Volume 24 Issue 3 Thematic Issue: The Characteristics and Role of Intangible Capital in Central-Eastern Europe, the Balkans and in the Mediterranean Article 4 September 2022 The Role of Human Capital Investments in Business Excellence of The Role of Human Capital Investments in Business Excellence of Croatian Companies Croatian Companies Ivana Tadić University of Split, Faculty of Economics, Business and Tourism, Split, Croatia, itadic@efst.hr Ž eljana Aljinović Barać University of Split, Faculty of Economics, Business and Tourism, Split, Croatia Follow this and additional works at: https://www.ebrjournal.net/home Part of the Human Resources Management Commons Recommended Citation Recommended Citation Tadić , I., & Barać , Ž . (2022). The Role of Human Capital Investments in Business Excellence of Croatian Companies. Economic and Business Review, 24(3), 161-170. https://doi.org/10.15458/2335-4216.1306 This Original Article is brought to you for free and open access by Economic and Business Review. It has been accepted for inclusion in Economic and Business Review by an authorized editor of Economic and Business Review. ORIGINAL ARTICLE The Role of Human Capital Investments in Business Excellence of Croatian Companies Ivana Tadic*, Zeljana Aljinovic Barac University of Split, Faculty of Economics, Business and Tourism, Split, Croatia Abstract The paper analyses human capital investments and their relation to company performance in Croatia. Human capital represents an inevitable element in recognising and measuring an organisation's values and supporting its business excellence.Theresultsobtainedshowthattrainingandextrabonusesorsalariesarepositivelycorrelatedwithcompany excellence, as well as show a significant difference in the mean of salaries per employee between high and moderate intensive intellectual capital companies. The differences in company excellence, when human capital expenditures are capitalized in acompany's balancesheet ratherthan recognized as expenses in the company'sprofit andloss account, is confirmed. Companies should pay attention to managing human resources and realizing their importance for business excellence, as well as the importance of appropriate recognition and measurement of human capital in financial state- ments. Keywords: Intellectual capital, Human resource management, Human resource accounting, Company performance JEL classification: M12, M41 Introduction and theoretical background S tanding out in today's competitive market, being successful and developing further repre- sent crucial factors of contemporary organisations. Their main importance is to be recognised and distinguished among major competitors, as well as among customers or clients by detecting own attri- butes, which are noticed, recognised and valued. Companies' human resources represent their most valuable asset (Hafeez & Abdelmeguid, 2003; Sara etal.,2021),whichmakesthem,aspreviouslystated, noticed, recognised and valued in the market. Although,companyAandcompanyBcanemploya similar employee structure regarding their gender, age, education (level and type of formal and informaleducation)orexperience,theserepresenta unique and the most valuable asset for each employer. The crucial benefit is the fact that human resources and their potentials are exceptional for each company and very difficult to imitate due to their specificities (Belak et al., 2009), such as knowledge (explicit and tacit), special experience (professional and life), skills, abilities or emotional intelligence. The key element for each organisa- tionalsuccessisrecognisedwithinhumanresources (Young & Thyil, 2009) and their potentials in terms of competences, creativity,innovation,attitudesand motivation, or more precisely, within its' human capital. Human resources and human capital are the fac- tors of future organisational success and develop- ment (Kazlauskaite& Buciuniene, 2008; Zink, 2008). Consequently, the fundamental need of each com- panyanditshumanresourcemanagement(HRM)is investment in employees in order to highlight the value of their human capital. Different human resource expenditures, undertaken in order to pro- vide an organisationally competitive compensation system, provide educational and training possibil- ities, manage performances by recognising and relating results with an adequate reward system, or Received 22 January 2021; accepted 4 April 2022. Available online 15 September 2022 * Corresponding author. E-mail addresses: itadic@efst.hr (I. Tadic), zbarac@efst.hr ( Z. Aljinovic Barac). https://doi.org/10.15458/2335-4216.1306 2335-4216/© 2022 School of Economics and Business University of Ljubljana. This is an open access article under the CC-BY-NC-ND license (http://creativecommons. org/licenses/by-nc-nd/4.0/). offer attractive and secure working conditions. In addition, they should not be valued solely as costs, but more importantly, as main organisational in- vestments.Investmentsindevelopingitspeoplecan