Highest and Best Use for Human Capital
In the commercial real estate world, there is a core concept called “Highest and Best Use” (HBU). Economists such as Irving Fisher conceptualized the idea of maximum productivity (though it had been discussed as early as 1831) in the late 19th and early 20th centuries, exploring how economic potential shifts based on certain conditions.
This is particularly relevant in real estate, where demographics, legal changes, urban sprawl, and even weather patterns can have a massive impact on the value of a property. HBU is chiefly an appraisal tool that dictates that the value of a property must be based on its full potential rather than its current condition.
For example, my family lives in the town of Highlands Ranch, Colorado. As the name suggests, Highlands Ranch was dominated by farmland until in the 1980’s. The growth of the Denver Metro area changed the HBU of the land to include residential and commercial real estate that converted the ranchland into the suburban population center that defines Highlands Ranch today. Another example prevalent in current commercial real estate trends is the shift in HBU from warehouse and industrial properties to residential use in urban centers.
But this concept has applications that go far beyond real estate. In fact, the human capital world would be wise to adopt this concept as companies consider how to invest in their people.
To determine the HBU of real estate, there are four tests:
Physically Possible. You can’t build a Target or Home Depot on a 500 square foot site. It may be difficult or impossible for a heavy structure to go on wetland soil. Basically, this test is about the limiting factors of the property’s geography.
Legally Permissible. Zoning, density, and environmental laws (to name a few) dictate what types of buildings and businesses are permitted on a property
Financially Feasible. Ever had a dream of starting a restaurant in a remote location? Or opening an amusement park near a vacation cabin? While ideas like these can seem appealing, they won’t meet the HBU test if they won’t yield a profit.
Maximally Productive. This is where it can get even more tricky…would a property be best as a strip mall or an apartment complex? Office or retail? A property with a footprint no larger than a small home has a potential value of hundreds of millions of dollars in New York City as a sky-scraper office or residential building.
Billions of dollars are spent every year on determining the HBU of properties. The difference in potential value between a property’s current use and its HBU can be vast and fortunes are made and lost in the effort to determine and execute HBU projects.
It is troubling that there is no similar process as it relates to human capital. People are hired to fill roles according to the needs of the employer based on jobs they perceive will add the most value to their bottom line. Candidates are considered based on their educational background, work experience, interviews (a notoriously bad way to make hiring decisions), and even their willingness to accept the compensation bid the company is offering.
Once hired, advancement is once again based on fit into the existing structure of a company. Oftentimes, employees advance up a linear, hierarchical track that ends at the C-suite. Great engineers are promoted to being leaders of engineers, despite the fact that these two roles represent massively different skill sets. Why? Because in order keep that great engineer, the company needs to give them a raise, and the next step up is a leadership position.
So, what is truly valuable in human capital terms today? How can assessment and placement be reimagined to help people and organizations be “maximally productive?”
Part II will explore the four tests of Human Capital HBU and present a new model with the potential to accelerate growth for people and profits and enhance (and perhaps save) capitalism for the next generation.
