However, by addressing these challenges head-on and involving key stakeholders in the process, companies can overcome these barriers and unlock the true worth of their human capital.

Employees are the driving force behind a company's success, and their skills, knowledge, and productivity directly impact its bottom line. By recognizing and valuing the contribution of labor, companies can create a culture of appreciation and motivation, leading to improved performance and financial outcomes.

In an era where technology and automation dominate the business landscape, it is essential not to overlook the value of human capital. Human Economic Value Added (HEVA) provides a framework for understanding and enhancing the true worth of employees in traditional companies. By calculating HEVA, companies can gain valuable insights into the economic contribution of their workforce, make informed decisions, and create strategies to maximize their human capital. By valuing and investing in their employees, companies can unlock their true worth and achieve sustainable growth in today's competitive market.