Human Capital
Contents :
  • Meaning and Definition of Human Capital
  • Elements of Human Capital
  • Types of Human Capital
  • Basis to Evaluate Human Capital
  • Ways to Increase Human Capital
  • Measuring the Value of Human Capital
  • Models of Human Capital
  • Importance of Human Capital

What is Human Capital ?

Meaning and Definition of Human Capital :

A.W. Lewis introduced the word “Human Capital” in "Economic Development with Unlimited Supplies of Labour". Human capital takes into account not only the people working in the organisation, but also their contributions towards the success of the organisation. The sum total of different values such as knowledge, life experience, skills, capabilities, and motivation of the manpower working in any organisation is known as human capital. The productivity and output of any organisation can be increased drastically with the help of human capital.

Human Capital is an all-encompassing term for the knowledge, 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.

According to Douglass :
"Human capital is, the acquired energy, motivations, skills, and knowledge possessed by human beings, which can be harnessed over a period of time to the task of producing goods and services".

Roos & Roos categories and define Human Capital as follows :

1) Competence : 
Essentially about knowledge and skills. Knowledge meaning specifically the "technical or academic knowledge of things", related to education, i.e., something that "has to be taught".

2) Skill : 
A skill is the practical counterpart of competence.

3) Attitude : 
Depends mostly on personality traits and cannot be changed much. It is influenced by "motivation, behavior and conduct".

4)Intellectual Agility : 
It covers innovation, flexibility, and adaptability traits seen at a group or organizational level as much as in individuals.

Becker's view is that Human Capital is similar to the "physical!" means of production, e.g., factories and machines, one can invest in Human Capital (via education, training, medical treatment) and the income depends partly on the rate of return on the Human Capital the organisation owns.

Thus, human capital is a stock of assets a company owns, which allows one to receive flow of income, similar to interest earned.

According to Becker :
"The Human Capital literature often distinguishes between "specific" and "general
Human Capital".

i) Specific Human Capital : 
It refers to skills or knowledge that is useful only to a single employer (and who will likely be willing to pay for it).

2) General Human Capital : 
It (such as literacy) is useful to all employers.

Likewise, the value placed on specific Human Capital due to their skills possessed may be worth more in one organisation than in another, e.g., an IT technician's value may be higher within an IT organisation than in an organisation where IT is purely a back office support function.

Human capital constitutes a key element of the market worth of a company. Generally, the value of human capital represents about over 36 per cent of total revenue in a typical organisation. People in organisations add value and there is a case for assessing this value to provide a basis for BR planning and for monitoring the effectiveness and impact of HR policies and practices. The process of identifying measures and collecting and analysing information relating to them will focus the attention of the organisation on what needs to be done to find. keep, develop and make the best use of its human capital.

Human Capital strategy

Elements of Human Capital

The various elements of human capital are as follows:

1) Know-How : 
This is one of the major elements as it relates to the process of the means to get the end results. It answers the question what is what and how to do it and the functions involved in general.

2) Education : 
This is a basic factor which makes one to understand the various aspects of the job or work allotted. This is also a motivating factor for career advancement.

3) Vocational Qualification : 
This element refers to the practical knowledge a person-gets through vocational education and training under certain sphere of activity.

4) Work-Related Knowledge : 
It is an individual's knowledge in the particular field of work 'which he has gained through such work being allotted to him. His earlier work experience in that particular job or work will be of additional value.

5) Occupational Assessment : 
A good analysis of the job will motivate one to study the nature of work or occupation. This will enable one o plan future career depending upon the value of assessment.

6) Psychometric Approach : 
This approach tries to measure the ability, i.e., intelligence in terms of quantity or how much intelligence a.person has. In other words, this approach tries to determine and measure qualitatively the factors that make up intelligence.

7) Work Related Competencies : 
This relates to the knowledge an individual processes with regards to the work he is allotted or involved in. This includes the nature of the job, his or her practical knowledge and experience in that line of activity, the training one has undergone in that line or work, is aptitude towards the work, etc.

8) Entrepreneurial Innovativeness, Proactive and Reactive Abilities : 
It is the entrepreneurial skill and force with which an individual involves himself in his work. The aptitude in the particular sphere of activity should motivate him for innovative approach. That should make an individual to act so when there is some adverse result. Innovativeness is based on the constant bent of mind on research in the work field.

