CHAPTER 1

AN INVESTMENT PERSPECTIVE
OF HUMAN RESOURCE
MANAGEMENT
The Strategic View of Human Resources

• Employees are human assets

• Increase in value to organization and marketplace
when investments of appropriate policies &
programs are applied
• Effective organizations recognize that employees
have value
• Much as organization’s physical & capital assets
have value
• Employees are valuable source of sustainable
competitive advantage
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Sources of Employee Value

• Technical Knowledge
• Markets, processes, customers, environment
• Ability to Learn and Grow
• Openness to new ideas
• Acquisition of knowledge & skills
• Decision Making Capabilities
• Motivation
• Commitment
• Teamwork
• Interpersonal skills, leadership ability

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Adopting an Investment Perspective
• Determines how to best invest in people
• Costs
• Human assets become competitive advantage
• Required skills become less manual, more
knowledge-based
• Appropriate, integrated, strategy-consistent
approach is needed

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A Dilemma

•Failure to invest in employees causes

•Inefficiency
•Weakening of organization’s competitive
position
•Human assets are risky investment
• Organization specific training
•Require extra effort to ensure that they
are not lost
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Exhibit 1-2
Types of Organizational Assets/Capital

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Research Findings

• HR practices directly related to profitability &

market value
• Primary reason for profitability:
• Effective management of human capital
• Integrated management of human capital can result
in 47% increase in market value
• Top 10% of organizations studied experienced 391%
return on investment in management of human
capital

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Exhibit 1-3
HR Value Chain

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HR Metrics Are Complex

•90% of Fortune 500 organizations evaluate

HR operations on basis of three metrics:
• Employee retention and turnover
• Corporate morale
• Employee satisfaction
•These metrics do not necessarily illustrate
how HR impacts
• Profits
• Shareholder value
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Mercer Model of Measuring HR Impact

• Identify problem HR can impact

• Calculate actual cost of problem
• Choose HR solution that addresses problem
• Calculate cost of solution
• Calculate value of improvement 6 to 24 months
after implementation
• Calculate specific return on investment
• ROI in human assets often not realized until some
time in future
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Exhibit 1-4
Factors Influencing Investment Orientation

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Investment-Oriented Organization

•Sees people as central to mission & strategy

•Mission statement & strategic objectives
espouse value of human assets in achieving
goals
•Management philosophy encouraging
development & retention of human assets
•Does not treat human assets in same ways as
physical assets

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Investment Orientation Factors

•Senior Management Values & Actions

• Managers need “investment orientation” toward
people
•Attitude Toward Risk
• Investment in human resources inherently riskier
• Human assets never absolutely “owned”
•Nature of Skills Needed by Employees
• The more marketable employee skills, the riskier
the firm’s investment in skill development
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Investment Orientation Factors

•Utilitarian (“Bottom Line”) Mentality

• Attempt made to quantify employee worth
through cost-benefit analysis
• “Soft” benefits of HR programs difficult to
objectively quantify
•Availability of Outsourcing
• Given availability of cost-effective outsourcing,
investments in HR should produce highest returns
& sustainable competitive advantages.

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Reading 1.1: The Hidden Leverage of Human Capital
Model for Management Success

•Strengthen key •Leverage

relationships downtime
•Customers • Use variable-pay
•Employees • Address neglected
areas:
•Shareholders • Infrastructure
• Marketing
• Operations

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Reading 1.1
Model for Management Success

•Refocusing staff on •Building return on

what’s important compensation
• Performance management as • Link base-pay progression to
disciplined, strategic, value- competency achievement
added process • Link incentive pay to annual,
• Clearly define, differentiate & semiannual, or quarterly
balance between core results
competencies & results

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