In part 1 of this two-article-episode, I made the point that all meaningful innovations that drive the prosperity of individuals, companies, and economies alike in the innovation economy start with the ideas and the actions of “human assets.” Hence, the human capital concept seems like a natural next step in people management, although we need to creatively overcome several significant challenges related to the concept. In today’s part 2, I will share with you a creative solution that I adapted from another area that promises to resolve most of the challenges related to the human capital concept and to be able to fairly reflect the investments in human capital in the accounts of individuals companies and countries.
Why do we still focus on to the productive assets of past economic ages?
In the past 50 years, we have moved from an agricultural and industrial society to a knowledge society and, more recently, a innovation society. However, when it comes to reflecting the most valuable assets of a company, our accounting practices still often reflect the asset perspectives of the agricultural and industrial age (which focused on activating buildings, machines, and tools).
True, with the advent of the knowledge economy (aka information age) during the past decades, intangible assets have come to the fore and gained importance. Intangible assets in the form of intellectual property and brand equity now account for a sizable portion of the value of a typical tech company. Still, one productive value driver that has been largely overlooked so far by accountants: people.
To establish the concept of human capital as a central prerequisite of a full-swing innovation economy, we need to find creative ways to help companies treat their talents as “human assets” not only in name but also for real as activated company assets listed in their balance sheet. But why is this in everyone’s interest? And how could this possibly be done?
Bridging the gap between the economic ages by visiting another world
Let’s creatively answer the aforementioned questions with a metaphor. Appreciating talents as valuable human capital of a firm in the innovation economy is like a professional football club acquiring and transferring licensed players. Let me explain.
Young football players are first groomed and developed in a local club near their hometown. A few top talents later join professional youth academies of top clubs on a national and international level.
When talented footballers becomes licensed players and sign their first professional contract with another club that didn’t develop them, this club needs to pay a compensation fee to all former clubs involved in the talent development process. (The compensation fee varies between 0.25% to 5% of the transfer fee based on at what age they groomed the talent).
As licensed football players progress in their careers and evolve into stars or perhaps even a superstar, all “talent development clubs” continue to be paid the proportional compensation fee for their educational efforts with each subsequent transfer to a new club (who didn’t invest any time or money in developing the player, but now benefits economically from the player’s professional performance).
Unsurprisingly, modern football clubs activate their licensed players as intangible assets in their balance sheet using the transfer fee as a benchmark (while expensing the player’s salary and, on an accrual basis, any agent fees in the Profit & Loss account).
Why professional football can help resolving the key human capital challenges
So what if we adopted the talent transfer system of modern professional football to business in general?
- What if, like football clubs, corporations (particularly those operating in the knowledge and innovation sector) had to activate their talents in their balance sheet as intangible assets?
- What if corporations had to pay a compensation fee to whoever invested in the education of talent they sign on? (To the parents who privately invested in their kid’s education? Or if schooling was publicly funded, to the school who did the education or the regional or national state who ultimately paid for it?)
- What if a competitor who poaches a young talent from your company (with the promise of a higher salary and better career prospects) had to pay you a transfer fee (that also compensates your firm for all investments in training and upskilling in this talent that you made)?
- What if schools or local governments in developing countries gained a share of the compensation fee if their talents transferred to another country? Or if they moved from rural areas to a city to join a corporation there? (Such compensation payments could help alleviate some of the issues caused by the brain drain challenge mentioned in part 1 by using the proceeds to foster local businesses or education development initiatives.)
Just entertain these thoughts for a moment in your mind, thereby also reflecting about consequences of such changes: Parents would have not only an emotional but also a rational, financial interest to invest in a good education of their children (by earning “compensation fees” as a return of investment for sending their children to good schools and universities). Schools and universities would have a much stronger interest to provide state-of-the-art top-level education in line with market and social needs to attract income (in the form of school fees paid by the family, or by compensation fees for talents educated there who sign-on or transfer to a new company during their careers).
Companies might have an even more substantial interest to invest in talent development programs if they know that they will get a reimbursement of their training spent for skilling, upskilling, and reskilling their talents should they move on to a competitor. And governments would have a strong interest in modernizing the curricula of our current, industrial-age education system and making it fit the new demands of the present-day knowledge and innovation age.
Conclusion: It’s time to make the human factor count in business
If you feel offended by the term “human capital,” forgive me. The concept does not intend to demean humans as capital assets (such as land, buildings, and machines) but rather to finally flag up the vital importance of the human factor for the value creation of a firm in the 21st century.
And if you’re a human capital expert, please forgive me, too, for my naive treatise. I am not an expert in human capital (nor do I aspire to become one), but I am deeply passionate about creativity and innovation. However, after investing time on understanding the human capital concept more deeply in connection with an innovation project I’ve been facilitating over the past months, I realized the importance of taking to the next level our appreciation for the value humans provide to creating economic benefits to a company in the innovation economy.
So, we need to envision smart, effective compensation schemes and accounting standards to adequately reflect the value of human assets. And we need to create mechanisms to fairly compensate both the top talents and those who invested in their education and continued professional growth. We need to embrace new creative perspectives (such as my excursion to professional football) and create win-win-win human capital solutions that benefit all stakeholders involved — talents and their families, educational institutions, companies, governments, and societies. That’s for the human capital experts who are deeply passionate about the concept to develop, not for me.
- What do you think of using the professional football transfer system as a springboard to get the human capital concept going? What other benefits and applications do you see in this idea? What other ideas do you have to make the human factor count in business?
- What is your talent all about? Find out with the help of TIPS, Thinkergy’s talent and innovator profiling system created to empower human capital in the innovation age.
- How can we support you in your efforts to transition your business and your people into the innovation economy? Contact us and tell us more about what’s on your innovation agenda in 2021 and beyond.
© Dr. Detlef Reis 2021. This article will be co-published in the Bangkok Post in the coming weeks.