9) Changeability : 
The competitiveness among the enterprises drives them making various changes in the organisation. As the organizations book or changes, the employees would be driven for challenging tasks with many changes being made in the organizational structure. It may even salt in positional change. An individual should be capable of adjusting himself to the changing organizational set-up and changing situations.

Types of Human Capital

Human assets are in intangible form and are within the inside of human resources. The types of human capital include :

1) Intellectual Capital : 
The first element of the human capital is intellectual capital which can be defined at individual level as well as at organisational level. At the level of individual, it refers to a person's knowledge, skills and expertise. It may be in the form of specialized knowledge, tacit knowledge and skills, cognitive complexity and learning capacity. At the organisational level, intellectual capital consists of both the stock of knowledge, skills and expertise that members of the organisation collectively possess, and the knowledge and expertise that may be embedded in or owned by the organisation including patents, information technology based know ledge systems, or specialized processes of work. Ghoshal observes that, 'in the recent past, much management attention has been paid to this issue of intellectual capital, and rightly so knowledge rather than money is increasingly becoming the key competitive differentiator - certainly in service industries like consulting, investment banking, IT services, and so on, but also in manufacturing based businesses like pharmaceuticals, consumer electronics and electrical machinery.

2) Social Capital : 
Social capital is the second element of human capital. It is derived from the network of relationships, both internally and externally. From organisations point of view, social capital relates to the structure, quality, and flexibility of the human networks which can be created through cohorts, joint training in which people get to know each other, job rotation through different departments and functions, long-term employment and internal culture.
The other aspect of social capital is external built on the relationships with external forces like customers, suppliers, government agencies, etc. However, building external relationships and working on these does not involve taking undue advantages for furthering the interest of the organisation. It is used in the context of trustworthiness.

3) Emotional Capital : 
Emotional capital involves self-confidence, ambition, courage, risk taking ability and resilience. It is reflected in what is described as a 'can do' spirit. Individuals need self-confidence based on self-esteem, courage, and resilience to convert their knowledge and relationships into effective actions. Organisations require high internal energy and an environment of pride, trust, and openness to create a bias for speed and action in rapidly changing environment.
In today's context, more companies are involved in developing Emotional Quotient (EQ) as the individuals in an organisation depend more on their emotional capital for effectiveness than their intelligence and technical skills. Emotional capital helps in controlling such emotions as anger, hatred, frustration, confusion, sadness, etc., which affect the job performance adversely. Further, it helps in reducing stress, a major problem of the modem organisations.

4) Spiritual Capital : 
Spiritual capital is the recent development in the practice of human resource management. First, it was Intelligent Quotient (IQ) followed by Emotional Quotient (EQ) and now has come Spiritual Quotient (SQ). Director (HR and OD) Aptech Limited, views that "One with a high IQ may get hired; whereas with a high EQ, one can get promoted. But this is a short-term perspective and long-term growth is linked to SQ". Spiritual capital is assuming increasing importance throughout the world. Spiritual capital is multi-directional and includes values, he and approach to work. Most growing organisations are of the opinion that people can be made to learn, their skills can be developed; but when it comes to values, ego and approach to work, these cannot be changed. Therefore, it is desirable to hire those whose valves, ego, and approach to work match those of the organisation.

All these forms of human capital are not isolated rather these are interrelated. Therefore, while measuring human capital, all these must be taken together. Hunan resource accounting makes attempt to measure this capital.

Basis to Evaluate Human Capital

In an enterprise the following indicators are being applied as measures to evaluate the human capital :
  • Reputation of company employees with head hunters.
  • Years of experience in profession.
  • Rookie ratio (percentage of employees with less than two years of experience)
  • Employee satisfaction
  • Employee participation.
  • Proportion of employees making new innovative plans and suggestions,
  • Value added per employee.
  • Value added per salary rupee.

Ways to Increase Human Capital

The following six ways are used to increase human capital:

1) Specialization and Division of Labour  : 
Specialization allows workers to concentrate on specific tasks and increased specialization of skills. Though specialization can also lead to boring, repetitive jobs and limited skill development of workers.

2) Education : 
Basic education to improve literacy and numeracy has an important implication for a basis of human capital.

3) Vocational Training : 
Direct training for skills related to jobs, electrician, plumbing and nursing. A skilled profession.

4) Climate of Creativity : 
An education which enables children to think outside the box can increase human capital in a way that 'rote learning' and an impressive accumulation of facts may not.

