Discussion on: Human Capital Management: Need, Resources and Approach

dipadhungana profile image

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.

1. 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.

2. 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.

3. 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.).