make a crucial difference between the above mentioned company A and company B, generating future individual and organisational gains (Bassi & Mcmurrer, 2005). The mutual, individual and organisational benefits arise from human capital investments,theindividualbenefitsariseintermsof upgrading, improving and developing employee career, and the personal competitive advantage and organisational benefits arise in terms of developing the overall organisational success, achieving stra- tegic goals and creating a competitive advantage. Inordertointroduceandrecognisetheimportance of human capital and human capital investments as crucial elements of this research, it is important to explain and classify the term of intellectual capital. The term was introduced in 1969 by Galbraith (Bel- luccietal.,2020),butthegrowthoftheresearch,aswell as of literature publications, rapidly increased in the 1990s, with primary focus on its organisational value anddevelopmentofclassificationsmodels(Marretal., 2003).Therearemanyresearchesspecifyingdifferent dimensions of intellectual capital. However, the ma- jorityofauthorssuggestits'threecrucialdimensions, whicharethehuman,structuralandrelationalcapital (Andreeva&Garanina,2016;Belaketal.,2003;Chen& Lin, 2004; Drenkovska & Redek, 2015; Dzinkowski, 2000; Lalovic & Koman, 2018; Sokolov & Zavyalova, 2021; Sonnier, 2008; Stewart, 2010), whereas human capital represents a part of the intellectual capital, which is based on human resources (Nerdrum & Erikson, 2001). Human capital can be observed as an important feature in intellectual capital (Lim et al., 2010),becauseitincludesallknowledgebuiltinminds of employees and is crucial in operating all other componentsofintellectualcapitalandorganisational resources. Its great importance is recognised in the factthatnocompanycanownhumancapital,meaning ifanemployeeleavesthe organisation, the organisa- tionisexposedtoagreatloss,duetothelossofhuman capital (Sokolov & Zavyalova, 2021). Human capital includes skills, abilities and expertise important in creatingadditionalvalueforeachorganisation(Belak et al., 2009). In contrast to human capital, structural capital is owned by organisations and is kept within, when employees leave the organisation. It can be identified as mechanisms and structures of an orga- nisation (such as management processes, policies, routines, cooperation, corporate culture, patents, trademarksorlicences),whichcansupportemployees increationoftheoverallbusinessperformance(Chen et al., 2004; Drenkovska & Redek, 2015; Dzinkowski, 2000; Lalovic & Koman, 2018). Finally, relation capital includes any of the connections that people outside the organisation have with it (Belak et al., 2009). It is visiblethroughthecompanyimage,customerloyalty or different stakeholders’ (customers, suppliers, dis- tributors, investors) satisfaction (Lalovic & Koman, 2018;Sonnier,2008). Due to the specificities of human capital and its major characteristic as being irreplaceable organ- isationalcapital,itrepresentsthefocusofthispaper. Consequently, the main research question is: “How important are human capital investments in busi- ness excellence of Croatian companies?“. Nowa- days, both scholars and practitioners are trying to incorporate human value in the balance sheet, which leads to the occurrence of human resource accounting (HRA) as a set of acceptable metrics applicable to employees in order to determine their value. HRA,beingan informationsystem, considers human resources invested in business as assets and places their monetary values in books of accounts, providing valuable information relating to human resourcestoallinterestedparties(KumarDas,2018). “It has the potential to provide an alternative solu- tion helpful to management decision making, especially regarding the adequacy of human re- sources when viewed within a financial health framework” (Arkan, 2016, p. 173 ). Additionally, it is important to note that traditional financial state- ments used in decision-making processes do not provide completely relevant information to under- stand how intangible resources are to create value for the company in the future (Mouritsen et al., 2004). Moreover, they fail to measure and present “the most significant building blocks of business” (Seetharaman et al., 2002), one of which is the human capital, mainly due to the inappropriate or insufficient quantification. Also, Osemeke (2017) noticed that in most cases the HRA information is given in the form of supplementary information attached to financial statements, instead of recording and disclosing it in the books of accounts or financial statements. This paper provides a significant contribution to the area of the HRM andHRA practices in the post- transition economies. The obtained results raise awareness about the importance of human capital investments in those countries, where HRM and HRA were lesser-known topics until the transition from a centrally planned economy to a market one. Today, they still differ from the capital market-ori- ented economies, because they are influenced by a variety of economic, social and political factors, like the legal system, stage of economic growth and development, enterprise ownership, activities of 162 ECONOMIC AND BUSINESS REVIEW 2022;24:161e170 enterprises, etc., and should for this reason be explored separately. 