Human capital is a term used in management
literature to refer to the value of employees and their skills, knowledge, and
ability. Human capital reporting allows management to measure and set out the
value of human capital within the employer.
What is Human
Capital?
The human capital could be a loose term that refers to the educational achievement, knowledge, experience, and skills of an employee. The theory of human capital is comparatively new in finance and economics. It states that organizations have an incentive to pursue productive human capital and to add to the human capital of their existing employees.
Human
Capital Theory
In
the 1960’s, Nobel Prize winners Gary Becker and Theodore Schultz pointed out
that education and training were investments that could add to productivity
(Becker 1975). As the globe accrued more and more physical capital, the opportunity cost of going to school declined. Education gradually became an important component of the workforce. The term was also approved by corporate
finance and evolved part of intellectual
capital,
and more broadly as human capital.
Why Human Capital is important and why
does it matter?
Smart
leaders are aware of the importance of human capital as a competitive
advantage. Organisations that focus on engagement, well-being, organisation
culture, and employee development in their organisations tend to outperform
their competitors.
The
effective utilization and engagement of an organisation’s human capital have
also been proven to have a direct impact on a wide range of organizational
KPI’s (Key Performance Indicators), including efficiency, employee revenue,
product quality, work safety, and customer fulfillment.
The Gallup organization’s 2017 State of the Global Workplace report ties employee engagement – a sense of being very involved and keen about their work and workplace – a wide diversity of business outcomes and the overall performance of the workplace culture.
They reported that most employees are not engaged; worldwide, the percentage of adults who work full time for an employer are engaged at work is just 15%.
The report also offers compelling statistics that show how business units in the
top quartile of global employee engagement perform versus those in the bottom
quartile.
·
Higher productivity: 41%
lower absenteeism and 17% higher productivity
·
Lower turnover: in
organizations with high employee turnover, highly engaged business units
achieve 24% lower turnover
·
Better product quality: highly
engaged business units experience 40% fewer quality incidents (defects).
·
Better customer experience: highly
engaged business units achieve 10% higher customer metrics and 20% higher
sales.
(Clifton 2017)
Effective human capital management isn’t
solely essential for ensuring the health and success of your business but to
enable you to compete in an increasingly competitive world.
By making human capital, a priority, the
organizations able to attract, retain, and engage the talented, high-performing
individuals you want to be successful, from finding the right talent, to
onboarding and supporting the employee experience throughout the employee life
cycle.
Measuring
Human Capital: Why?
Attempting
to measure and develop human capital just since it is “good practice” will
never help an organization to accomplish your goals. One needs to
know why it is being done in order to get the most out of it.
On that note, pleased find below few reasons why organizations should measure its human capital.
- To determine it’s human capital’s ROI (return on investment) – human capital is an asset that the organisation invest in and expect to get a return on. Once you calculate what your return is on your human capital investment, you will be able to judge the efficiency and effectiveness of your human capital.
- To identify gaps in human capital – It’s quite simple; when you measure what you have, you will be able to see what you don’t have! The gap becomes even clearer when you consider your organisation’s overall objectives.
- To bond, the gap in your human capital - Just similar with any other analyses, their overall objective is recognizing what you have, what you are lacking, and then determining how to bond the gap between the two in order to achieve your organization’s goals.
It is critical to keep in mind your organization’s objectives during all your analysis, and
Key Takeaways: Human
Capital
- Human Capital the intangible economic value of an employee’s knowledge, skills, experience, and social qualities that contributes to a person’s skill to perform work in a manner that produces economic value.
- Education and health are key qualities that improve human capital and directly contributes to economic growth.
- Both employers and employees make significant investments in the development of human capital.
- Human capital theory is an effort to quantify the true value of an investment in human capital and is closely linked to the field of human resources.
Now that
you know why you need to measure human capital, make certain you take all the
right steps to assure its
optimal development!
Reference
- Gary S. Becker. "Human Capital: A Theoretical and Empirical Analysis, with Special Reference to Education." National Bureau of Economic Research, 1975
- Chen. (2021) Intellectual Capital. Available from https://www.investopedia.com/terms/i/intellectual_capital.asp [Accessed on 29 April 2021].
- J. Clifton. (2017). The Gallup organization’s State of the Global Workplace. P. 4 to 7. Available at: https://www.gallup.com/workplace/238079/state-global-workplace-2017.aspx?thank-you-report-form=1 [Accessed on: 29 April 2021]
Human capital is not a tangible asset. It is the economic value comes from skills, abilities, knowledge and worker experience. Human capital initiatives are the objectives which organizations select to pursue that depends on people of the organization. Few initiative strategies are improve performance culture, lean management, building a global mindset, new business model and re-engineering functional disciplines.
ReplyDeleteThe concept of human capital recognizes that not all labor is equal. But employers can improve the quality of that capital by investing in employees—the education, experience, and abilities of employees all have economic value for employers and for the economy as a whole.
ReplyDeleteGood Article. Deloitte's 2021 Global Human Capital Trends Report highlights key areas of improvement for organizations in the year to come. According to that, it has 5 Key Trends of human capital. There are Designing Work for Well-Being, Unleashing Worker Potential, Where Work Happens, Setting New Directions for Work and the Workforce, Accelerating the Shift to Re-Architecting Work.
ReplyDeleteThe stock of behaviors, skills, social, and personality qualities reflected in the capacity to perform labor in order to generate economic value is referred to as human capital. Human capital is distinct from all other forms of capital. Companies need it in order to achieve their objectives, expand, and remain creative
ReplyDeleteIn its most basic sense, “human capital” refers to the group of people who work for or are qualified to work for an organization—the “workforce.” In a larger sense, the various elements needed to create an adequate supply of available labor form the basis of human capital theory and are critical to the economic and social health of the world’s nations.
ReplyDeleteConcerning a professional organization, human capital is made up of all the organization's employees. People are by far any company's most important asset. Technology, methods, and processes give short-term advantages and are quickly and easily assumed. However, an organization's people are perfect. That's why any firm that can attract and retain elite talent provides itself long-term competitive advantages.
ReplyDeleteEducation is one of the most important elements of human capital, leading to increased economic output, higher individual income, and increase economic mobility for families.
ReplyDelete