Impact of Human Capital Incorporation on Economic Value Added of Large Scale Organizations: A Conceptual Managerial Decision Making Approach

Abstract

In today’s turbulent times, Corporate have realized the importance of human capital in the corporate world. But there was no such method suggested to show human capital in the framework of conventional accounting. After an exhaustive literature survey, the paper has focused on financial approach towards human capital management and has developed a conceptual managerial decision making model of Economic Value Added (EVA) with incorporation of human capital in the calculation of Weighted Average Cost of Capital (WACC) which will help the organizations in the long run to know the real value of EVA which has become the real indicator for the increase or decrease in shareholders fund. The appropriate value of EVA differs from organizations to organizations depending upon different HR practices, size, and nature and planned outcomes of the business.

The paper first has explored the concept of EVA and Human Capital Management and economic definitions cited in Google website and has attempted in citing human capital definition which has been derived from the conclusion of the study. The paper has also attempted in framing a calculation methodology (Dash. Sujata. P (2013), “Inclusion of human capital in the calculation of WACC”, European Scientific Journal, Vol.9, No.28, pp. 405-421) to find out the true economic profit that is the EVA of any organizations in Indian context irrespective of manufacturing and service sector industries which gives an insight about the appropriate value which directly reflects the true wealth of the shareholders after incorporating human capital in the calculation of WACC. Any organizations can utilize the calculation methodology and can thereby enhance the performance of their organization using EVA because EVA is a financial performance metric that measures value based on adjusted accounting data to access financial performance and help a company grow. (Stewart, p.3, Makelainen & Rozticki, 1998, p.7). EVA measures the profitability of a company after taking into account the cost of all capital including equity. It is the post -tax return on capital employed (adjusted for the tax shield on debt) minus the cost of capital employed.

The paper finally describes the conceptual managerial decision making model of EVA with inclusion of human capital and tested the role of human capital management in economic value addition of large scale organizations empirically.

Keywords: Human Capital, Human Capital Management, Economic Value Added, Weighted Average Cost of Capital.