Human Capital in Euros and Cents

It’s a question you’ve heard all too often: “Why are employees only ever regarded as costs and not as valuable capital?” And “Doesn’t the value of a company’s human capital also contribute to the value of a company?” However, such discussions in the past have generally only paid lip service to the value of the employees and given rise to odd-looking and isolated indicators, which produced results that could not be compared across companies. The questions ultimately remained unanswered and discussions about how human capital should be assessed continued to chase their own tails.
The Saarbrücken Formula, developed at the Department of Business Administration at the University of Saarbrücken, cannot solve all problems in this regard, nor does it intend to. Instead it concentrates on one concrete question – how high is the value of the human capital, expressed in Euros or any other currency, and categorized into variables that can be evaluated in monetary terms?
The Saarbrücken Formula regards human capital (HC) as a “stock value” and therefore takes into account neither the costs of capital acquisition nor the capital usage (productivity). The issue focuses much more on how the human capital is constituted and how it can be influenced to ensure a stable structure or bring about a structural improvement. What is particularly interesting is its recourse to monetary values. For instance, the assertion that motivation has sunk from 3.1 to 3.0 can also be expressed in Euros and Cents. Furthermore, the formula shows the consequences of measures in the area of knowledge management and personnel development, and also throws light on employee motivation with its components “commitment”, the readiness to perform (“willingness”); “context”, the ability to perform (“opportunity”); and “retention”, the inclination of the employee to stay in the company (“availability”).
Further advantages of the Saarbrücken Formula are that it can be calculated easily, standardized to a large extent, used internationally, understood intuitively, and is theoretically sound. At the same time it is also compatible with company evaluation, company rating (Basel II), due diligence, controlling, project management, professionalization of HR, risk management, and innovation management.

Four control components

Saarbrücken Formula
Saarbrücken Formula

According to the Saarbrücken Formula, human capital consists of four components. The value base is made up of the number of employees as a quantity component (FTEi) and the market salary as a price component (li). The value loss or depreciation (wi/bi) provides information about the loss of knowledge in the company, triggered for example by the aging of knowledge over time. Depreciation is counterbalanced by value compensation, which contains the HR development costs (PEi). Finally, the value base is subject to changes since the motivation of each and every employee (Mi) can change. Value base, depreciation, value compensation, and value change are calculated for each employment group (i) and then totaled for the entire company. An employee group is constituted along company-specific strategic lines. Most companies will have identified functional groups in the scope of their organizational structure and procedural organization. Comprehensive methods are available for this identification process, including a standardized motivation survey as part of the Saarbrücken Formula system.
The Saarbrücken Formula is not merely an isolated financial indicator, but rather a comprehensive HR control model that provides information about employee motivation or the dissipation factor of employee knowledge, for instance, and does so in monetary units. This correspondingly enables the relevant parameters to be identified and concrete implications drawn, such as “an increase in personnel development that can generate an effect not only on offsetting depreciation, but also on motivation.”

Sample calculation in a web solution

Web solution and sample calculation
Web solution and sample calculation

A web solution is now available with which companies can determine the human-capital value of their staff using the Saarbrücken Formula at the push of a button. The relevant data is entered into the software in a preliminary exercise. This may include for instance the composition of the employee groups, length of service (firm tenure), or the average personnel development overhead. Other data, such as market salaries or the job-specific ‘life span’ of knowledge can be generated directly by the system. In the present sample calculation, the human capital on the results screen can be analyzed as follows.
A capital loss occurs since new appointments and personnel development do not fully compensate for the natural aging of knowledge. Here a depreciation of 932,628 balances a positive personnel development of 300,000. This is why it is important for knowledge management to adopt an active role. Employee commitment and retention have a positive effect on the figures (788,330 and 472,998), both being key performance indicators that become transparent and controllable in this way.
The value for context gives cause for concern with a total minus figure of around 158,000. This reduces the value of the human capital and is due to the unsatisfactory working environment of the staff. The calculation provides not only the total value of the human capital, which is 5,833,644 in this case. It also makes its value-linked basic structure transparent, communicable, and controllable.

HC calculation at the push of a button

SAP link
SAP link

A continually expanding network of partners is growing up around the Saarbrücken Formula, who compare notes in regularly held working groups. The goal of the network is to further standardize the process of calculating the individual components of the formula. There are various projects involved in this.
A piece of software is being developed in conjunction with Pecaso GmbH that supports SAP users in using the Saarbrücken Formula to calculate the human capital of their company. To do so, the software uses existing data from the SAP solutions for HR and financials. All access operations, calculation routines, and storage of the interim and final results are handled by SAP and embedded in the existing authorization and data-security system. A prototype is already available and is currently being tested by several large companies.
Additionally, the “DAX 30” project is being run in conjunction with PricewaterhouseCoopers Deutschland, where the Saarbrücken Formula is being used to analyze the value of a central employee group across a range of DAX 30 companies. The results are expected in February 2006. The project is intended to throw light on the extent to which the Saarbrücken Formula is a viable tool for company evaluation. Furthermore, a fully deployable stand-alone web solution for human-capital evaluation is now available. This PRISMA web interface was designed for small and midsize enterprises that do not use SAP software. It is independent of the IT systems used in corporate environments, since it accesses an external server. A group of SMEs met for the first time in January 2006 in order to gain an introduction to the topic of human-capital evaluation with the help of the Saarbrücken Formula web solution.
A training version of the Saarbrücken Formula software is used at the University of Siegen and in the MBA program of the University of Saarbrücken among others. This should be generally available by the summer of 2006 and should firmly anchor the Saarbrücken Formula in academic teaching. This simplified training system enables students to determine the human-capital value of companies for training purposes using information that is accessible externally, such as HR or business reports.

The network that has grown up around the Saarbrücken Formula enables various groups to contribute to the standardization process. Discussions on how to calculate the value of human capital will only assume a more objective form once as many companies as possible are deploying soundly based tools such as the Saarbrücken Formula, since this will provide results that are capable of comparison.

Prof. Dr.  Christian Scholz
Prof. Dr. Christian Scholz