HR options and their valuation – a case study

Sammanfattning: This thesis introduces and discusses the notion that real options theory can be applied to investment decisions when the value lies in human capital. This approach contributes in circumventing traditional problems which arise during valuation of intangible assets. This leads to the development of HR (human resource) options, which can be defined as “investments in the human capital pool of an organization that provide the capability to respond to future contingent events” (Bhattacharya & Wright, 2005), or “real options featuring intangible assets” (A. Berk & Kaše, 2010), created through HR practices or strategies. Different HR options (i.e. compensation plans, recruitments, temporary workers) have been studied by scholars and have been shown to have an effect in different aspects of a firm (i.e. growth, flexibility, learning). The different categories of uncertainties surrounding (the valuation of) human capital are discussed; they are relevant for the case study of this thesis. The thesis focuses on recruiting as a HR option: a single recruitment is viewed as an investment project and an attempt to determine its Net Present Value is made. For this reason, a valuation model is developed with help of continuous-time stochastic processes which have been previously used for similar purposes in research. The model is then implemented in a real-world scenario, with data either taken from publicly available market indexes and from statistical processing of employee data provided by a large (500+ employees) consulting company, active across various sectors of the Swedish industry. The expected value of a single recruitment is therefore determined. Sensitivity analyses are then carried out with the intent to provide insight into how certain parameters (and, in extension, the HR processes that determine them) affect the expected value of a recruitment. A conclusion which should be kept in mind during reading is that the main objective of this paper is not the valuation part itself. Instead, it is the discussion about different parameters, the listing of uncertainties involved, and the sensitivity of the result to various HR practices, which seek to bring understanding regarding the recruitment process and HR options in general.