1 Human capital and organisational success Human capital, as an intangible asset or a knowledgerelatedresource(Bogner&Bansal,2007), is more likely to contribute to attaining the main organisational goals, strategy and outcome than other organisation assets. Even if human capital information is often deficient, it is important to identify and disclose them in order to attain set goals. Moreover, it is expected that disclosure of human resources leads to greater utility of ac- counting information, reflecting innovation capacity and competitiveness and satisfying the social re- sponsibility requirement (Alvarez Dominguez, 2011). Different stakeholders seek human capital information disclosure and its impact on organisa- tion's activities (Alvarez, 2015). Organisational success can be measured in many ways and it often includes different financial mea- sures such as liquidity, financial leverage, profit- ability, activity, or turnover, as well as nonfinancial measures like quality or social responsibility. Each of these ratios evaluates a portion of company per- formance only, while companies have to improve simultaneously and continuously in order to be competitive and successful. Thus, both the re- searchers and stakeholders seek for the yardstick that captures various dimensions of a company's success simultaneously, which is enabled by using business excellence models. According to Adebanjo and Mann (2011), business excellence can be defined as excellence in strategies, business prac- tices, and stakeholder-related performance results that have been validated by assessments using proven business excellence models. Business excellence models are used by organisations to assess and improve their work practices and per- formance (Mohammad et al., 2011), and guide them towards sustainable world-class business results andarebasedonbusinessprinciplesthathavebeen proven to work (Adebanjo & Mann, 2011). Alvarez Dominguez (2011) conducted a research on Spanish companies, listed on the Madrid Stock Exchange, observing an index of disclosures on humanresourcesinannualcorporatereports(asthe independent variable) and good reputation (as the dependent variable, consisting of six variables on the first level, and subdivided into three other var- iables on the second level). The research fortified that human resources disclosure is positively and significantly related to corporate reputation. Importance of the human capital information disclosure was also the issue of an Australian research, investigating its influence on investors' share investment intentions. The results revealed that information disclosure affects investors’ inten- tion to hold on to stocks to avoid regretting selling winners too early (Mariappanadar& Kairouz, 2017). Since it is not only the previously mentioned re- searches that highlight the importance of human capital disclosure from the perspective of external stakeholders, so they can properly evaluate com- panies'potential(Curadoetal.,2011),itisextremely important to disclose the information from the in- ternal stakeholders’ concern, shaping a better un- derstanding between the employer and employees (Myer et al., 2004). Accordingly, different re- searchers were investigating the relevance of the human capital information disclosure to company performance, outflowing its value and importance. Acquiring and maintaining key employees, as well as developing their talents with the purpose of facilitating organisational human capital is a neces- sity for improving organisational performance (Huselid, 1995). Research of Belak et al. (2009) confirmed the importance of human capital in- vestments for the organisational performancebased on Croatian high-tech companies. Research results suggest that companies which invest more in training and additional education of their em- ployees,aswellasinextrasalaries(resultsofgreater employee knowledge, skills and abilities derived from training and education) realise better financial results. Moreover, among different approaches to identifying and disclosing company human capital, Lin et al. (2012) considered 40 different human capital related keywords (e.g. advanced training, employee behaviour or employee welfare) from annualreportsofTaiwanesecompanies.Thehuman capital disclosure information was related to organisational performance, more precisely the market to book ratio and return on asset (ROA), confirming a statistically positive relation and sug- gesting the importance of human capital as an organisational hidden value. As human capital investments are