consortiums

PROJECT 6

PERSONNEL RECRUITING

Valuation of Employee Training and Development

Adam Schwartz
School of Business Administration,
University of Mississippi

Proposed Grants $79,930

Abstract:
Recent developments in the area of real asset option pricing have provided valuable insight into corporate capital budgeting decisions. We propose to value hiring decisions in a framework that permits

stochastic initial training costs followed by a service flow whose value follows a stochastic jump/diffusion process. The jumps allow for the added influence of rare and unpredictable events (not priced by Black-Scholes). In our framework, the decision to hire is based on a simple “Net Present Value” rule. However, both the investment and the service flow values are stochastic, and the valuation of the service flow may contain several valuable options including: the flexibility to reassign, the option to retain or re-enlist, the option to place on reserve or the right to terminate an employee.