Illustrate different constituents of human capital. Discuss the need, resources and approaches of human capital management.
Constituents of Human Capital, Need and Approaches
The most important capital that can be owned by an organization are its human force. As defined in the Oxford English Dictionary, human capital is,” the skills the labour force possess and is regarded as a resource or asset.” It holds the concept of increment in an individual’s productivity as a result of investments done in that individual such as education, training, health and intellectual development. Human capital is the knowledge, skills and abilities of the people working in the company (Goldin).
Constituents of the Human Capital
These are the knowledge available in the organization in the form of their human capital. It is the accumulation of everything, everybody in a company knows that gives a competitive edge to the company (Stewart, 1997). These are the intangible resource of the company.
Intellectual capital is used for assessing the wealth of the organizations. The IFRS (International Financial Reporting Standards) has developed the International Accounting System 38 with the purpose of prescribing the accounting treatment for intangible asset. The valuation is integrated in the statements of the company as “Goodwill”. These intangible resources summing up with tangible can be regarded as the intangible resources make up the total value of the business (Armstrong, 2014). Intellectual capital include knowledge that employees have developed over many years. It could be ways of marketing, cost cutting technologies or could even be secret formulas held by companies such as Coca- Cola and KFC.
These are the knowledge attained from the network of relationships within and outside the organization. The network of the employees can also be of huge help for development of the organization. Companies such as Airbnb and Uber rely largely on the social capital to grow market shares. They use the power of social networking sites for marketing and quality control as users provide them with reviews and suggestions of their services. Likewise, in Nepal an emerging start-up named Tootle uses similar approach to use its social capital in regards to increase its business.
These are the institutionalized knowledge possessed by an organization. A company as it grows older has recorded documents, files, databases and manuals. This capital is also known as Structural Capital (Armstrong, 2014). The company goes through numerous phases as time passes. The documentation of these incidents helps the company in future days to decide on what to do on a similar case. They do not have to search the solutions from scratch as such databases can be used as reference.
Examples of Organizational Capital would include:
- Mission and Vision which shows the direction of the company to the workers.
- Organizational Structure
Human Capital Management
The organization is nothing without its employees. Employees run the organization and are the most important assets of the organization. Besides, a company might have to bear a huge cost of replacing an important employee. For example: Mr. Anil Keshary Shah recently shifted to Nabil Bank from Mega Bank. Regardless of the reasons behind the change, Mega bank will need to spend a huge amount to replace the benchmarks set by him. Additionally, the price of shares are effected due to this change as well. Similarly, business of a restaurant is largely affected in absence of the head chef. Thus, it is immensely necessary to identify and retain such human capital.
Human Capital Management is also required to train, recruit, select and retain the employees in an organization. Additionally, Human Capital Management is specifically important as it aims to:
- Provide a means to improve in areas where employees can do better.
- Work on shortcomings of the employees and get the most out of them.
- Aid in recruiting the candidate with right set of skills (both hard and soft skills).
- Help in continuous professional and personal development of employees by means of trainings, refreshment programs, mindfulness trainings and so on.
In order to manage the human capital, a company needs to know its requirements. The kind of skills available in the company, the skills required to achieve the goals and performance drivers of the company are some of the aspects that needs to be looked on before approaching the people.
Some of the approaches to measurement are described below.
- The human capital index – Watson Wyatt
In 1999, Watson Wyatt Worldwide reported the results from a survey that was administered to 405 U. S.- and Canada-based companies that were publicly traded had at least three years of shareholder returns and had sales or market value in excess of $100 million as of their most recent fiscal year end (Hornstein, Luss, & Parker, 2002).
Items measuring human resource practices in five areas–recruiting excellence; clear rewards and accountability; a collegial, flexible workplace; communications integrity; and prudent use of resources–were combined into a set of factor scores to be used to estimate the effect of HR practices and policies on overall firm performance, as measured by the natural log of Tobin’s Q.
Based on the collected data, the following figure demonstrates the relationship between human capital and shareholder value creation. The results are not exactly similar since the survey was extended between 1999 and 2001 to include the role of technology, impact of benefits, and the effect of reducing voluntary employee turnover, the results are reasonably similar (Hornstein, Luss, & Parker, 2002).
