Companies Don’t Know How to Measure Their Human Capital Other Than as a Labor Cost–And it’s Hurting Profits.

Tensie Whelan

By Tensie Whelan and Ulrich Atz

Companies have an easy way to boost their financial performance: Hire the best employees at all levels of the company, invest in them, and retain them. 

It sounds easy. But more than 51% of the Russell 1000 are not paying their employees a living wage. Why not? Because companies are pressured to reduce costs in order to return more money to shareholders and labor is the biggest “cost” for most companies. Unfortunately, this approach may actually depress returns to shareholders in the medium and long term.

Our research has found that we are not using decision-useful metrics when it comes to corporate employees in the U.S., which means we are not properly assessing human capital’s role in corporate financial performance. Neither our accounting methods nor our reporting metrics are up to the task.  Current financial accounting assesses investments in employees as labor costs (despite those investments potentially leading to higher productivity and retention). Those costs are not detailed on financial statements in the U.S. (and only about 15% of firms disclose them), even though employee-related spending is responsible for typically more than half of a company’s operating costs.

Read the full Fortune article.
Tensie Whelan is a Clinical Professor of Business and Society and Director of the Center for Sustainable Business.