For anything to have value it needs to be measurable. In fact, in scientific circles it’s an article of faith that if you can’t measure something, it doesn’t exist. So the time it takes an electron to orbit an atom is precisely known in yoctoseconds (one quadrillionth of a second).
We’re a little short of that level of precision when it comes to measuring the value of talent. Knowing the value of talent in an organization can have major benefits. For one, it would let the organization know how much better (or worse) off it is than its competitors. It would also help focus recruiting efforts where they generate the most return on investment.
None of this should be news to anyone who reads ERE, but the problem has no easy solutions. That’s partly because it’s hard to define the parameters. Just what constitutes talent? Is it every employee in an organization, or just a few, and if so, which ones?
What about the context? Is an accountant who works for a company with 20 employees the same value as one who works for a company with 10,000 employees? Are the employees in a company that is growing worth more than in a company that is in decline?
In an earlier article I had written that the value of talent could be measured in terms of profit-per-employee. That has merit but is obviously useful only as a global measure. For the concept to be more useful, there’s also a need to be able to measure specific types of talent in an organization and address the types of questions mentioned above.
Evaluating Key Talent
Measuring the value of certain types of talent is easier than others. Talent that has highly visible contributions is the easiest. It was recently reported that the Yankees had hired Roger Clemens at a price that amounted to about $1 million per game. Clemens will cost the Yankees $26.1 million this year ($18.7 million in salary plus a $7.5 million tax the team will pay Major League Baseball for exceeding the salary cap).
An analysis by sports analyst Vince Gennaro shows that Clemens will likely add six wins to the team. Those six wins, if they occur, would catapult the Yankees from a projected 90 wins to 96. Based on MLB history, a 90-win team has just a 31% chance of going to the post-season while a 96-win team has an 81% shot. So adding Clemens to the roster boosts the Yankees’ chance of making it to the post-season by 50%.
For the Yankees, this has two benefits. First, increased revenue from ticket sales, concessions, television ratings, sponsorships, and postseason revenue. Those are estimated to be about $24 million or $2 million less than the cost of hiring Clemens.
Second, the significantly higher likelihood of post-season play will mean that the team can charge higher ticket prices in their new stadium opening in 2009. In total, the payoff for signing Clemens can far exceed the cost of signing him.
The same type of analysis can be applied to key talent in an organization. The definition of key talent can differ, but for the purposes of this article, we’ll limit it to C-level executives. Any C-level role is usually associated with specific profit objectives. The hiring decision frequently has an immediate effect on the stock price of a public company, providing some validation that talent has measurable value.
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Using the same logic as above, value of a C-level executive can be estimated for the short-term from the likely profits generated, and for the long-term from the impact on stock price or increase in value of the company. The specifics of how to arrive at a valuation for the employee can be based on the employee’s past performance, and the employee’s ability to meet the profit objectives set for them in the past. This number needs to be adjusted to factor in the likelihood that the performance will continue.
For the Yankees, 45-year-old Clemens may well upset their calculations. Similarly, for an executive, factors like unfamiliarity with the industry, size of the profit objective, and even age can reduce the probability of achieving the profit objectives, and consequently lower their value to the company.
Context also matters. The Red Sox offered $8 million less for Clemens. But that was appropriate given what he would bring to Boston, estimated to be just four additional wins for a revenue impact of about $13.7 million. With no longer-term objectives, Clemens had far less value to the Red Sox than he did to the Yankees.
The same logic should apply when attempting to put a value on an executive. A company with ambitious goals has much more to gain from a highly talented executive than a company that has modest goals.
That was the rationale behind Ford’s decision to hire Alan Mullally from Boeing. Mullally had faced challenges at Boeing similar to the ones facing Ford, including improving customer satisfaction, manufacturing, supplier and labor relations, and fluctuating fuel prices. He also had experience leading a company on the brink and with eroding market share, as Boeing found itself after 9/11, while facing stiff competition from Airbus.
But with no experience in the auto industry, his value would be less than what it would be if he had come from the same industry.
Current accounting procedures essentially treat talent, however defined, as a cost walking around on legs. That’s largely because people do not fit the financial definition of an asset, and any measure of talent will require some judgment. Then there is the problem that those people in organizations most closely associated with acquiring talent (i.e., HR) often react negatively to the idea of measuring people and are ill-equipped to do so.
Finally, if people are to be treated as assets, then some will also become liabilities. You can’t very well have one without the other. The first step needs to explicitly recognize human resources as human assets. The Society for Human Resource Management, or SHRM, would have to become SHAM, but that’s a small price to pay.