Financial Perspectives on Human Capital: Building Sustainable HR Strategies
This paper explores the complex field of sustainable human resources management (HRM) with a specific focus on integrating financial management tools into HRM strategies. This study proposes a novel and practical framework that systematically prioritizes sustainable practices within HRM. Our analysis of existing knowledge leads to a solution-oriented approach that substantiates the financial justification for robust investments in employee development initiatives. This research addresses essential questions surrounding the adaptation of corporate finance tools to meet the evolving requirements of HR. The scope extends to the systematic examination of the financial feasibility of HR development initiatives, with the proposed model offering practical insights for informed decision-making within organizations. Furthermore, this paper aims to highlight the individuality of its findings due to the lack of comparable publications on the utilization of financial tools in HRM.
The primary objective of this research is to develop a theoretical framework for integrating financial analysis into human resources development (HRD) from a sustainable HRM perspective, with a focus on proposing relevant financial tools. In this paper, we first conducted a review of the existing literature related to sustainable HRM, HRD, financial analysis, and their intersections. We opted for presenting the literature review chronologically to illustrate the evolution of the research in this field of study. This paper organizes the existing literature based on the sequence of when the studies were conducted or when key concepts emerged to provide a clear picture of how the field of sustainable HRM has evolved, starting with earlier works and progressing to more recent research. The second part of the paper elaborates on some financial tools that can be used to substantiate the investments in human resources development (HRD) as an important part of sustainable HRM.
The novelty of our paper proposing financial tools to substantiate investments in human resources development (HRD) lies in its ability to bridge the gap between theoretical concepts and practical application. The paper brings together two critical areas of organizational management: HRD and financial analysis. It provides a conceptual framework for integrating financial analysis into HRD, which is a novel approach and helps organizations align their human capital investments with financial goals. The paper also offers a holistic view of HRM by considering the financial aspect. This perspective allows organizations to see HRD as an investment with potential returns rather than just a cost, which is a paradigm shift from traditional HR practices.
Sustainable HRM focuses on fostering socially and environmentally responsible HR practices within organizations. Sustainable HRM is concerned not only with social and environmental sustainability but also with financial sustainability. When integrated with HRD, it promotes the development of employees’ skills, knowledge, and abilities in ways that align with sustainability goals. This alignment creates a workforce better equipped to drive sustainability initiatives. Financial analysis, on the other hand, provides a quantitative lens through which organizations can evaluate the impact of HRD efforts on their financial performance. By employing financial tools, organizations can assess the economic benefits and costs associated with HRD programs, thereby substantiating the value of sustainable HRM practices. These intersections enable organizations to not only enhance their sustainability efforts but also justify their investments in human development by demonstrating how such investments contribute to long-term financial viability and competitiveness. As such, the convergence of sustainable HRM, HRD, and financial analysis represents a strategic and holistic approach to achieving both sustainability and financial objectives within organizations.
2. Theoretical Foundation
When considering stakeholders and their levels of satisfaction, it is important to be aware of the diverse nature and perceptions of their satisfaction. Simplistically, shareholders are typically pleased by higher dividends, employees strive for larger paychecks, governments expect companies to pay taxes, suppliers are satisfied when their debts are settled upon maturity, and customers are pleased with a good price–quality ratio.
All these stakeholders’ requirements are considered under normal circumstances, but there are several other aspects that need to be addressed. In recent years, customers have diversified their preferences and now consider factors beyond just the price–quality ratio when measuring their satisfaction. Many customers are seeking products that are produced sustainably, with greater respect for the environment and socially responsible actions. Shareholders may also have other dimensions of their overall interests. They may focus on maximizing the value of the company and analyzing differences in stock prices at various times. Additionally, they may be more inclined towards ESG-based (Environmental, Social, and Governance) investment strategies rather than strictly focusing on maximizing shareholder value (MSV).
On the other hand, a sustainable approach to doing business is preferred, and that includes identifying sustainable ways of tackling the needs of stakeholders. Employees are one of the major stakeholders usually considered. Of all the characteristics of sustainable HRM, we will mainly focus on care of employees and employee development.
The main purpose of this paper is to demonstrate that the need for HR development, as a sustainable approach in HRM, can be analyzed and supported using financial management tools. Our intention is to advocate for the identification of sustainable methods to support employees in their skill development. This research was conducted in two stages. In the first stage, a bibliometric review was performed to generate a comprehensive overview of existing knowledge in the field of sustainable HRM, which is presented in the theoretical background section. In the second stage, we present several financial management tools that can be utilized to support HR development initiatives.
To establish the coverage for this topic, an analysis on relevant articles in the field of sustainable HRM was conducted. The Web of Science Core collection was used because it offers a wide collection of scientific resources and the interest in our topic can be dynamically analyzed. When searching WoS for articles on “sustainable human resources management”, more than 8700 articles were found for the 1992–2022 time frame. However, the interest in this topic has grown steadily since 2014. One interesting aspect in several of these articles is the scaling-down of ESG criteria—Environment, Social, Governance—to a size which seems fitting for a company: the environmental, social, and economic vision of the company’s performance. This paper categorizes the available literature by the chronological order of study conduct and the emergence of pivotal concepts. This approach aims to offer a comprehensive overview of the evolution of the sustainable human resource management (HRM) field, commencing with earlier works and advancing to contemporary research.