important for the performance of large enterprises, they are also a subject of interest for small and medium-size en- terprises. Findings are supported by a Chinese research conducted within private high-tech and traditional companies. The research revealed a relationship between human capital and organisa- tionalperformancemeasuredintermsofinnovative and operational growth (Jin et al., 2010). For high- tech companies, the study found a statistically pos- itive relationship between technical and managerial trainings that were undertaken before the venture ECONOMIC AND BUSINESS REVIEW 2022;24:161e170 163 (1), technical and managerial trainings that were undertaken after the venture (2), entrepreneur's learning capability (3) and the innovative growth performance. Also, for the same group of com- panies, the study found a statistically positive rela- tionship between the level of education acquired before venture (1), the level of education acquired after the venture (2), technical and managerial trainings undertaken after the venture (3) and operational growth performance. On the other hand, for traditional companies, the statistically positive relationship supports the relationship be- tween the technical and managerial trainings un- dertaken after the venture and innovative growth performance. Also, for traditional companies statis- tically positive relationships were supported be- tween the level of education obtained after the venture (1), entrepreneur's learning capability (2) and operational growth companies (Jin et al., 2010). The research supported the importance of human capital for company growth, however, establishing more positive relationships within high-tech com- panies. This is not a surprising moment, under- standing that high-tech companies require specific talents, the one with a substantial level of knowl- edge, eager for the long-life learning process, and responsible for creative, innovative work and sus- tainabledevelopment.Inthelightoftheimportance and influence of human resource practices and human capital for job performance, an interesting researchwasconductedwithintheservicesector,as one of the fast-growing sectors in Sultanate of Oman,confirming itssignificant andpositive effects (Imran & Atiya, 2020). Consequently, organisations focusing on investing in their human capital and developing it will gain greater performance of their employees (Chadwick, 2017) and inevitably greater overall organisational performance. Thus, the research hypothesis assumes that com- pany performance is associated with human resource investments and furthermore that a financial statement analysis, especially in high intensive intellectual capital companies, provides a truer and fairer view of company performance, if human capital expenditures are capitalized in the balance sheet rather than recognized as expenses in the profit and loss (P/L) account. Namely, it is assumed that companies which are investing more in human resources (by providing training and paying extra bonuses or salaries to employees) will obtain better financial results than the companies that are investing less in human resources. Also, companies with a lot of intellectual capital have a great proportion of unrecorded intellectual capital orintangibleassets,soafinancialstatementanalysis based on structural ratios does not provide a true andfairviewofthecompanyperformance.Namely, structural(financial)ratiosplayanimportantpartin evaluating the performance and financial condition of an entity and each ratio contains common as well as unique information (Chen & Shimerda, 1981). These are traditionally used to measure different segments of business, comparing a ratio with a certainstandardoramongcompanies.However,the basic assumption of a structural analysis is propor- tionality (Whittington, 1980), which is not met in HIIC (high intensive intellectual capital) companies, because of the great proportion of unrecorded in- tellectual capital or intangible assets. 2 Data and methodology In order to test the premises defined previously, the following statistical hypotheses are developed: H1 … Human capital investments through sal- aries and bonuses and/or training and education activities are positively related to company excellence. H2 … Capitalization of human capital expendi- turesinthebalancesheet,ratherthanrecognitionas expenses in the profit and loss account, is positively related to company excellence. The next step was a selection of dependent and independent variables. As we wanted to investigate the impact of different ways in recognizing and measuringhumancapitalexpendituresoncompany performance,theBusinessExcellence(BEX)indexis defined as the dependent variable. In explanation, the BEX index is a predictive statistical ratio model for determining company excellence, capturing simultaneously various dimensions of company performance. Belak and Aljinovic Barac (2007) con- structed this model based upon Altman's