06 Feb CONTINGENT TALENT STRATEGY: TAKING A PAGE FROM FINANCE
In a world where 80% of the average company’s share price is created by that company’s intangible assets (brands, patents, relationships, processes, etc.), human capital and financial capital are connected at the hip. Companies need both to succeed: financial capital to place a business bet and human capital to win it. Given this symbiosis, what can we learn about human capital strategy from the more established practice of managing financial capital?
HR needs to take a page from the finance handbook on capital structure. Financial capital is the economic lifeblood of an enterprise, but of course, this capital comes at a cost. Virtually all companies choose to meet their capital needs through a combination of selling equity shares and securing debt—a mix that optimizes the cost of capital but requires a continuous balancing act.
Debt has advantages:
Interest cost is normally lower than what equity holders expect from dividends and capital gains.
Debtholders do not dilute equity voting rights.
Transaction and regulatory costs of debt are lower than the costs of equity.
And it has disadvantages:
Interest and principal must be paid on an inflexible schedule that stresses cash flow.
Debtholder claims take precedence over equity in the event of a bankruptcy.
The interests of debtholders are not as aligned with the business as are those of equity holders.
Well-managed companies often supplement their equity capital with debt to the tune of 25–30% (depending on their risk tolerance), balancing the advantages and disadvantages. Finance managers bring high value to their companies through this well-honed strategy.
In human capital terms, the advantages and disadvantages of choosing between regular employees and contingent talent nearly parallel those of choosing between equity and debt. For example, although contingent talent has an immediate cash cost that may exceed that of an equivalent employee, employment is normally more expensive in the longer term (long-term incentives, development, etc.). Also, contingent talent is more flexible in terms of gearing capacity up or down, but regular employees are more engaged because they have a greater stake in the business.
The reasons for managing the mix of financial capital center on ensuring resource capacity and flexibility, optimizing the cost of capital, and providing access to the broad capital markets. Companies have the same needs with respect to human capital, and for the most part, these go unmanaged. It is time for HR to take the reins and implement strategies that optimize the resource companies count on them for: human capital.
By Tom McGuire
Tom McGuire is the talent strategy leader at Talent Growth Advisors, a human capital strategist, and a former CFO whose brilliance is overshadowed by his creativity. He is also the author of Talent Valuation: Accelerate Market Capitalization through Your Most Important Asset (2015). He can be reached at Tom@talentgrowthadvisors.com.