by Jan E.G. Koster, a member of NVP, the Dutch Association for HRM consultants & managers

A challenge for new perspectives in Human Resources Management
(originally published in Dutch 12th September 2012)

Jan  E.G. Koster

A real opportunity to acknowledge ‘human capital’ as a company investment, not just in words, but also put into practise.


1. Introduction of the subject

The statement that human capital is regarded as the most important capital of a company is not new. In my opinion, this statement has been used for some 20 years by people who say they  support it, such as CEOs, consultants, HRM advisers and other stakeholders in a company. However, when they are asked why “human capital” is not a part of the company’s financial balance sheet as such, then the question is not understood and they say that the cost of staff is of course in the exploitation account of the company  it belongs to. This is also the major bottleneck: Personnel is considered  a cost item for the company. This essay wants to support  the idea of seriously considering  “human capital”  an investment with all the implications that go with  it. One of the consequences is that the item ‘personnel’ in financial terms is placed on the balance sheet because it belongs there. This essay may be considered  a contribution to new thinking in the field of HRM, not  just as a new thought about human capital, but also to give it the value and position it deserves just like  any other capital investment.


2. Starting point

In an English HRM manual[i]  human capital is defined as follows: the employees of an organization, and their skills, knowledge and experience considered as one of the organization’s assets. In other words, it is about the people who should be considered as a kind of property, knowledge and experience as working capital or simply said as assets. The International Financial Reporting Standards, in short, IFRS, however assumes a different definition. In its edition of International Accounting Standards (IAS) No. 38, the term ‘intangible assets’ is discussed. IFRS applies as a definition of asset:

‘A resource controlled by an entity as a result of past events and from which future economic benefits are expected to flow to the entity’.

In itself, this definition does not conflict with those of the earlier mentioned Dictionary of Human Resources. In addition, a financial balance sheet of a company is generally regarded as a measure of the company’s financial health: it shows what assets are attributed to the company and how these assets are financed with debts and liabilities: the assets and the liabilities.

A  report from the Dutch Central Statistics Institute[ii] published in 2012 focuses on  ‘Human Capital’. This report is based on the 2007 OECD[iii] definition, in which knowledge, skills and competencies are the core. The OECD also regards ‘Human Capital’ as an investment and the author of the relevant chapter 8 deals with  ‘Human Capital’ in the Netherlands and is derived from the gross domestic product (GDP). The author assumes the potential of human capital and the changes in it. The potential includes the persons aged 15-64 years. This differs from the approach as outlined below.


3. Replacement value ‘human capital’

The idea of ​​expressing the balance value of human capital in replacement value is a fundamentally different approach: replacement value is defined as the total cost for  an entrepreneur to regain staff with the same value. . This includes recruitment and selection costs, training costs and costs for dismissal (payroll salary, legal procedures). This point of view has not been chosen in  this essay.


4. Analysis

In Fiducie[iv], a former specialist magazine of the Amsterdam Financial Students’ Association and now a section  in the current FSA magazine, Gert Jan Jordaan MSc. writes as a conclusion and recommendation that …… <quote> Intellectual capital is an underestimated value for companies ……… And transparency about this value is necessary. <End quote>, and  somewhat later <quote> specialists in the field of capital investment believe that if a reliable valuation methodology is available, brand name, research, development and patents need to be activated. But specialists in this field are not in favor of activating the value of staff and customer files <end quote>. An obvious question is why not: Why do brand names, research etc. in a reliable valuation methodology  not balance the balance sheet and staff? The obvious conclusion of the author of this essay is: Provide a reliable valuation method for human capital and it is balanced. In addition, one may wonder if the opinion of the investment specialists should always be followed. Partly because of them we ran  into a deep economic crisis in 2008.


5. Fixed or current (intangible) assets

If a company really wants to consider “human capital” as an investment,  the undeniable question is how can human capital be dealt with in a financially technical sense?

First of all, the entrepreneur will have to wonder in which way human capital can be put on the balance sheet: under fixed assets or current assets? Indeed, the assets and investments are among the assets. The next question is whether this item is liable to depreciation and is it important to know whether this item increases, remains the same or decreases in value each year?