Z-score (Altman, 1968), taking into consideration the char- acteristics of financial reporting in Croatia and the specificities of the Croatian capital market. Conse- quently, it is the most appropriate measure of company performance. The BEX model combines four different financial aspects (profitability, value added,liquidityandfinancialstrength)todetermine the likelihood of excellence amongst companies. Generallyspeaking,thegreatertheindex,thebetter the total excellence of the company. To be more precise, BEX distinguishes between first-class com- panies (BEX index higher than 6.01), those showing signs of excellent growth (BEX index between 4.01 and 6.00), the very good (BEX index between 2.01 and4.00)orgoodones(BEXindexbetween1.01and 164 ECONOMIC AND BUSINESS REVIEW 2022;24:161e170 2.00), and the borderline investment opportunities (BEXindexlowerthan1).Negativevalue oftheBEX index indicates companies whose existence is en- dangered. The BEX index is calculated according to the following formula (1): BEX¼0:388 EBIT TotalAssets þ0:579 NetOperatingProfit SubscribedCapital capitalprice þ 0:153 NetWorkingCapital TotalAssets þ0:316 5ð NetProfitþAmortizationþDepreciationÞ TotalDebt ð1Þ In addition, two measures of human capital are selectedastheindependentvariables,inaccordance with the criteria posted by Alvarez (2015), Arslan et al. (2013), Barcons-Vilardell et al. (1999) and Bryl (2018), and taking into account the limitations of the available data: Annual salary and bonuses per employee exceeding the average annual salary and bo- nuses for the sector (SAL), Cost of professional training and other educa- tional activities per employee (T&E). These variables are controlled for the industry group, so the companies are assigned to the high intensive intellectual capital (HIIC) sector or mod- erate intensive intellectual capital (MIIC) sector in accordance with its main activity (NACE classifica- tion) as shown in Table 1. Tables 2 and 3 show an in-depth analysis of annual salary and bonuses, cost of professional training and other educational activities per employee with regard to the company's main activity. Descriptive statistics of both human capital in- vestment variables with regard to the intellectual capital intensity is presented in Table 4. Data presented in Tables 2 and 3 show that the highest salaries per employee are earned in high intensive intellectual capital (HIIC) sectors: manu- facture of computer, electronic and optical products and electrical equipment, and intellectual services (i.e. activities of head offices, management consul- tancy activities, architectural and engineering ac- tivities, technical testing and analysis, and scientific research and development industries). The com- panies in the manufacture of computer, electronic and optical products, and electrical equipment sector also recorded the highest amount of educa- tion and training costs per employee in the sample. Contrary, the lowest salaries were provided to em- ployees in manufacture of textiles, apparel, leather and related products, and also in manufacture of wood and paper products industries, which can be tagged as moderate intensive intellectual capital (MIIC) companies. The minimum annual salary of 4110 KN as well as the maximum annual salary of 375,050 KN in the MIIC sector are the result of an unrealistic number of employees, because for sta- tistical purposes only full-time employees are re- ported, excluding part-time employees, leased employees, subcontractors, etc. As can be seen from Table 4, on average, MIIC companies also record a lower average annual amount of education and training costs per employee (8027 KN) than HIIC companies (10,035 KN). It is interesting to note that companies in agriculture, forestry and mining industry do not invest in training or education of its employees at all. This can be explained with the fact that the greatest shares of jobs within these industries are physical jobs, according to their description and specification, requiring a lower level of employee education.Usually,employeesperformingsuchjobs reach the maximum of their benefit or revenue for their employers at the start of their employment. Consequently, these positions do not require addi- tional investments in the development of employee knowledge,skillsandabilities (KSA), due to the fact that these jobs rarely change and the employees’ initiallevelofKSAisingeneralsubstantial,because of deficient career development opportunities. Table 1. NACE divisions HIIC and MIIC sector classification. HIIC sector (NACE divisions) MIIC sector (NACE divisions) 19-20 Manufacture of refined petroleum, chemicals 01-09 Agriculture, forestry, fishing, mining and quarrying 26-27 Manufacture of computers and electrical equipment 10-12 Manufacture of food, beverages and tobacco products 58-61 Broadcasting & telecommunications 13-15 Manufacture of textiles, leather and related products 62-63 Information services 16-18 