Table 1: Key links between Human Capital and Shareholder Value Creation
|Practice||Impact on market value 1999||Impact on market value 2001|
|Total Rewards and Accountability||9.2%||16.5%|
|Collegial, Flexible Workplace||7.8%||9.0%|
|Recruiting and Retention Excellence||10.1%||7.9%|
|Focused HR Service Technologies||n.a.||6.5%|
Note: This table is taken from the paper of (Hornstein, Luss, & Parker, 2002).
In conclusion, Watson has stated that it pays to manage people right (Wyatt, 2002).
The organizational performance model- Mercer HR Consulting
This model is based on elements such as information and knowledge, decision making and rewards, each of which plays out differently within the context of the organization, creating a unique DNA.
This model emphasises on focusing the actual experience of employees and identify the gaps between the requirements of the workforce in supporting the business goals and what is actually being delivered (Armstrong, 2014).
The Human Capital Monitor- Andrew Mayo
“People are always accounted as costs and never as investments, whereas they could be both” (Mayo, 2006).
Mayo developed the human capital monitor to identify the human asset worth which is equal to ‘employment cost* individual asset multiplier’. He believes that value added per person is a good measure of the effectiveness of human capital (Armstrong, 2014).
Armstrong, M. (2014). Armstrong’s Handbook of Human Resource Management Practice. London, Philadelphia, New Delhi: Kogan Page.
Goldin, C. (n.d.). Handbook of Cliometrics. 3.
Hornstein, H., Luss, R., & Parker, O. (2002). The Watson Wyatt Human Capital Index: A deifinitive impact on shreholder wealth.
Mayo, A. (2006). Mayo learning. Retrieved from http://mayolearning.com/assets/Uploads/Publications/CIPD-DATA-REQUIREMENTS-2006.pdf
Stewart, T. A. (1997). Intellectual Capital: the New Wealth of Organizations. New York: Doubleday.
Wyatt, W. (2002). http://www.oswego.edu/~friedman/human_cap_index.pdf. Retrieved from www.oswego.edu: http://www.oswego.edu/~friedman/human_cap_index.pdf
Human capital is the collection of traits that includes knowledge, abilities, experience, intelligence, training and wisdom possessed by the people working in an organization. OECD defines human capital as skills, competencies and other attributes embodied in individuals or groups of individuals acquired during their life and used to produce goods, services or ideas in market circumstances. As per the Oxford English dictionary human capital is the skills the labor force possesses and is regarded as a resource or asset. It encompasses the notion that there are investments in people (e.g. education, training, health) and these investments increase an individual’s productivity resulting in the increased organizational performance (Goldin, 2014). Human capital is non-standardized, tacit, dynamic, context-dependent and embodied in people (Scarborough & Elias, 2002). Human capital is the human factor in the organization; the combined intelligence, skills and expertise that gives the organization its distinct character. The human elements in of the organization are those that are capable of learning, changing, innovating and providing the creative thrust which if positively motivated can ensure the long-run survival of the organization (Bontis, Dragonetti, Jacobsen, & Roos, 1999). This is the organization’s constantly renewable source of creativity and innovation.
The factors that determine the human capital are skills and qualifications, education levels, work experience, social skills, intelligence, emotional intelligence, judgement, personality traits, habit and creativity. There are three major constituents of human capital.
Intellectual Capital: The intellectual capital is derived from the collective knowledge (either documented or not documented) of the individuals working in an organization. It consists of stocks and flows of knowledge that can be used to produce wealth, multiply output of physical assets, gain competitive advantage and enhance value of other types of capital. It is not easily translatable into financial terms. The value of the firm can be increased or decreased depending on the knowledge level of the employees. It encompasses the models, strategies, unique approaches and methodologies organizations used to create, compete, understand, solve problem and replicate (Akpinar). For instance, the success of Apple Company is the result of the intellectual capital of the employees working there.
