The Handbook of Board Governance, 3rd Edition

41Measuring and Assessing Employee Value Added: Board Oversight of Human Capital

Stephen F. O’Byrne, BA, MS, JD

President, Shareholder Value Advisors

Two key challenges for board oversight of human capital are (1) the absence of comprehensive measures of employee alignment or well-being and (2) the need to consider two different ways of aligning employee and shareholder interests. There are many human capital metrics, from turnover to human capital return on investment (HCROI), but none of these measures capture employee alignment or well-being. And there are two different ways to align employee and shareholder interests: treating employees as partners by giving them pay that is highly correlated with shareholder value or treating employees more like bondholders by giving them competitive pay with little pay risk. We can call these two approaches “partnership alignment” and “attractive bargain alignment.”

Partnership alignment has been the quest of industrialists and economists for more than a century. Andrew Carnegie said that the “sliding scale” wage system (which tied wages to product prices) “is the solution of the capital and labor problem because it makes them partners—alike in prosperity and adversity.”¹ A hundred years later, economists Joseph Blasi, Douglas Kruse, and Aaron Bernstein wrote that “the goal of partnership capitalism, then, is to get employees to think of themselves as owners…the partnership approach is the closest thing to a free lunch you can find in ...