- Introduction of Human Capital Investment.
- Areas of Investment in Human Capital.
- Need / Importance of Investment in Human Capital.
- Strategies of Human Capital Investment.
- Human Capital and Productivity.
- Rate of Return on Human Capital Investment.
- Benefits and Limitations of ROI in Human Capital Investment.
What is Human Capital Investment ?
Human capital investment means that the investor invest a certain amount of capital for human resources to increase the quality of human resources, capabilities and levels and at last to increase labour output. The purpose of human capital investment is the adding of human capital value including increasing the knowledge of human capital improving the skill of human capital, rising the ideological and moral levels of human capital, strengthening human capital capacity to adopt economic development and social progress and so on.
Human capital is defined as a combined knowledge, skill and abilities of the total workforce. Human capital investment is important because of companies who utilize this cost and leadership strategy depend on their workforce to give them the competitive edge. In the current business scenario of increasing government regulation, competitive world economies and global market investing in human capital helps a business to retain its competitive edge.
For example, Microsoft and Apple are two great companies who utilize the human capital investment strategy and their result's are well known.
Human capital investment strategies must align with the organisation business goals and objectives as well as its organisational values. The business practices word and actions of an organisation must reflect its values. Human investment means allocation resources to improving the knowledge base of the total workforce and the skills and abilities of high potential employees.
The goal is to capitalize on their knowledge, skill and abilities to gain competitive advantage. This is an area in which human resource can contribute to the company by actively participating in the organisation strategic planning process in order to understand how to align human resources programs to meet the organisations goals and objectives.
Areas of Investment in Human Capital
The five main areas of investment in human capital are as follows :
A) Acquisition : Acquisition involves ,
1. Recruiting -
Requesting can be done internal and externally. If the HR planning finds the need for specific for additional employees based on job analysis to hire these additional employees the enterprise must discover potential applicants. Out of these potential applicants, screening is to be done to identify job applicants who will be successful if selected.
2. Employees Socialization -
When acquisition functions is over the selected applicants have to be appointed in the organisation, who have to adapt themselves to the organisational culture and their work environment.
The organisational culture convey the new employee how thing are done and what really matter for the workforce and for the organisation. When they adopt the organisational culture there learn the rope, i.e. what is most significant for them and for the enterprise and how one gets adapted to the new and environment. This is referred to as employees socialization.
3. Human Resource Planning -
In HR planning, the management has to ensure that it has the right number and kind of people at the right places at the right time, capable of effectively and efficiently completing the work needed for the enterprise to achieve its overall objectives.
B) Development - This includes,
1. Career Development -
A career is a sequence of position occupied by a person during the course of a lifetime. Effective organisational career development ensure they needed talent being available and improves the organisational ability to attract and retain high talent personnel.
2. Employee Training -
Training is a learning experience which seeks a permanent change in an individual to improve his ability to perform on the job. It can involve the changing of skill, knowledge, attitude or social behavior.
3. Management Development -
The management development activities should attempt to instill sound reasoning process to enhance ones ability to understand and interpret knowledge. Development focuses more on the employees personal growth.
C) Motivation -
Motivation is the willingness to do something and is conditional by this actions ability to satisfy some need for the individual. A need is one which is looking for a certain outcomes appearing very attractive. Unsatisfied need creates tension with stimulate drives within the individual. These drives generate search to find particular goals that if attend, satisfy the need and lead to the reduction of tension.
D) Maintenance -
The objective of this is to retain people who are performing at high levels. This required that your organisation provides a safe and healthy working conditions and satisfactory labour relations. This involves compensation administration. It involves.
1. Job Evaluation -
Job evaluation seeks to use the information in job analysis to orderly determine the value of each job in relation to all jobs within the organisation.
2. Safety and Health -
Organisation have to make provisions for the safety and health of the worker. Basically, employees are to be given safety education, skill training, engineering, protection and regular enforcement.
3. Compensation Administration -
The goal of compensation administration are to design the lowest cost pay structure that will attract, motivate and retain competent employees who will perceive the reward as fair. As the organisation was to pay fair wages the employees want fair compensation for the job being done. So the organisation is concerned with determining a fair compensation plan.
E) Research -
Since effective management of human resources depend on refining Human Resource Management practices to changing conditions, as there is need for conducting research to keep abreast of the latest finding in HRM and provide a suitable framework by which the solution to the problem of HRM can be found. The HRM research could be in any of areas such as wage survey, job analysis, job satisfaction, effectiveness of training methods etc.
Need / Importance of Investment in Human Capital
Investing in human capital is extremely important in order for a business to thrive in today's marketplace and also for economic improvement. Investing in human capital is investing in the skill and capability of Human Assets whether that consists of front line staff, sales representatives, manager, supervisor or any association throughout the organisation. Employees and Association should be provided opportunities for growth and advancement through education and improvement programs.
1. Lowering the Demand for Training -
Many workers increase their productivity by learning new skills and perfecting old ones while on the job. Presumably, future productivity can be improved only at a cost for otherwise there would be an unlimited demand for training.
2. Highlight Committed Employees -
Those investment will bring out the most committed, talented people within the organisation. It is those individuals who will bring a business to true success.
3. People Act as Linking Element -
The most important aspect of a company are great product, great service, great relationships and a solid reputation. Without great people none of this can exist.
4. Value Increasing Potential of People -
These people that are being invested in to our true assets that have potential to increase in value. They do not depreciate and are not easily written off at the end of the year. They are primary assets which should be appreciated, managed and developed as to assets and not liabilities.
