When one considers the total assets of a company, there is one that stands out by its inherent capacity to create and add value. All the other assets, such as cash, plants, warehouses, transportation, machines and equipment, energy are all inert, and they do provide not any value unless a human being comes into the picture and puts them into use.

This particular asset, human capital, is the economically most important, but also the one that is most difficult to measure. Beyond trite truisms and platitudes of how important people are, human capital essentially allows leverage of the assets one finds back on the balance-sheet. A very crude measurement of the leverage generated by human capital could be expressed by the difference between the market value and the book value of a company.

Although human capital is the economically most important asset, it almost never appears in any book on business ratio's. I have in front of me "key management ratio's: the 100+ ratios every manager needs to know", and there is none expressing economic value of employee performance; on the contrary the underlying accounting leading to those ratios would treat employee related metrics as a cost rather than as leverage. The reason is that accountings main role and focus is on the conservation of assets, moreover, its focus on the past; whereas human capital related metrics look to the other direction, the future.

Value-add starts with the definition of the goals of a company, goals which trickle down in an operational sense through the business units to the human capital, which is organized and invested accordingly with other resources. Value-add then comes through the creation of revenue, efficiency, the reduction of expense, leading to profitability and other goals of the company. A goal denotes a direction of desired action into the future, hence the inadequacy of traditional accounting into measuring employee performance.

One can already intuitively feel the importance of management in this picture: the leverage of human capital through goal definition, through its allocation in tasks and processes, themselves organized according to specific business units leading to required outputs in quality, productivity and service. Hence great management will take into account employee performance, and the only manner this can be realized is through adequate and effective metrics, which I will cover in a follow-up post.