4. Results and Discussion
The alignment of sustainable HRM with broader sustainability goals reflects a paradigm shift in organizational values. Companies increasingly recognize that sustainable practices in human resource management not only contribute to environmental and social responsibility but also enhance overall organizational performance. The integration of financial tools into HRM strategies, as emphasized in sustainable HRM, solidifies its legitimacy. The acknowledgment that investing in human capital development is not only a socially responsible act but also a financially sound decision demonstrates the approach’s practical viability.
Sustainable HRM lacks a solid theoretical background and a consolidated approach. Similar to stakeholder theory, it lacks a clear normative framework, and often relies on good practices rather than well-defined regulations or instruments to guide decision-making.
HR managers often do not view employees as developable assets, and instead focus on utilizing them without making significant efforts to support their skill development or tap into their true potential.
Sustainable HRM encompasses a broader vision than mainstream HRM, considering outcomes beyond just financial results. The adoption of concepts like the triple bottom line (economic, social, and environmental performance) can significantly improve business practices.
Placing employees at the center of sustainable HRM and recognizing them as major stakeholders can increase awareness and prioritize their well-being and development.
HR practitioners should strive to create a unique HR system that focuses on attracting and retaining talent, while minimizing the possibility of replication by competitors. Developing a unique system that aligns with sustainability principles can provide a solid competitive advantage.
Overall, these conclusions highlight the need for further development and refinement of sustainable HRM, as well as the importance of integrating sustainability principles into HR practices.
4.1. Financial Support of Sustainable Human Resources Management
4.2. Developing a Framework to Financially Support HR Development
To address RQ2: How can HR development, a key component of sustainable HRM, be integrated into long-term strategy? we examined and adapted concepts and tools from corporate finance. HR development is frequently linked with expenses, which raises questions about financial considerations. Training sessions and courses, although they enhance the quality of HR, necessitate a cost–benefit analysis. Engaging employees in their own skill development entails various implications. Decisions regarding whether to temporarily remove employees from their regular tasks to attend courses or to balance their involvement in ongoing processes while participating in after-work training sessions all involve financial costs.
In the first case, when employees are removed from their work, replacements are needed, and these replacements must be remunerated. Keeping employees at work full-time and sending them for additional training after hours can potentially affect their well-being and, subsequently, lead to decreased productivity, which can have negative financial consequences for the firm’s revenues.
(a) Appling the net present value (NPV) method
NPV—net present value.
PV—present value of the future increase in the firm’s revenues.
IC—implementation cost for the HR development method—i.e., the amount that must be paid for the training session or for the course.
PV—the present value of the future impact of the investment.
FI—the future impact of the investment.
r—the average profit rate at the firm’s level. It can be the arithmetic average, the mean, or the weighted average of the profit rates the company is recording.
n—the number of years in which the impact should happen.
Once the calculations are completed, the NPV for the HR development project can be determined and used to evaluate the feasibility of the chosen method. It is important to acknowledge that the main limitation of this tool lies in the challenge of accurately calculating the future impact of the investment. However, there are companies for which this difficulty may be mitigated. The essence of this approach is its feed-before nature, which assists in identifying the appropriate HR development method. Nevertheless, it is crucial for every company to incorporate references to this type of impact in its future activity projections. By including considerations for HR development impact, companies can enhance their strategic planning and decision-making processes.
(b) Using the future value (FV) tool
Another valuable instrument (feedback-type) for conducting a cost–benefit analysis is calculating the future value of the amount invested in HR development. This instrument allows for analysis over various time intervals, such as one year, two years, and so on. Two main approaches can be employed in this stage.
The first approach involves comparing the calculated future value with the increase in the firm’s revenues. By calculating the difference between these two values, one can obtain a clear understanding of the profitability of the HR development investment.
The second approach entails assessing the future value through the break-even point of the calculated amount. In some cases, this analysis may yield a result in terms of the number of products that need to be sold to recoup the investment. However, a potential issue arises if the analysis is correlated with market share reports, revealing that the projected number of products cannot be sold within the existing framework.
It is important to carefully consider these findings and evaluate the feasibility of the HR development investment based on the projected future value and its alignment with market conditions and potential sales.
FV is the future value of the amount paid as a fee for a training session or course.
The other notations remain as in the previous example, as future impact, used in the following lines, will be written as FI.
The analysis continues by calculating the ratios between the two indicators. Comparing the results with the value 1 can provide valuable feedback for the whole HR development operation.
FI/FV > 1—means that the investment was properly chosen.
FI/FV < 1—means that the investment should have not been made.
At the end of this feedback analysis, the timeframe in which such an investment can be profitable should be found.