5) Infrastructure : 
The infrastructure of an economy will influence human capital. Good transport, communication, availability of mobile phones and the internet are very important for the development of human capital in developing economies.

6) Competitiveness : 
An economy dominated by state monopolies is likely to curtail individual creativity and entrepreneurs. An environment which encourages self-employment and the creation of business enables greater use of potential human capital in an economy.

Measuring the Value of Human Capital

The value of human capital is inherently dependent upon its potential to contribute to the competitive advantage or core competence of the firm. The recognized importance of achieving human capital advantage has led to an interest in the development of methods of measuring the value of that capital for the following reasons :
  • Human capital constitutes a key element of the market worth of a company and its value should therefore be included in the accounts as an indication to investors or those contemplating a merger or acquisition of the total value of a business, including its intangible as well as its tangible assets.
  • The process of identifying measures and collecting and analysing information relating to them will focus the attention of the organisation on what needs to be done to find, keep, develop and make the best use of its human capital.
  • Measurements of the value of human capital can provide the basis for resource-based HR strategies that are concerned with the development of the organisation's core competencies.
  • Measurements can be used to monitor progress in achieving strategic HR goals and generally to evaluate the effectiveness of HR practices.

Models of Human Capital

There is no single framework or recommended best model for the evaluation and measurement of human capital. However, there are a number of models that can give a framework of reference to develop a better understanding of the contribution of human capital. Many of these also recognize that there are many different types of data, both qualitative and quantitative, that must be assessed and analysed to give an accurate understanding of human capital.

Some of the most commonly used models of human capital are as follows :

Models of Human Capital :
  • Balanced Scorecard
  • Mercer's Human Capital Wheel 
  • Watson Wyatt's Human Capital Index
  • Human Asset Worth Estimator

Balanced Scorecard

Balanced scorecard is a management system that enables organizations to translate the vision and strategy into action. This system provides feedback on internal business processes and external outcomes to continually improve organizational performance and results. Robert Kaplan and David Norton created the balanced scorecard approach in the early 1990s. Most traditional management systems focus on the financial performance of an organisation.

According to Kaplan and Norton :
"The balanced scorecard retains traditional financial measures. But financial measures tell the story of past events, an adequate story for industrial age companies for which investments in long-term capabilities and customer relationships were not critical for success. These financial measures are inadequate, however, for guiding and evaluating the journey that information age companies must make to create future value through investment in customers, suppliers, employees, processes, technology and innovation".

Mercer's Human Capital Wheel

William Mercer, another leading specialist HR consultancy, has developed a "wheel" divided into six segments entitled "people" (capability and experience), "structure" (hierarchy and organisation), "processes" (how work is organized), "decision-making", "information flow", and "reward". Concrete measures exist for each.

Changes that have happened in each sector over the previous three to five years are plotted on the wheel. These are then related to measures of performance and quality such as added value per employee or another measure of productivity. In a large organisation, separate business units can be compared on the relationship between their success and their positioning on the sectors of the wheel.

The HR consulting company Mercer HR Consulting launched the Human Capital Wheel (figure) in the 1990s.
It was based on a model of organisational permanence that explicitly linked human capital management to workforce productivity.

Factors Affecting Mercer's Model :

According to the Mercer model, a firm's human capital strategy consists of six interconnected factors :

1) People : 
Identifying who is in the organisation, their skills, and competencies on hiring, what skills and competence, they develop through training and experience, the level of qualifications and the extent to which they apply firm-specific or generalized human capital.

2) Work Process : 
Detailing how work gets done, the degree of teamwork, interdependence among organisational units, and the role of technology.

3) Managerial Structure : 
Reflecting the degree of employee discretion, management direction and control, spans of control, performance management and work procedures.

4) information and Knowledge : 
How information is shared and exchanged among employees through formal or informal means.

5) Decision-Making : 
How important decisions are made and who makes them; the degree of decentralization, participation, and timeliness of decisions.

6) Rewards : 
How monetary and non-monetary incentives are used; how mach variable pay is at risk; individual versus group rewards, immediate versus career rewards.

Advantages of Mercer's Human Capital Wheel :

1) It encourages organisations to look at all the factors that combine to impact on the contribution of people to business performance.

2) If organisations also buy into some of the statistical tools marketed by Mercer, they can measure their performance against the model, identify gaps and hence areas for improvement.

