We have successfully developed and applied, with a number
of client assignments, an interactive,
software product HR Valuation Model
that can be used to measure, either on a pro
forma or actual basis the return-on-investment (ROI)
and net present value (NPV) of planned or ongoing performance
The two, key financial metrics
that are provided from the modeling process are ROI and NPV.
ROI compares annual cash returns with the original
cost of the HR initiative; NPV recognizes that returns from
an HR initiative occur over an extended period of time subsequent
to the initial cost outlays, and must be discounted.
HR Valuation Model, therefore, provides a
practical and effective way of planning for, conducting, and
completing what if or sensitivity analysis regarding
the financial valuation of investments earmarked for various
types of HR initiatives.
The HR Valuation Model can also be used for determining the
financial impact of various types of HR initiatives as well
as other types of outcome metrics, such as retention, loyalty,
absenteeism, and commitment.
For example, it can be used for determining the financial
impact of leadership development initiatives on executive
performance and job satisfaction. Or it can be used for valuing,
financially, the projected payoff from investments in work
life programs on retention and commitment.
The flexible modeling process afforded through HR Valuation
Model combines the power of valuation analysis
with that of capital budgeting techniques to produce HR valuation,
or financial, results.
In applying the HR Valuation Model to your specific needs,
we incorporate your companys cost of capital, or discount
rate, thereby recognizing the time value of money invested
in the HR initiative. Also, we use your marginal tax rate
to ensure that the results from the modeling process are calculated
in after tax dollars, similar to other capital budgeting decisions
that your company makes.
In all, there are nine input values incorporated
into the models financial calculations, all of which
are directly related to your specific HR investment initiative.