On February 1, 2023, Meta's stock surged 20% in a single day, not because of a breakthrough product, but because Mark Zuckerberg declared 2023 the company's "year of efficiency." Wall Street understood the euphemism: 21,000 workers would lose their jobs. In a single trading session, Meta gained $40 billion in market value by eliminating the very people who had created that value.
The perverse logic is built into the accounting standards. When a company fires an employee, expenses drop immediately, with no corresponding losses recorded on the balance sheet. However, if a company sells a factory, it must write down the asset. The accounting system thus makes workforce reductions appear more effective than they actually are.
Every CEO claims that "our people are our greatest asset." Yet employees who design, sell, and sustain the business appear nowhere among corporate assets. This is not a technicality. It's a fundamental disconnect between how value is created and how it's measured.
The Invisible Majority
The S&P 500 is worth approximately $40 trillion; however, only $4 trillion appears on balance sheets. The remaining $36 trillion consists of intangible assets: brands, intellectual property, software, data, and human capital. Experts estimate that employees represent 55-60% of this value. That's roughly $20 trillion in collective workforce capability that is not reflected in any financial statements for investors, lenders, and managers to see.
In 1975, tangible assets accounted for a significant portion of corporate value. Today, intangibles account for approximately 90% of S&P 500 valuations. Yet accounting frameworks built for mills and machines still govern how we measure companies built on talent and expertise.
Why Employees Remain Invisible
Accounting standards require assets to be recognized only if they provide measurable future economic benefits, are under the company's control, and result from past transactions. A factory qualifies. An employee does not. Companies don't own people; their future contributions are uncertain, and they can leave at any time. These realities have kept human capital off balance sheets for centuries.
This omission creates distorted incentives. Consider two companies: TechCorp invests $50,000 per hire in recruiting and training, building skills that increase productivity 8% annually. QuickCut minimizes training costs, resulting in a rapid turnover of workers. Under current rules, TechCorp investments reduce short-term profits while QuickCut appears more efficient, even though TechCorp is building the stronger long-term engine.
The numbers reinforce the point. Companies spend hundreds of billions of dollars annually on training, coaching, and development, and every dollar flows directly to the income statements as an expense. Meanwhile, technology development costs can be capitalized and amortized over time, smoothing earnings. The message is clear: investing in technology creates assets; investing in people creates expenses.
The Exception That Proves the Rule
Professional sports illustrate how contractual control transforms accounting treatment. When MLB teams sign players like Shohei Ohtani or acquire existing contracts through trades, they obtain legally enforceable rights to the players’ services for a fixed period. The teams capitalize the related acquisition costs—such as signing bonuses and trade payments—and amortize them over the life of the contract. Player salaries are recognized as expenses, but the underlying contract right qualifies as an intangible asset.
In contrast, ordinary employment arrangements do not provide this level of enforceable control, which is why corporate balance sheets do not list employees as assets.
Goodwill's Contradiction
Goodwill reveals one of accounting's deepest inconsistencies. When companies acquire competitors, they often pay premiums for key elements such as an assembled workforce, customer relationships, and institutional knowledge. That premium recorder, goodwill, remains on the balance sheet indefinitely. We recognise and accept the capital value of cohesive human productivity when it is purchased through acquisition, yet we ignore the same value when it is developed internally.
Models That Work
The measurement challenge is real, but it is solvable. The Lev-Schwartz model values human resources as the present value of expected future earnings, discounted for risk and adjusted for retention probability. The formula is straightforward:
V = Σ [Expected Income × Retention Probability] / (1 + Discount Rate)^years
Consider a consulting firm that hires 200 analysts annually. Assume $40,000 in recruiting and training costs per hire, a 12-month ramp to full productivity, an average annual contribution of $90,000 from years two through five, and 20% annual attrition after year two. Applying a 10% discount, each analyst represents a value of $120,000 to $180,000 in human capital.
Alternative valuation methods include replacement cost models (estimating the expense to rebuild lost capability), contribution-based models (analogous to customer lifetime value calculations), and residual income models (attributing excess returns to human capital after accounting for tangible assets). The approaches differ, but all provide a lens that current accounting frameworks lack entirely.
The Path Forward
Implementation must begin internally. Start by capitalizing recruiting and training costs for management reporting—not for GAAP compliance—and amortize them over expected employee tenure using retention data. Build cohort models and update them quarterly to track the return on human capital investment (RHCI) by business unit alongside traditional return on invested capital (ROIC). Link leadership incentives directly to the creation and preservation of human capital.
Global regulation is evolving in this direction. The EU’s Corporate Sustainability Reporting Directive (CSRD) now requires detailed workforce disclosures beginning in 2024. Denmark pioneered voluntary intellectual capital statements, and Infosys has published human resource valuations in its annual reports since 2008—finding that these measures correlate more closely with stock performance than traditional asset metrics.
Why This Matters Now
In an economy where over 80% of corporate value stems from intangibles, ignoring human capital on balance sheets is not a mere accounting oversight—it’s a misunderstanding of value creation. Companies routinely capitalize software that may be obsolete within five years, yet expense employee training that can yield returns for decades. We record office buildings as assets, but not the workers who generate the cash flows to sustain them.
The companies that learn to measure, manage, and maximize human capital will separate from competitors, optimizing for an expense line that quietly erodes future cash flows. Markets will eventually catch up when measurement improves. Until then, leaders must develop their own value-driven frameworks and manage accordingly.
The question is not whether we can model human capital perfectly; we already rely on imperfect models for depreciation schedules, goodwill impairment, and deferred tax assets. The real question is whether we are willing to keep flying blind with the assets that matter most.
The $20 trillion in human capital value will not reveal itself automatically. Companies that start measuring and managing it today will gain a decisive competitive advantage over those still treating their most valuable asset as a cost to minimize.
