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 improvement initiatives.

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.

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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 company’s 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 model’s financial calculations, all of which are directly related to your specific HR investment initiative.