Why Hiring is Hard - How Financial Accounting Screws Up HR!

I made a post last week about an article I came across when trying to figure out why hiring has become so hard. After Googling for a few hours and reading this particular article, it reminded me of an interview I had with Dave Ulrich , where he shed light on a truth many leaders overlook: The most important or best thing HR can give an employee is a company that wins in the marketplace.

Dave further shared this graphic and highlighted just how important employees are to a company's success. Talented employees with a positive experience are a huge asset since employees who have good experiences will impact many stakeholder outcomes.

When speaking with my clients, and further emphasized in countless discussions with job seekers, it's clear there's an undiscussed math lurking in the shadows of businesses, creating a rift between ambition and reality.

Here's the paradox: Organizations go to great lengths to support their employees, offering not just extensive health plans and paid time off, but also embracing flexible work arrangements, comprehensive mental health support, robust career development programs, inclusive diversity and inclusion initiatives, and even financial wellness tools. These efforts signal a clear intent: to create an environment where employees feel valued, supported, and equipped to excel. The end goal? To forge winning teams poised for market success, where the investment in employee well-being is seen as integral, not optional. But here’s the catch - all these must be achieved while keeping an eye firmly on profitability.

So, how does financial accounting complicate this narrative? It's not about assigning blame but understanding the systemic challenges within financial accounting. The crux of the issue lies in the Generally Accepted Accounting Principles (GAAP), which influence how companies report their finances. These principles necessitate that companies categorize costs clearly and conservatively, leading to an unintended consequence: employees, despite being the backbone of any business, are classified as expenses (liabilities) rather than assets.

Why the Distinction Matters: In financial terms, assets are resources expected to deliver future economic benefits, like equipment or patents. In Rich Dad Poor Dad's terms, assets make you money and liabilities cost you money. Employees, whose contributions fuel innovation, drive revenue, and sustain the business, don't fit neatly into this category due to the challenge of quantifying their future economic benefits in financial statements. Outside of these easy-to-identify contributors, most positions in an organization would clearly classify as a liability. This classification skews the balance sheet, emphasizing costs over the long-term value employees bring.

But here lies the core issue: Employees are far from liabilities. They are, unequivocally, an organization’s most significant asset. Acknowledging this is the first step towards assembling a championship team. It's about looking beyond the balance sheet, recognizing the intrinsic value of employees, and compensating them through competitive pay, comprehensive benefits, flexible working conditions, and a culture that champions their growth and well-being.

Expanding, we need to address the deeper, systemic challenges that financial accounting imposes on HR. These practices not only distort hiring, training, and benefits practices but also shape a company's approach to talent management in ways that can stifle innovation and growth. The peculiarities of financial accounting in the United States, for instance, treat training and development not as investments but as current expenses. This perspective disincentivizes long-term investments in human capital, despite the obvious benefits for company performance and employee satisfaction.

Moreover, the real-world impacts of these accounting practices are far-reaching. Industries across the board—from tech to retail—have felt the strain, with companies often opting to cut costs in ways that ultimately harm their ability to compete and innovate. Examples abound of firms skimping on training or delaying hiring, only to find themselves at a disadvantage in the marketplace.

What's needed is a shift in both corporate and accounting cultures, and further education for employees, job seekers, and students before entering the workforce - a move towards recognizing and reporting the value of human capital more explicitly. Simple, modest additions to reporting requirements could significantly enhance how companies view and invest in their employees. Highlighting successful case studies, we see organizations that buck the trend, embracing more enlightened accounting practices that acknowledge the true value of their people.

Leadership plays a pivotal role in this transformation. Visionary leaders must champion the cause, advocating for accounting reforms that reflect the true contributions of their workforce. Policy changes, too, are essential. Drawing on international examples, we can advocate for standards that allow companies to more accurately report the asset value of human capital.

Implementing these changes won't be easy, but the path forward is clear. By engaging stakeholders across the spectrum—investors, regulators, and employees—we can foster a more holistic approach to valuing human capital. This approach not only benefits employees but also enhances company performance, creating a virtuous cycle of growth and innovation.

Recognizing the intrinsic value of employees beyond the balance sheet is more than just a moral imperative; it's a strategic necessity. By expanding our understanding and changing how we account for human capital, we can bridge the gap between ambition and reality, forging companies that truly win in the marketplace.