Many frequently deployed phrases about employees indicate that employees are assets. “My key assets go home at night,” managers may say, or management teams may reward employees for the assets they bring to the table in terms of talent and expertise.
Accounting Principles May Affect Perception
But in fact, accounting principles used in almost every company classify employees as expenses, rather than assets.
You may say, “yes, but that’s only accounting. It doesn’t affect how we treat our employees – or how we reward them, encourage retention and company loyalty, or how we promote employees.” Business leadership may believe that it’s entirely possible to account for employees fiscally as costs but to account for them culturally and psychologically as assets.
But in fact, the reality that employees are viewed as costs in a fiscal part of the firm may have both symbolic and literal weight. One of the crucial issues facing U.S. businesses, for example, is the rise of artificial intelligent (AI) and deep learning.
It is estimated that jobs will be increasingly automated and processes more frequently run by machines in the coming years. As a result, companies may feel pressure to automate and reduce employee costs. That pressure can only be exacerbated by managers who have been trained, at least in part, to regard employees as costs on a line item, rather than assets.
For numbers-oriented management teams, the vision of employees as costs may make slashing those expenses of paramount importance. Personnel costs are a large part of any firm’s budget, so scanning for large costs to pare down or eliminate as a focus will lead many managers to assume that reducing employee costs is the best business strategy.
But is it? After all, human capital can innovate and imagine new products. Human assets can analyze evolving business conditions and adapt. Humans can see potential and current problems that systems may not view as issues. Human assets can make sure that customers are satisfied and pleased with products.
In standard accounting principles, assets are defined as things with future economic value. Office equipment, for instance, or raw materials, are assets. But the fact is, top-notch employees also have future economic value.
Companies might benefit from accounting changes to better capture employees as assets.
Should Accounting Change?
A recent Harvard Business Review article argues that accounting should change to give a fuller picture of how employees contribute to a company. It points out that firms must account for capital assets that are physical, but not for human capital. This may have been prudent for a manufacturing economy, but not for a more goods, services, and knowledge-based one.
HBR posits that current accounting principles lead to an underemphasis on investing in workers, rather than simply paring down their involvement and their salaries. If worker-based assets aren’t measured, companies may not be able to reward them adequately. Moreover, a company can be rewarded for automation, but not for investing in its workers through training or other programs.
In addition, investments in employees aren’t often documented, so successes and failures aren’t systematically quantified or known. That may discourage companies from developing training and other programs. In fact, one of the arguments against training is sometimes that a firm trains employees that other firms then use to their advantage. Without documentation, there’s no effective counterargument.
Should accounting change to better account for human capital as assets? Perhaps. According to the HBR, the Securities and Exchange Commission is already exploring how this might be done.
In addition, business leaders should take steps to actively appreciate the contributions of their human capital.