Manufacture of wood and paper products 64-75 Intellectual services (legal, accounting, management, etc.) 22-25 Manufacture of rubber, plastic and metal products 29-30 Manufacture of transport equipment 31-33 Other manufacturing 41-43 Construction 45-47 Trade 49-53 Transportation and storage 55-56 Accommodation and food service activities Source: Authors (2020). ECONOMIC AND BUSINESS REVIEW 2022;24:161e170 165 The research sample was selected from a list of issuers listed on the Zagreb Stock Exchange (ZSE), publicly available at their webpage www.zse.hr. According to the data available on the 31st of December 2018, shares of a total of 132 issuers were listed. Funds,banks, and insurancecompanieswere excluded due to differences in financial statements, and another three companies were excluded from this total due to incomplete or missing financial statements. Thus, a final sample of 119 companies was formed, representing 90% of the population, so the research can be considered relevant and the obtained results reliable for non-financial listed companies.Inordertotestthehypotheses,different statistical techniques have been used. The OLS regression analysis was applied as the most appro- priate methodology for testing the first hypothesis about the impact of human resources investments (by providing training and paying extra bonuses or salaries to employees) on company financial per- formance and overall business excellence. The ManneWhitney U test, as the most appropriate for comparing the differences between two indepen- dent groups when the dependent variable is continuous but not normally distributed, is applied to determine whether there are any statistically significant differences between the average salaries and bonuses and educational and training costs per employee in companies from the HIIC and MIIC sectors. To test the second hypothesis about a statistically significant difference in a company's performance measurement, if human capital expenditures are capitalized in the balance sheet, rather than Table 2. Descriptive statistics of annual salary and bonuses per employee with regard to the company's main activity (in thousands of KN). Industry (NACE divisions) Group N Mean Std. Dev. Min. Max. 01-09 Agriculture, forestry, fishing, mining and quarrying MIIC 4 142.07 129.18 61.07 335.00 10-12 Manufacture of food, beverages and tobacco products MIIC 16 118.02 37.93 67.58 190.81 13-15 Manufacture of textiles, leather and related products MIIC 5 67.16 8.22 57.23 76.27 16-18 Manufacture of wood and paper products MIIC 3 92.85 16.78 81.39 112.11 22-25 Manufacture of rubber, plastic and metal products MIIC 4 123.38 29.91 88.94 159.91 29-30 Manufacture of transport equipment MIIC 4 126.84 28.24 89.19 152.21 31-33 Other manufacturing MIIC 2 109.42 47.60 75.76 143.08 41-43 Construction MIIC 4 154.53 81.48 111.88 276.72 45-47 Trade MIIC 9 134.25 76.04 58.48 309.31 49-53 Transportation and storage MIIC 11 212.43 100.34 106.21 375.05 55-56 Accommodation and food service activities MIIC 33 119.37 60.42 4.11 325.80 19-20 Manufacture of refined petroleum, chemicals HIIC 3 149.51 77.90 89.79 237.64 26-27 Manufacture of computers and electrical equipment HIIC 4 271.75 120.72 148.35 433.04 58-61 Broadcasting & telecommunications HIIC 5 175.67 70.55 83.00 270.40 62-63 Information services HIIC 5 175.97 124.55 64.66 371.11 64-75 Intellectual services (legal, accounting, management, etc.) HIIC 7 287.29 186.09 109.79 596.48 TOTAL 119 148.72 94.42 4.11 596.48 Source: Authors (2020). Table 3. Descriptive statistics of annual training and education costs per employee with regard to the company's main activity (in thousands of KN). Industry (NACE divisions) Group N Mean Std. Dev. Min. Max. 01-09 Agriculture, forestry, fishing, mining and quarrying MIIC 4 0.00 0.00 0.00 0.00 10-12 Manufacture of food, beverages and tobacco products MIIC 16 7.13 5.55 0.00 15.47 13-15 Manufacture of textiles, leather and related products MIIC 5 6.37 5.76 1.34 16.30 16-18 Manufacture of wood and paper products MIIC 3 1.85 2.36 0.00 4.51 22-25 Manufacture of rubber, plastic and metal products MIIC 4 11.51 8.43 0.00 20.22 29-30 Manufacture of transport equipment MIIC 4 10.48 7.17 0.00 16.23 31-33 Other manufacturing MIIC 2 12.67 2.19 11.13 14.22 41-43 Construction MIIC 4 9.54 8.49 2.04 20.75 45-47 Trade MIIC 9 9.78 11.25 0.00 33.95 49-53 Transportation and storage MIIC 11 8.57 12.77 0.00 39.52 55-56 Accommodation and food service activities MIIC 33 8.40 12.36 0.00 64.14 19-20 Manufacture of refined petroleum, chemicals HIIC 3 18.12 31.38 0.00 54.36 26-27 Manufacture of computers and electrical equipment HIIC 4 17.98 9.61 5.96 29.31 58-61 Broadcasting & telecommunications HIIC 5 6.46 8.72 0.00 18.93 62-63 Information services HIIC 5 12.91 12.79 0.00 28.32 64-75 Intellectual services (legal, accounting, management, etc.) HIIC 7 2.52 4.95 0.00 13.48 Total 119 8.43 10.76 0.00 64.14 Source: Authors (2020). 