What are you worth?

Dec. 7, 2005
Knowledge and experience are valuable assets
By Paul Studebaker, editor in chiefAt least once a year, prudent companies (and many individuals) take the time to add up their net worth: the sum of the present values of their assets. These calculations always include tangibles like buildings, production equipment and inventories. Sometimes they include dollar amounts for intangibles like patents, customer relationships and brands. But they almost never account for human capital: employees’ knowledge and capabilities that are essential to company success.November 11 marked the passing of noted author, management consultant and professor Peter Drucker. In the 1950s, General Motors invited him to examine its corporate structure. In the resulting book, “The Concept of the Corporation,” Drucker recommended that decision-making be decentralized, managers be hired from “a wide cross-section of personality types” and long-term goals be met through a series of short-term objectives. He also said that a manager’s most important quality was “integrity.” The book was a best-seller, but GM refused to implement his recommendations.Though he always recognized that corporations exist to generate profit, Drucker was the first to put forth the view that employees are a resource, not a cost.

Some claim the capital value
of a person
ranges from $500,000
to $5 million.

The concept of human capital has been consistently championed by Nobel Prize-winning economist Gary Becker. He defines it as the value of a person based on the kind and amount of particularly useful knowledge the person possesses, on the premise that the more useful knowledge any person has, the more value the individual adds to society.Becker claims that when you look at how companies spend money, a typical manufacturing company’s assets are only about 23% physical – the balance is represented by its employees.“Tangible forms of capital are not the only ones. Schooling, a computer training course, expenditures of medical care and lectures on the virtues of punctuality and honesty also are capital. That is because they raise earnings, improve health or add to a person's good habits over much of his lifetime,” Becker says. “They are called human capital because people cannot be separated from their knowledge, skills, health or values in the way they can be separated from their financial and physical assets.”Leonard Nakamura of the Philadelphia Federal Reserve estimates that the investment in intangible assets by U.S. corporations has a value of roughly $5 trillion, which is equal to about half of their market value, according to a recent white paper by Trek Consulting LLC. Trek’s services include helping companies establish and track an “IC rating” for their intellectual capital.The consulting firm seems to focus on knowledge-economy companies that have essentially no physical assets, not industrial manufacturing facilities, presumably to help them encourage investors. But that makes its observations no less interesting if you’re thinking about evaluating yourself or your coworkers.Trek claims you can understand, rate and strategize improvements of intellectual capital by grading it from three viewpoints: efficiency (where it is today), renewal (the state of its innovation processes) and risk (where it could lose ground). The IC rating also grades 11 subcategories in each area, including organizational capital (intellectual property, processes and practices), human capital (management and employees) and relationship capital (brand, customer capital and vendor network).As you go about your year-end contemplation of where you are, what you’ve done and how you might make 2006 a better year, why not give some thought to your human capital? You could add up, evaluate and total your team’s years of experience, certifications and capabilities that contribute materially to the success of your plant, see if you’re going in the right direction and determine any weaknesses you might work on during the coming year with, for example, training or hiring strategies.On a personal level, think about what you’ve added to your knowledge during the past year, how much your technical, interpersonal and management skills are worth, and whether or not you could use some formal or informal education or inspiration.Some Becker followers claim the capital value of a person ranges from $500,000 to $5 million. When it’s time to plan investments, spending money on preserving and improving employees’ useful knowledge should be considered as seriously as any other plant or equipment project.

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