Valuing human capital career development: a real options approach

Abstract

PurposeThere has been a long controversy in the literature on assessing the value of human capital – a long-sought but elusive and challenging task. The ability to quantify flexible human capital (FHC) has been a shortcoming in extant literature. We make a meaningful contribution by showing how real options (RO) methodology can be used to quantify FHC and we provide complementary case study evidence from Fortune 500 “best companies to work for” that the value of employee career development is higher in more volatile sectors in line with real options theory (ROT).Design/methodology/approachThis article provides a prescriptive RO methodology for adopting a more flexible, staged SHRM organizational perspective suitable for uncertain environments, and explores its theoretical and empirical implications through the dual use of RO methodological modelling and multi-case study data involving ten Fortune 500 companies. The case study approach is aimed at creating managerially relevant knowledge. The relevance of our approach to managerial practice is shown through guidelines on how a company like Google might use the RO methodology to estimate the career development option value so as to inform its internal development program for employees to create and capture value.FindingsOur focus is on the staging flexibility in HR as exemplified by the internal career development process. This process can be viewed as a multi-stage (compound) option involving various types of HC uncertainty, HC options, and HR practices. We model staging HR deployment via the option to promote staff employees to middle-level management, itself embedding the option to rise to the top management. To empirically validate our valuation approach, we present case study research that enables quantifying the option value of a career development program and allows assessing how much a mismatch exists in a sample of ten public U.S. companies.Research limitations/implicationsThe overall staging quantification idea is important as it offers guidance as to how to value HR as a sequential investment process under uncertain demand or skill conditions. The analysis is limited to the extent that staged career development might interact with other types of human capital (e.g. switch and learning) options and HR practices (e.g. training). Human resources may also interact with other organizational intangibles, such as brand equity. Our analysis also does not account for psychological considerations from the employees' perspective, such organizational commitment facilitating trust to enable reciprocal commitments, which remains a fruitful subject for future extensions.Practical implicationsROT can provide useful guidance and tools for HR scholars and managers. By keeping tabs on HR-based flexibility value and focusing on the key input variables driving HR flexibility, HR managers can determine the flexibility value unleashed from staging the deployment of HC resources in the face of unanticipated demand and skills shifts.Originality/valueThis is the first paper that attempts to quantify the value of staged career development flexibility using the RO methodology. This article will be cited for its innovativeness in being the first to quantify the value of human capital's contribution to corporate value creation and provide objective evaluation in the context of organizational career-development programs. Besides providing useful insights to scholars, the article also demonstrates how the RO methodology can apply to actual companies and inform managerial practice offering guidelines of relevance to HR practitioners on how to quantify the value of staged HC development in an uncertain environment.