166 ECONOMIC AND BUSINESS REVIEW 2022;24:161e170 recognized as expenses in the P/L account, t-test for paired samples was used. Applied methodology is based on Barney's (1991) and Chen and Lin's (2004) claims that the skills of employees are a company's assets, so they need to be recorded as intangible assets in the financial statements, just like goodwill, copyright, or franchise. Namely, employees that contribute the most to human capital are much more unique and consequently very difficult to replace. Therefore, companies employing such workers are willing to pay higher salaries and extra bonuses in order to retain them. The amounts exceedingtheaveragefortheindustrysectorcanbe considered as investments in intangible assets. On the other hand, easily replaceable workers who do notcreateasignificantaddedvalueforthecompany have lower salaries that are recognized as expenses in the P/L account. Based on these assumptions, the scenario method is applied, this way adjusting the financial statements first. Amounts of annual sal- aries exceeding the average for the industry sector and costs of professional training and other educa- tional activities are removed from the P/L account and added in the balance sheet as intangible assets. Afterwards, the BEX index is recalculated for the “adjusted” financial statements and the differences in the value of the index before and after recalcu- lation are tested. 3 Results and discussion As described above, the OLS regression analysis was applied to test the hypothesis about the impact of human resources investments (by providing training and paying extra bonuses or salaries to employees)onthecompany'sfinancialperformance and overall business excellence. All model as- sumptions are met and the overall model fit (R- Square¼0.265)showsthataquarterofthevariance in business excellence can be explained from the annual salary and education and training costs per employee, indicating a meaningful strength of as- sociation. The p-value of the F-test (F ¼ 4.365; sig ¼ 0.010) indicates that these independents reliably predict the dependent variable in the model. The t-test of each independent variable in the model shows that both variables are found sta- tistically significant at a 90% confidence level, and the VIF values confirm no multicollinearity prob- lems between the independent variables. The ob- tained results are presented in Table 5. As can be seen from the above table, both vari- ables are positively correlated with the company's excellence, meaning that greater investment in human capital in the form of extra salaries and bo- nuses or investment in knowledge of employees, in terms of providing employee training, will increase company excellence measured by the BEX index. Thus, the first hypothesis about the statistically significant difference in the company's performance measurement, if it invests in human resources through salaries & bonuses more than an industry average and/or through training & education activ- ities is accepted. These findings are in compliance with Arslan et al. (2013) research, which confirmed that human capital investments, such as training investments, enhance employees' skills and abilities as well as their potential to work more efficiently and effectively. Consequently, such employees' ef- fortsfortifygreaterorganisationalopportunitiesand contribute to proficient organisational performance. Similarly, Bryl (2018) supported human capital in- vestments in terms of higher salaries, training and additional benefits, sustaining their impact on organisational financial performance, classifying these companies within the top ones on the market, on behalf of the substantial benchmark analysis provided. Additionally, the ManneWhitney U test signifi- cance value of 0.000 for salaries and bonuses per employee designates significant differences be- tween the average salaries and bonuses per employee in companies from the HIIC and MIIC sectors. On the other hand, the significance value of 0.941 for costs of training and educational activities indicates no significant differences between human resources investments in companies from the HIIC and MIIC sectors. These results can be observed from a strategic human resource management perspective and organisational decision in “buying” Table 5. OLS regression results. Model B T Sig. VIF Constant 5.888 1.444 0.151 SAL 0.047 2.100 0.038 1.017 T&E 0.350 1.792 0.076 1.017 Dependent variable: BEX Source: Authors (2020). Table 4. Descriptive statistics of human capital investment variables (in thousands of KN). Variable Mean St.deviation Minimum Maximum SAL MIIC 130.45 70.89 4.11 375.05 SAL HIIC 221.03 135.52 64.67 596.48 SAL total 148.73 94.42 4.11 596.48 T&E MIIC 8.03 9.94 0.00 64.14 T&E HIIC 10.04 13.67 0.00 54.36 T&E total 8.43 10.76 0.00 64.14 Source: Authors (2020). ECONOMIC AND BUSINESS REVIEW 2022;24:161e170 167 or“creating”owntalents.Accordingtotheresults,it can be concluded that Croatian organisations are