Social Capital: The social capital is derived from the relationship and network of relationships within and outside the organization. The social capital provides the organization with access to scattered resources. Knowing the right people to go to will ease the work. For example if a company producing product X has good relationship with the vendors, the vendors will help to enhance the business by promoting product Y produced by the same company. It is like if we have good relationship with our neighbor who is a plumber, we don’t have to worry much if the need arises for us to repair our taps. Apart from maintaining cordial relation with important external agencies, the harmony between the internal staffs is also equally important to get the best out of the employees.
Organization Capital: The institutionalized knowledge available in database and manual of the organization forms the organizational capital. It includes information and formalized knowledge. Organizational capital focuses on the explicit knowledge that is reflected through the vision, organization structure, principles, policies and training tools.
Human capital management is the process of acquiring, training, managing and retaining the human resources in an organization. It is important because human capital is the workforce asset of any organization as people in the organization are the ones whose performance affects the overall performance of the organization. Recruiting and applicant tracking, onboarding, human resource management, benefits administration, performance and talent management, time and labor and payroll are the components of human capital management. It focuses on managing employees so that they contribute towards the organizational development. Human capital management helps to hire right candidate, orient new employee to the system, upgrade knowledge with time, make employee comfortable, retain employees and make employees self-sufficient. It is human resource management that helps to identify key managerial drivers, aid management to take effective decisions regarding people, monitor the effectiveness and impact of human resource policies implemented in the organization, focus on what needs to be done to increase human efficiency and find out the ways to make the best use of human capital (Armstrong, 2014). Human Capital Management aims to:
- Enable the Human Resource Manager to hire right candidate for right role.
- Ensure free flow of information between supervisor and subordinate.
- Design training and skill development activities for upgrading existing knowledge.
- Extract the best out of the employees.
- Highlight importance of soft skills and personal development.
- Improve in areas where employees are lacking.
The approaches to human capital depends on type of organization, business goals, divers and performance indicators. The commonly used approaches are:
The Human Capital Index
This approach of human capital management was developed by Watson Wyatt which calculates the correlation between human capital and shareholder value on the basis of following criteria:
- Total rewards and accountability
- Collegial, flexible workforce
- Recruiting and retention excellence
- Communication integrity
The organization with fair salary system, shared responsibility and easily adaptable workforce,good flow and retention of employees and transparency in communication tends to have higher human capital index indicating better management of human capital. This approach believes that Human Capital Index can be increased through training and development programs (valuebasedmanagement.net)
The Organizational Performance Model
Mercer, a consulting firm in human resource has developed this approach. This approach measures the effectiveness of human capital management on the basis of people, work processes, management structure, information, knowledge, decision making and reward. This approach uses the statistical tool, Internal Labor Market Analysis to find out the deviation between the actual performance and the set standard. If the actual performance is below the set standards, it means the human capital management techniques need to be revised.
The Human Capital Monitor
This approach was developed by Andrew Mayo that identifies the human value of the enterprise as:
Human Asset Worth = Employment Cost*Individual Asset Multiplier
The employment cost includes cost incurred during the recruitment of an employee and asset multiplier is the share of that individual in organization profit. Here the absolute figure is not important. It helps to analyze whether the human capital is sufficient, increasing or decreasing so that the activities can be planned accordingly.
Karie has listed the following as the successful organization’s approach to Human capital management:
- Drive workforce strategy at C-level
- Prioritize training and mentoring
- Plan for changing demographics of the workforce
- Attract quality talent
- Reward based on merit, not tenure
- Recognize the value of data
Akpinar, A. T. (n.d.). Turkey: Kacaeli University.
Armstrong, M. (2014). Armstrong’s Handbook of Human Resource Management Practice. London.
Bontis, N., Dragonetti, N. C., Jacobsen, K., & Roos, G. (1999). The Knowledge Toolbox: A Review of Tools Available to Measure and Manage Intangible Resources. European Management Journal , 391-402.
Goldin, C. (2014). Human Capital.
Karie, W. (2015). 6 Ways of Successful Organization Approach to Human Capital Management. SAP Community Network .
Scarborough, H., & Elias , J. (2002). Evaluating Human Capital. London.
valuebasedmanagement.net . (n.d.).