On fixed assets (buildings, production machines, inventory), a certain percentage is depreciated on an annual basis, which gradually reduces the book value of the item. In  business economy there is one exception for depreciation:  there is no depreciation on land. Land keeps its value. It is good to realize that ‘human capital’ changes annually. There are new (inexperienced) employees, there are (highly experienced) employees retiring or leaving the company for another employer. Also, a business unit can be closed or sold, which significantly reduces the balance sheet value. It may also be that another company is taken over, which increases human capital at once.  How to deal with it in financial terms as an entrepreneur?

A small example is  professional football. In this sector, more than in other sectors, the football players, the “human capital”, are the most important working capital. Large  amounts of money are spent and the players are “traded”, mostly with mutual consent, for  example Robert van Persie’s transfer from Arsenal to Manchester United. There is good reason to put the working capital on the balance sheet. And……. What does an investor actually buy when he buys a whole football club? He buys the players with their soccer skills!! Indeed, without the players and their qualities, such a football club is of no value.

If human capital to be considered as floating assets then it can be assumed that these (partly) can also be made available relatively quickly for other purposes. Like financial reserve as current assets, it can also be used relatively quickly for (additional) purchases or otherwise, provided that they are not secured for a long time.

The question is whether personnel can be quickly “detached” from the assigned function or duties imposed on and the released human capacity can be used otherwise. Employers’ call for permission to dismiss permanently employed people without the intervention of a  judge, to accelerate the introduction of a shorter unemployment period and to make it more flexible for human capital is understandable. The idea of ​​considering human capital as a floating asset includes this. For the time being, a position under ‘fixed assets’ is pleaded, although a part of the ‘current assets’ is definitely not excluded.


6. Valuation methodology

Job ranking is a HRM instrument that the management may use to estimate “value”. It is not a function of reward for reward, as many people think. It deals with the balance between the various functions in a company. The result of job evaluation  linked to the salary levels associated with those functions is a different thing altogether. Terms such as employability, competences reward, various forms of performance appraisal are all quite good evaluation standards, but they all go beyond that one point: considering employees in an organization as an investment. In theory, human capital is considered as (main) corporate capital, but in practice, human capital is systematically reduced into a (high) cost item.

In many job evaluation methods the training level required for the performance of a function is an important starting point. In order to be able to function properly as a corporate lawyer, the person must have a lot of legal knowledge. This is minimal at either diploma- or degree-level. Also for a carpenter the necessary certificates are crucial. In order to get a valuation method for the balance value of human capital, a proper step can be made with the methodology described below, which includes these criteria. In this essay, therefore, is chosen for knowledge and experience, on the one hand, and for skills and behavioral competences on the other hand in addition to the definition of the ‘Dictionary of Human Resources’ mentioned above.


7. Knowledge and experience years

If the definition is taken from the previously mentioned HRM manual, then account must be taken of the total knowledge, behavioral competences, skills and work experience years. Present knowledge could be classified at 3 or 4 different levels: CERTIFICATE LEVEL 1, CERTIFICATE LEVEL 2, DIPLOMA LEVEL AND DEGREE LEVEL. It depends all on the nature of the company. In some companies, the diploma and degree levels could be combined, while the certificate levels become more diversified. The different levels may be linked to the corresponding work experience years. In that way, a range of ‘skills’ can arise. For example, if there are 10 Certificate level 2 employees in the company, with a total of 75 years of experience, then it counts as “75 years Certificate level 2”. When In addition, there are 4 diploma /degree level staff with a total of 45 years of experience this is extended with 45 years of diploma/degree level. The experience that employees have gained elsewhere should also be taken into account: A diploma level employee who is employed for a year, but has built up 10 years of experience elsewhere counts for 11 years diploma level. In this way, the entrepreneur can get a reasonable picture of the available human capital in his company at any time. Below is an example of an imaginary financial services company with 50 employees. Out of the 50 employees, 25 have a diploma /degree level, 20 employees have a certificate level 2 education and 5 a certificate level 1 education. For this example, it is assumed that they are all full-timers. Of course, the model can be worked out as well for part-timers separately and  also  in combination with full-timers.