moreproneto“buying”talents,meaningtheyrather recruit and select talents, attracting them with a substantial compensation system and retaining them by higher salaries and extra bonuses, than recruiting young employees and investing in their further career development. This can especially be noticed in companies from the HIIC sector, highly appreciating talented employees, representing companies' substantial human capital. Due to the fact that companies from the MIIC sector generally require employees with a lower level of educational background, the differences between the average salaries and bonuses per employees are visible among companies from the sample. On the other hand, “buying” instead of “creating” companies’ talents show no significant differences between human resources investments in companies from the HIIC and MIIC sectors. Obtained results of the second hypothesis testing confirmed a statistically significant difference in the company's business excellence, if annual salary and bonuses per employee exceeding the average annual salary and bonuses for the industry sector are capitalized in the balance sheet as intangible assets rather than being recognized as expenses in the P/L account. The paired samples correlation shows that theBEX(mean¼1.08)andBEX adj scores (mean¼ 4.02) are strong and significantly positively correlated (r ¼ 0.868). On average, BEX scores were 3 points lower than BEX adj scores (95% Confidence Interval of the Difference [ 5.09, 0.8]), and these differencesare statistically significant (t 118 ¼ 2.717, sig ¼ 0.008). The potential capitalisation within a company's balance sheet would yield a truer and fairer view of that company's performance. Quite similar results were obtained on the sample of Croatian high-tech companies, confirming a statis- tically significant difference on company perfor- mance capitalizing human resource expenditures in the balance sheet rather than recognising these as expenses in the P/L account (Belak et al., 2009). Additionally, Obara (2013) concludes the research with the statement that the discrepancy between book value and market value of the organisation could be reasonably reduced by excluding the human resource asset value from the organisational P/L account and including the human development investment within their balance sheets. Also, Hilorme et al. (2019) appointed a similar problem, more precisely, the problem of the number of in- dicators of the company's activity, such as qualified personnel, which cannot be identified or shown in the balance sheet. 4 Concluding remarks The main objective of this paper is to determine the role of human capital investments and their impact on business excellence of the listed com- panies in Croatia as an example of a post-transition economy. All findings confirm the correlation be- tweengoodcompanyperformanceandhighlevelof investment in human capital through salaries & bonuses and/or training & education costs. Both variables are positively correlated with company excellence.Resultsalsoconfirmthedifferenceinthe mean of salaries per employee between HIIC and MIIC companies, as well as the difference in com- pany business excellence when human capital ex- penditures are capitalized in the balance sheet rather than recognized as expenses in the P/L account. Summarizing the findings results in an important practical implication: Croatian companies should pay attention to managing human resources and realizing their importance and impact on competi- tive advantage, and moreover on business excel- lence. The same is expected from the relevant regulatory authorities who should encourage human capital investments through subsidies or other forms of state aid (e.g. tax exemptions). It is not only human resource investments that are visible as beneficial investments on the micro level, as they are also beneficial on the macro level, or even on the state and regional levels. Investing in human resources, especially in terms of extra bo- nuses and salaries, leads to greater pension funds, health insurance and income tax and similar de- ductions, which employees as well as their em- ployers need to provide. Accordingly, it stimulates and enables economy for further investments. Moreover, greater disposable income increases de- mand and consequently supply, creating a flywheel for the ongoing economic expansion. However, it is important to point out a potential limitation that may have impacted the results of the empirical research. The data for the research were collected from financial statements of listed com- paniespubliclyavailableonthestockexchangeweb page. As Croatia belongs to a macro-based ac- counting system countries with an underdeveloped capital market, the data may contain erroneous or anomalous values which are usually referred to as calculation errors or result from legislative frame- work specificities (e.g. reported number of em- ployees). 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