How Can HR Contribute to Economic Value Add (EVA) in Organizations?

Hi Sajita,

HR is traditionally viewed as a cost center. We have used the term EVA in finance, but to my surprise, I came across this term in an article in human capital used in the HR context. The article mentioned that EVA has two components - Revenue and costs. Revenue can be generated from client servicing that is indirectly related to employees' performance. Thus, hiring the right kind of employee is very important for the organization.

The next component is COST, where the organization has to ensure that the budget structure supports the designing of an attractive compensation package. I would like to know your opinion on this topic. How can an HR department add to the EVA of an organization?

Regards,
Sajita

EVA IS THE RESIDUAL INCOME AFTER CHARGING THE COMPANY FOR THE COST OF CAPITAL PROVIDED BY THE LENDERS AND THE SHAREHOLDERS.

IT REPRESENTS THE VALUE ADDED TO THE SHAREHOLDERS BY GENERATING OPERATING PROFITS IN EXCESS TO THE COST OF CAPITAL EMPLOYED IN THE BUSINESS.

EVA WILL INCREASE IF OPERATING PROFITS CAN BE MADE TO GROW WITHOUT EMPLOYING MORE CAPITAL i.e. GREATER EFFICIENCY i.e. Optimise / rationalise the manpower cost



Or ADDITIONAL CAPITAL IS INVESTED IN PROJECTS THAT RETURN MORE THAN THE COST OF OBTAINING NEW CAPITAL i.e. PROFITABLE GROWTH i.e. employ highly skilled people

Or CAPITAL IS CURTAILED IN ACTIVITIES THAT DO NOT COVER THE COST OF CAPITAL i.e. LIQUIDATE “UNPRODUCTIVE CAPITAL” i.e. curtail transaction oriented activties oe outsource non-crtitical oe non value adding activities

Definition of EVA: EVA IS COMPUTED AS THE DIFFERENCE BETWEEN NET OPERATING PROFIT AFTER TAXES [NOPAT] AND COST OF CAPITAL EMPLOYED [COCE]

NOPAT IS THE PROFIT AFTER DEPRECIATION AND TAXES BUT BEFORE INTEREST COSTS

Please check whether you are referring to this standard definition while using EVA

V K Sharma