The diploma- and degree-level employees have a total of 422 years of work experience (10x 30 years, 10×10 years, 4x 5 years 1×2 years). Each year counts for 50 points. This results in 21,100 points.

The certificate-level 2 employees have a total of 210 years of work experience (5x 20 years, 10x10years and 5×2 years). Each year counts for 25 points. This results in 5,250 points.

The certificate-level 1 employees have a total of 67 years of work experience (2×30 years; 1×5 years; 2x 1years). Each year counts for 10 points. This results in 670 points. Crucially, there is a sufficient difference between the different levels of education in order to make the difference in the balance sheet clear.

In terms of education and experience, this company has over 27,020 points. This can easily be expressed nominally in money, for example, one point is equivalent to € 1.00 or € 1.25. For example, human capital can be valued at € 27,020 or € 33,775 in terms of knowledge and experience years.


8. Skills and behavioral competences

In addition, the skills and behavioral skills have  to be made visible. These  cannot be indicated as concretely , but it is not impossible to do so. Depending on the number of different behavioral competencies, levels can be applied in the same way as with a competency reward system: basic (1st level), experienced (2nd level) and excellent (3rd level). For each behavioral competence it is then possible to figure out ‘about how much competence X on the three levels the company has’. Below is a detailed example, based on four key (business) competencies: integrity, customer orientation, (external) environmental awareness, and (internal) organizational sensitivity.

The example company is again the financial service provider with 50 employees. It has been selected for 4 business competencies, and each employee must, to a certain extent, have a certain level of these competences – depending on the job performed.

In terms of integrity it is assumed that 20% should have 1st level, 70% over 2nd level and 10% over 3rd level.

With regard to customer orientation it is assumed that 10% should have 1st level, 80% over 2nd level and 10% over 3rd level.

As regards (external) environmental awareness, it is assumed that 10% should have 1st level, 40% over 2nd level and 50% over 3rd level.

In terms of (internal) organizational sensitivity, it is assumed that 10% should have 1st level and 90% over 2nd level.

Assuming that each of these 4 competencies is equally valued, a calculation can be made as to what the total value of this is in points: 10 points for basic level, 25 points for practiced level and 50 points for excellent level, producing the following totals :

  • Integrity: 10×10 + 35×25 + 5×50 = 1.225 points
  • Client oriented: 5×10 + 40×25 + 5×50 = 1,300 points
  • Environmental awareness: 5×10 + 20x 25 + 25×50 = 1,800 points
  • Organizational sensitivity: 45×25 + 5×10 = 1.175 points.


9. Transferring points into money and the balance sheet

Assuming that each point – regardless of origin – stands for one euro (€ 1), then the total investment ‘human capital’ on the balance sheet represents € 27,020 + € 5,500 = € 32,520. However, assuming that each item, stands for € 1.25 then the total amount of human capital on the balance sheet will be € 40,650. The table above shows this clearly. The question to be asked is whether the relationship between the balance sheet value of knowledge and experience on the one hand and skills and behavioral competencies on the other hand is correct? Secondly, whether the relationship between the balance sheet value of human capital and the operating costs of the human capital is realistic? After all, the salary costs and other direct staff costs will remain on the operating account. When the effect of this way of thinking is compared with job assessment in connection with competence reward, this shows a ratio of 83-17. There is a strong case for  companies agreeing upon an introduction of competence-based pay for a substantial part of the total fixed salaries for their employees. In this way, an entrepreneur really contributes towards competence-based pay. This is also mentioned in the article “Functional compensation” mentioned above.


10. Unpaid Professionals

Particular attention should be paid to those organizations that mainly work with volunteers . This situation is found in many sectors. It is an important step in the right direction to see this special human capital, the volunteers, as an investment and  to really consider this human capital as an investment. This human capital is not less important than paid employees. A term such as ‘unpaid professional’ is therefore much better than the term ‘volunteer’. After all, paid employees work voluntarily. They only have a contract of employment, whereas the unpaid professional just has a voluntary agreement. However, such a volunteer agreement is not free of obligation. Commitments and duties have been agreed upon. And yet……. In many cases volunteers are still considered as second best. It is a big threat when someone applies for a job as a volunteer and points out to his conversation partner that he wants to do his job as an unpaid professional, simply because it is an interesting job to do! Volunteers are still asked to do the work  the employees haven’t  got the time for. The health care sector has many examples of this.

