Enhancing Return on HR Investment: Risk Management With Real Options Approach

Abstract

Return on human resources (HR) investment may not remain stable over time for organizations, due to changes in business conditions. The “real options” approach enables organizations to evaluate investment opportunities of HR in uncertain environments and highlights how these investments create value through future choices (i.e., HR options). HR options are “investments in the human capital pool of an organization that provides the capability to respond to future contingent events.” This research applies this logic to analyze the uncertainties associated with HR in organizations and discuss how organizations manage these uncertainties through HR “options” that are capabilities generated by various HR management practices. With appropriate HR capabilities, organizations are able to manage uncertainties proactively. Research emphasizes that certain HR management practices create HR options in terms of reducing uncertainties of return, volume and costs. Research also underscores that effective compensation and benefits practices reduce uncertainties of costs significantly.