Valuing human capital career development: a real options approach
| DOI | https://doi.org/10.1108/JIC-06-2019-0134 |
| Pages | 781-807 |
| Date | 20 May 2020 |
| Published date | 20 May 2020 |
| Author | Francesco Baldi,Lenos Trigeorgis |
| Subject Matter | HR & organizational behaviour,Behavioural accounting,Accounting & Finance,Organizational structure/dynamics |
Valuing human capital
career development:
a real options approach
Francesco Baldi
Department of Management, University of Turin, Turin, Italy and
Department of Economics and Finance, LUISS Guido Carli University, Rome,
Italy, and
Lenos Trigeorgis
Bank of Cyprus Chair, Faculty of Economics and Management, University of Cyprus,
Nicosia, Cyprus
Abstract
Purpose –There 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/approach –This articleprovides 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 throughguidelines 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.
Findings –Our focus is on the stagingflexibilit yin 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 stagingHR deploymentvia the option topromote staff employeesto middle-
levelmanagement,itselfembedding theoption to riseto the top management.To empiricallyvalidateour 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/implications –The 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 implications –ROT 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/value –This 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.
Keywords Career development, HR flexibility, Human capital value, Real options, Strategic human resource
management
Paper type Research paper
Real options
approach for
human capital
781
The current issue and full text archive of this journal is available on Emerald Insight at:
https://www.emerald.com/insight/1469-1930.htm
Received 1 June 2019
Revised 18 August 2019
7 November 2019
10 January 2020
Accepted 5 February 2020
Journal of Intellectual Capital
Vol. 21 No. 5, 2020
pp. 781-807
© Emerald Publishing Limited
1469-1930
DOI 10.1108/JIC-06-2019-0134
Introduction
This article shows how to quantify the value of a company’s sequential (staged) career
development program under uncertainty using real options (RO) methodology. There has
been a long controversy in the literature on assessing the value of human capital –a long-
sought but elusive and challenging task[1]. The ability to quantify flexible human capital
(FHC) has been a shortcoming in extant literature. We make a meaningful contribution by
showing how RO methodology can be used to quantify FHC and providing 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 realoptions theory
(ROT). The article is innovative in containing recent data on career path on Fortune 500 firms
that allow to quantify the value of human capital’s contribution to corporate value creation
along the whole career path and providing objective evaluation in the context of
organizational career development programs.
The paper builds upon and advances long-standing and ongoing debates in the
management field concerning the organizational view of career-development programs (Iles
and Mabey, 1993;Herriot et al., 1994), flexible human resource management and its link to
performance evaluation (e.g., Martin-Alcazar et al., 2008;Whyman et al., 2015), as well as the
use of RO decision flexibility addressing the tradeoff between flexibility and commitment,
e.g., previously applied in the context of equity ownership vs. acquisitions (e.g., Dalziel, 2009;
Ahammad et al., 2017). This paper aims to value a sequential investment process in a different
organizational context involving human resource (HR) career-development programs.
Few past attempts to apply ROT to the HR context have been qualitative and limited in
scope, primarily addressing the issue of HR practices either individually, for example HR
training (Berk and Kase, 2010), or collectively (Bhattacharya and Wright, 2005). The
literatures on ROT and HR flexibility are reviewed in the next section. ROT has been used
more broadly in finance and strategy to improve strategic decisions, for example in valuing
sequential problems such as R&D viewed as compound options or in governance choices, for
example between flexible equity ownership and committed acquisitions mode (Dalziel, 2009;
Ahammad et al., 2017). Naturally there is a need, and value added, to use a similar framework
to improve decisions as to how we manage people’s career development.
The paper illustrates an innovative application of RO methodology to the domain of
strategic human capital management (SHRM), specifically how to quantify the value of an
organization’s flexible HC career-development program to increase its ability to create and
capture value. As such, it 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 modelling and
multi-case study data involving ten Fortune 500 companies. The case study approach is
aimed at creating managerially relevant knowledge (Eisenhardt, 1989;Yin, 1994;Eisenhardt
and Graebner, 2007;Gibbert et al., 2008). In this vein, the article combines the RO
methodology with the case study approach in an effort to apply and extend ROT to the SHRM
context with specific focus on employees’career development from the organization’s
perspective. It provides guidance on how a company like Google might use the RO approach
to inform its staged career-development program to create and capture value.
Our ROT framework is well-suited to address a recent call by Kryscynski and Ulrich
(2015) “for the field to ground itself in practical phenomena so that its insights moving
forward can be both academically rigorous and practically relevant.”Noting that in the
academic literature they do not find “much about how a company can redirect the actions and
behaviors of its critical human capital to deliver on the changing demands of the external
marketplace”(p. 357), they encourage “new conceptual frameworks and assumptions by
bridging the theory practice gap”(p. 359) and recommend to “tie theoretical explanations to
observable phenomena”using theory to help explain interesting phenomena (p. 367). They
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