Disadvantages of Mercer's Human Capital Wheel :

1) Like most of the available models, outcomes will be entirely dependent on the context in which the organisational performance model is applied and it assumes that a certain level of information will be available.

2) Many organisations would not yet be in a position to apply this model effectively.

Watson Wyatt's Human Capital Index

Watson Wyatt's human capital index proposes that there are four critical HR practices which are linked to increased shareholder value, They are :

1) Clear rewards and accountability that differentiates between high and poor performers.

2) A collegial and flexible workplace environment encouraging teamwork and cooperation.

3) A commitment to hiring the best people and the development of recruitment practices to support the firm's strategic aims.

4) A level of integrity in communication strategy where goals are clearly stated and business processes have a high level of transparency.

Human Asset Worth Estimator

What is it that makes one person more valuable than another? The answer is very organisation specific. For some, it is finding people who will fit in well and make good team members. For others, the ability to get certain kinds of results is all that matters. So any approach has to have some flexibility to meet different situations.

The formula suggested in the human capital monitor for calculating human asset worth is as follows :

Human Asset Worth = Employment Cost x Individual Asset Multiplier/1000

We divide by 1000 so that the end result will not look like a monetary amount that can be directly compared with cost, as this would be misleading. The purpose is to be able to understand relativists and provide a guide to taking appropriate actions.
Although one might naturally start with a person's market value, as it is hard to ascertain and is not going to be readily at hand. What we do know is peoples remuneration and we keep close track of this. It may well reflect accidents of history (either positive or negative) and be under- or over-rated in respect of the market, but it provides the best starting point.

Employment Cost (EC) :

This is the cost of employing a person, including taxes such as social security or national insurance, and the value of the benefits package. It should exclude bonuses unless they are in whole or part guaranteed. It also does not include the overheads of providing space and equipment, as these are so variable and are likely to be averaged-Out on a per person basis.

Employment Cost = Base Salary + Value of Benefits + Employer Taxes

Individual Asset Multiplier (LAM) :

Every person is an individual, not just another "head". They bring a different level of present and potential value to their current role and to the organisation. The individual asset multiplier is designed to reflect this.

Collective Human Asset Worth :

The purpose of an organisation is to organise the human capital of individuals in ways that produce more than they would as individual contributors. A team should be more than the sum of the individuals that make it up. When we look at the working environment, work group effectiveness is picked-out as one of the contributing factors to value-adding contribution. But for the purposes of asset value comparisons, we can look at teams by combining the human asset worth of all the members. If we have evaluated each individual in the way suggested, we have the basis for some important analysis of our human capital.

For Example :

1) Relative Value of Teams and Departments : 
Our efforts on the retention of talent can be focused through seeing the relative value of different groups of people. This value may then be compared with the contribution that the group is making - and, indeed, their costs. Arguably, there should be a more or less linear relationship between "asset value" and "value-added" for most groups.

2) Distribution of Potential : 
We can get an understanding of how potential is distributed and where we may have continuity problems.

3) Extent of Values Alignment : 
We can look at the factors that have been judged and get a feel of how values alignment is distributed, in functions and in areas. This may lead to some action to shift the culture more toward the espoused values.

4) Flexibility of Our Workforce : 
The higher the average factor for "capability", the more flexible our people are. In tines of re-structuring this may save unnecessary redundancies and it also give us more options in career management.

Importance of Human Capital

The importance of human capital can be reflected through following factors :

1) Structural Unemployment : 
Individuals whose human capital is inappropriate for modem employers may struggle to gain employment. A major issue in modem industries is that rapid de-industrialization has left many manual workers, struggling to thrive in a, very different kind of labour market.

2) Quality of Employment : 
In the modern employment industry, there is increasing divergence between low skilled and high-skilled jobs. High skilled and creative workers have increased opportunities for self-employment or good employment contracts whereas low-skilled workers struggle to find a job or work on temporary basis.

3) Financial Growth and Productivity : 
Long-term financial growth depends increasingly, on improvements in human capital. Better educated, innovative and creative workforce can help increase labour productivity and financial growth.

4) Human Capital Flight : 
An era of globalization and greater movement of workers has enabled skilled workers to move from low income countries to higher income countries. This can have adverse effects for average performing companies who lose their best human capital.

5) Limited Raw Materials : 
Economic growth in countries with limited natural resources, e.g., Japan, Taiwan and South East Asia. Rely on high skilled, innovative workforce for adding value to their raw materials in the manufacturing process.