5. Increase Employee Loyalty -
If associate feel that they are worthy of a company's investment fund they will feel an increase in motivation to bring success to their employer. The advantage of investing in human capital not only include increased association productivity but also increase loyalty.
Strategies of Human Capital Investment
Following are some example of employees programs which can be implemented by human resource as part of human capital investment strategies :
1. Increase Retention -
With the dwindling workforce, employers must think about how to retain valuable employees. While a certain amount of turnover is healthy but an organisation would like to keep their best and brightest employees with them. In a true global economy, it makes good economic and business sense to invest in human capital.
2. Pay and Recognition -
Organisation should design employee compensation and recognition programmes that rewards high performance based on specific criteria.
3. Benefit Matter -
It is the role of Human Resource to review existing employee benefit programmes to ensure they include healthcare, wellness, accommodations for work and life issues, flexibility in work schedules and work sites, sick leaves etc. Numerous studies show that the organisation which provide these benefits are more productive because employees are healthier and less stressed.
4. Develop a Succession Plan -
This is a long-term systematic strategic plan that identifies individuals with potential leadership ability to fill key position in the organisation. HR works with executive management in designing the programs to develop employees over time to be ready to step into crucial role as current executive leave the organisation. Manager should schedule regular feedback session to keep the employee on track to becoming fully competent for the new position within a specific time frame.
5. Hiring Smart -
The organisation should adopt a hiring and selection process that allowes the hiring manager enough time to hire smartly and choose the best person who can contribute the most to the job. Training should be given to managers on how to ask behavioral type questions check background and work experience and other relevant information in order to get the best candidate.
6. Invest in Professional Development -
Budget should be prepared for training, education, seminar and conference so that individual can update or acquire the knowledge and skill for professional development. Various question can be asked during the seminar such as how can this be applied to the organisation ? These ensure everyone takes learning seriously and transference of knowledge occurs.
Human Capital and Productivity
Productivity measured in terms of output per man is broadly determined by two principal factors.
1. Employees Job Performance -
It has been emphasized earlier also that the human factors is a critical factor in the success of an enterprise or an industry. The human side of an enterprise is its dynamic part, good machines, improved method of work, new processes, in short all improvement in technology calls for willingness and actions on the part of men in industry to serve as agent of higher productivity. Employees include men at level of organisation right from the rank and file workers up to the top level executives.
Of these employees job performance depends primarily on :
- The motivation of employees (may be called the willingness of the worker to work).
- The ability of the individual employees (may be called the ability to work).
- Physical conditions of work.
2. Technological Development -
Technical factors including the degree of the mechanization, technical know how, raw material, layout and the methods and techniques of work determine the level of technological development in industry.
Rate of Return on Human Capital Investment
A rate of return is the gain or loss on an investment over a specified time period expressed as a percentage of the investment cost. Rate of return is usually but not always calculated annually also called return.
To gain and maintain credibility at the executive table it is increasingly important for human resource management to present support for their human capital management strategies in a manner which is similar to those used to support financial and structure capital. Progressive human resource executive has recognized that using human capital metrics to support business decision provide direct links to organisational result in quantitative terms that are readily understood by other Executive Decision Makers. Retention of employees as well as high level of employees productivity has become increasingly important component of successful organisation. In fact, it has been demonstrated that human resource activities that as clearly aligned with business strategy can result in significant increases in return on investment and organisational success.
There appear to be casual relationship among training, employees engagement and effective leadership that support human resource effectiveness. These studies provide evidence that employees with on going opportunities for learning with strong leadership and more highly motivated and engaged and therefore more productive and less likely to leave the organisation. Both the productivity and retention factor can lead to increase return on investment (ROI).
Benefits of ROI in Human Capital Investment
Benefits of return on investment in human capital investment are as follows :
1. Earn the Respect of Senior Management -
Measuring the return on investment of an HR programme is one of the most convincing way to earn the respect and support of the senior management team, not only for a particular HR programmes but also for the HR projects as well.
2. Develop a Result Based Approach -
Throughout the cycle of HR programmes design, development and implementation the entire team of stakeholders focuses on results.
3. Improve the HR Processes -
Because a variety of feedback data collected during the HR programme, the comprehensive analysis provide data to drive changes in HR processes and make adjustments during programme implementation.
4. Gain the Confidence of Clients -
The client requests and authorities an HR programmes will have a complete set of data to show the overall success of the process.
5. Alter or Eliminate Inefficient HR programmes -
This benefit is two-fold. First in a program is not effective and the result are not materialising the return on investment process, will promote changes or modifications. On rate concession the programmes may have to be halted if it is not adding the appropriate value.
6. Show the Contribution of Selected HR Programmes -
With the return on investment process the human resources staff and client will know the specific contribution of an HR programmes which was not possible with data previously developed.
Limitations of ROI in Human Capital Investment
Major limitations of the return on investment process are as follows :
1. Changes of Focus for HR Staff -
Many HR staff members may not have the basic skill necessary to apply the return on investment process within their scope of responsibilities. Also the typical HR programme does not focus on result but on qualitative feedback data.
2. Faulty Initial Analysis-
Some HR programmes have been implemented for the wrong reasons and are based on management request or effort to chase a popular industry fad. An ROI calculation for an unnecessary HR programmes will likely yield a negative ROI value. This is the realistic barrier for many interventions.
3. Fear -
Some HR staff members do not pursue return on investment because they perceive the ROI process as an individual performance evaluation process instead of the process improvement tool.
4. Cost and Time -
The return on investment process will add additional cost and time to the human resource programme. The additional investment in ROI should be offset by the results achieved from implementation. However, this barrier often stops many ROI implementations early in the process.
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