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
Intellectual 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.
Social Capital
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.
Organizational Capital
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
Principles
Policy
Stories
Training
Tools
Human Capital Management
Needs
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.
Approaches
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.
1. 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%
Communications Integrity
4.0%
7.1%
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).
2. 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).
3. 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).
References
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.
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
Intellectual 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.
Social Capital
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.
Organizational Capital
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:
Human Capital Management
Needs
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:
Approaches
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.
1. 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
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).
2. 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).
3. 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).
References
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 mayolearning.com/assets/Uploads/Pu...
Stewart, T. A. (1997). Intellectual Capital: the New Wealth of Organizations. New York: Doubleday.
Wyatt, W. (2002). oswego.edu/~friedman/human_cap_ind.... Retrieved from oswego.edu: oswego.edu/~friedman/human_cap_ind...