Bringing quantitative rigor to employment deals.

Author:Jesuthasan, Ravin

Whether in the finance or human resources function, you're likely to dismiss the idea of any connection between how the organization issues debt and how it develops employment deals. What two processes could be further apart?

But in fact, there are strong parallels between the two, starting with the role of debt in effective financial capital management and the corresponding role the employment deal plays in effective human capital management. Recognizing the parallels and learning from them can not only help savvy organizations improve their return on investment in their talent programs, but can also provide a platform for better collaboration between finance and HR, each of which has a stake in the cost and results of effective employment deals.

Organizational Impacts

At the most basic level, both processes are essential inputs to operate a business. Few organizations can expand without taking on debt. And few can secure the talent they need to sustain expansion without an attractive employment value proposition (EVP).

Second and more critically, both processes represent obligations to the organization with both explicit and implicit consequences. A default on a bond significantly raises the cost of capital while dramatically reducing reputational capital. Reneging on a deal or EVP (whether it is formal or implicit) raises the cost of acquiring talent in the future while also reducing reputational capital.

Finally, both processes are subject to public scrutiny and broad commentary. Debt rating agencies analyze and report on the quality of issued debt while various technology-enabled stakeholders regularly opine on companies' EVPs. Thanks to the growth of social media sites, both current and former employees can voice their opinions to various third parties, which then publically rank companies' appeal as places to work through a variety of forums.

Although the processes for managing debt and creating employment deals could not be more different right now, taking more explicit note of these parallels can shed light on actions companies can consider to improve return on investment on their EVP.

Think Duration

At the heart of any sound debt management strategy is the ability to match duration to the economic realities of the organization's operating model. Duration is affected by myriad features, such as maturity dates, expected changes in interest rates, coupon rates and call and convertible provisions. Finance considers all these factors...

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