4.3. Practical Implications
This paper proposes the integration of financial tools into human resource management (HRM) strategies, with a specific focus on sustainable practices. The findings underscore the significance of adopting a comprehensive model that not only prioritizes sustainable HRM but also substantiates the financial justification for investments in employee development initiatives.
The implications of this research extend beyond theoretical considerations, offering practical insights for organizations navigating the challenges of managing human capital within budget constraints. By introducing a systematic framework for evaluating the financial viability of HR development initiatives, the paper empowers decision-makers to align organizational goals with sustainable HRM practices. The proposed model represents an asset for strategic decision-making, helping HR professionals to bridge the gap between financial considerations and sustainable HRM practices.
By offering a solution-oriented approach, this paper supports organizations in optimizing their investments in employee development. This is crucial for enhancing workforce capabilities, fostering talent retention, and ultimately contributing to improved organizational performance.
The paper serves as a guide for organizations seeking to embed sustainability into their HRM practices. By integrating financial tools into HR strategies, organizations can not only achieve economic efficiency but also contribute to environmental and social sustainability through the development and retention of a skilled workforce.
This paper’s focus on sustainable HRM practices aligns with broader CSR objectives. Organizations can utilize the insights from the research to integrate socially responsible practices into their HRM, showcasing a commitment to employee well-being and development as part of their broader corporate citizenship.
The aim of this paper is to analyze the existing knowledge in the field of sustainable human resource management (HRM) and address the main inconsistencies through an interconnected approach. This approach supports the implementation of sustainable HRM strategies while also proposing the use of financial management tools to support and substantiate investments in human resource development.
The paper emphasizes the importance of a use–develop–repeat process, which, if properly designed, can lead to achieving a comparative advantage in pursuing sustainability in the workplace. Two main approaches regarding HR are proposed in this paper. The first approach focuses on the utilization of HR and discusses both intrinsic and extrinsic motivations, as well as other methods to enhance the appropriate utilization of HR resources.
The second approach is dedicated to the development process of sustainable HRM and introduces tools that can be used to establish the financial feasibility of this process. These tools provide a means to assess the financial viability of investing in HR development initiatives within the context of sustainability.
Overall, the paper aims to address the gaps and inconsistencies in sustainable HRM by integrating financial management tools into the decision-making process. By considering the utilization and development of HR from a sustainable perspective, organizations can enhance their competitiveness and achieve sustainable outcomes in the long run.
This paper provides a theoretical foundation for organizations to make more informed and data-driven decisions regarding HRD investments. This aligns with sustainable HRM principles by ensuring that resources are allocated efficiently to initiatives that contribute positively to both human development and organizational sustainability.
Our paper proposes the integration of financial analysis into sustainable HRM, addressing a gap in the literature. By doing so, it extends the scope of HRM beyond traditional HR functions, making it more strategically aligned with organizational financial goals. The proposed financial tools offer a means to economically justify HRD investments. This contributes to the sustainability of HRM by demonstrating the financial returns and benefits of human capital development, making a strong case for continued investment in employee growth and well-being. The paper argues the importance of aligning HRD efforts with the organization’s sustainability goals. The proposed tools help HRM practitioners ensure that HRD investments contribute positively to all dimensions of sustainability. The theoretical framework and proposed financial tools create opportunities for further research in the field. Empirical studies that focus on validating the effectiveness of these financial tools in diverse organizational contexts are needed to advance the field of sustainable HRM. Sustainability is an evolving and crucial aspect of modern business and integrating it with HRD and finance creates a forward-looking approach.
Using the proposed tools, HR managers and practitioners can effectively substantiate their decisions regarding HR development. However, implementing such a process may encounter challenges, as some employees may resist change or struggle to meet the required performance levels. This highlights the importance of skillful HR managers who can identify suitable employees, nurture their talents, retain them within the company, and achieve a favorable cost–benefit ratio. Moreover, HR managers must develop a unique approach that cannot be easily replicated by competitors. This is crucial for realizing a comparative advantage and maintaining a competitive edge in the market.
By employing the adapted NPV or FV methods to establish the feasibility of HR development, the quality of sustainable HRM in a company can be enhanced. This, in turn, enables companies to grow in a sustainable manner. The main objective of this research was to design a model for the financial substantiation of HR development, adapting corporate finance tools to the specific needs of HR development within the context of sustainable HRM. The proposed model has significant practical implications.
However, it is important to acknowledge the limitations of this study. Future research should aim to test the proposed model in practice and make adjustments if necessary. Testing the model might not only contribute to further research but also reveal any limitations or challenges that may arise in its implementation. Additionally, it is crucial to consider the long-term effects of implementing such a model, which are beyond the scope of this study. Furthermore, the willingness to use the model for substantiating HR development investments may vary due to various factors such as company size, national and organizational culture, personal beliefs, and more. Data regarding this aspect are limited and warrants further investigation.
Even though this paper is mainly theoretical, it has the potential to guide practical applications in real-world organizations. By proposing financial tools, our paper lays the foundation for future practical implementations and empirical research, which can validate the effectiveness of the proposed tools.
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