What differs from the paid employees is that there is no need to make a distinction with this group in terms of levels, as this is usually not a selection criterion for recruitment and selection. It does not matter if there is a certificate-level 1 person or someone who has passed his MSc-degree. As  non-paid professionals, people  can be involved in different organizations at the same time. Of course, the employability must be tailored and the person will spend more time in one  organization  than in the other one, while being recognized by several organizations as a non-paid professional and not as a volunteer.

In order to allow the unpaid professionals to take an investment on the balance sheet, you could count  the number of unpaid professionals and put this at certificate-level 2. For example, in a health care organization, 50 people work as a volunteer with an average work experience of 25 years, then it represents 50 x 25x 25 = 31,250 points. Whether those points represent a balance on the balance sheet of € 31,250 again, like the example of the financial service provider, is the question. However, a correction must be made to hours because no one works  full time as an unpaid professional. Based on availability of 1 day / week, this amount should be multiplied by 20%. This results in a balance sheet value of € 6,250.

As regards the required competencies, health care can also be chosen for the same competencies  chosen previously.. Assuming that each of these 4 competencies are equal in value, a calculation can be made as to what the total value is in euros (€). Displayed in a table® as follows:

11. Benefit for Dutch and European companies.

What value does this way of thinking have in the Netherlands and in Europe? It is indeed a very relevant question. If after all it doesn’t make sense in the long run, one should not rack his brains.

The usefulness is that human capital is also really seen as an investment. In addition, the balance between assets and liabilities becomes wider. The company will look financially technically healthier. Mainly since this crisis, starting in 2008 commercial banks have been  reluctant to provide loans to companies to enable new investments. Due to a healthier balance, commercial institutes and commercial banks are likely to be willing to finance new investments. That’s the profit for Dutch and European companies..


Originally in published in Dutch, September 2012

Translated into English: July, 2017

Author: Jan E.G. Koster BSc

Thanks to:

R.B.J. Göttgens, Novel Groep Accountants & Consultants, Winterswijk, The Netherlands;

A.A.M. Stappers, former Manager HRM, Zorggroep, Noord Limburg, Venlo, The Netherlands.

Special thanks to Margaret Paige for her valuable contribution in reviewing the English version.


12. The author

The author (* 1949), originally trained as a tropical agriculturist at the Deventer Diploma level School for Tropical Agriculture (1971-1976), worked for quite a few years  for NGO’s for development cooperation both abroad and in the Netherlands. In 1990 he made a professional switch to HRM. From 1995 – 2007 he was the owner of  F-waarde and worked partly under his own name, and partly under license in terms of job descriptions and job assessment, performance appraisal, remuneration and related topics. He acquired his clients  in the sectors health, education, government and businesses. He joined the NVP, the Dutch Association for HRM in 2000 and wrote an article on integration of job evaluation and competency reward in its magazine “Personeelbeleid” (Nov 2004). Now he is socially involved in various organizations, among others, as a board member and consultant for the Philanthropic Consultancy Foundation (STIDAD) in Houten and as a senior expert at the PUM Foundation (related to VNO-NCW, the employers’ association) for short-term philanthropic consultancy in favour of Small and Medium Scale Enterprises (SME) in developing countries.

LinkedIn account:

[i] Dictionary of Human Resources and Personnel Management by Ivanovic A and Collin P.H. (Bloomsbury publishing, ISBN 07475 6623 2)

[ii] CBS: The Economy in The Netherlands 2011 (September 2012), chapter 8: The human capital in figures.

[iii] OECD Organisation for Economic Cooperation and Development

[iv] Fiducie, November 2005, volume 1: “intellectual capital, the king on the Financial Balance Sheet”.