What Is Human Capital? HR Pros Explain Its Importance
You’ve always had a knack for bringing out the best in people and recognizing their natural talents. It’s helped you build incredible friendships over the years, but you might be surprised to learn it’s a skill that could also come in handy in the workforce! Human resources leaders use this talent every day to recruit, train and retain the employees who keep business running smoothly. This process even has a name: human capital.
What is human capital? This term might sound like corporate jargon, but it’s actually all about treating employees well so that business can grow. It’s a win-win situation!
The basic idea of human capital is simple, but bringing it to life in the business world can be tricky. Join us in learning from HR professionals about how human capital is used to bring growth to both employees and organizations alike.
What is human capital? More than meets the eye
Capital in a business setting typically refers to any type of asset a company uses to bring goods and services to its customers, like money, equipment, technology or real estate. Human capital, however, takes the idea of business assets to the next level.
“Human capital is the collective knowledge, experience, skills and abilities that employees bring to an organization,” says Richard Pummell, human resources lead at DevelopIntelligence. “It may sound a little clichéd, but human capital is the most valuable asset an organization can have.”
The proper equipment and technology are needed to produce an end product, but smart business leaders know it’s employees who are the heartbeat of the company. “My company only goes as far as my employees can take it,” says Matthew Ross, co-owner and COO of the The Slumber Yard. “A whole team of people working together with specialized skills and know-how is much more productive and efficient than just one singular person.”
It’s this increased efficiency, productivity and innovation that makes human capital much more than just a feel-good idea. Human capital can have a huge impact on the financial health of a company—for better or worse. “Human capital is fundamental to an organization,” says Samuel Johns, human resources specialist at ResumeGenius. “Two companies identical in all other respects will post very different financial results based solely on their human capital.”
How companies measure human capital
Human capital has an undeniable effect on an organization’s bottom line, but it’s not always straightforward to track and measure those numbers. Companies will often use different analysis methods to determine how successfully they’re leveraging human capital.
Some organizations, like ResumeGenius, use their return on investment (ROI) to get a picture of their human capital. Johns says, “[we] invest in our staff through training, workshops and higher education.” Then they can determine their growth in human capital by “comparing the company’s profits before and after training, and dividing them by the amount we invested in training.”
Others use a more simple formula, looking at overall company growth or decline as an indicator of their human capital. “When the company is growing, it's an indication the right people are in place,” Pummell says. “When growth is not present, there are factors within various departments that may not be performing the way they should.”
Additionally organizations often monitor statistics like turnover rate, absenteeism, employee satisfaction and willingness to refer friends. While no one single data point can cover everything affecting an organization’s human capital, the information when evaluated holistically can give HR leaders a good idea of how things are going.
Improving human capital
Strong organizations always have an eye toward improving their human capital. These HR pros agree that there is one way any company can start prioritizing their human capital: reduce turnover and give their employees a voice.
“Employee turnover is inevitable. However, my business partner and I try to limit it as much as possible,” Ross says. “Every employee that leaves lowers the quality of the company's human capital because it will likely take six to eight months to train up a new employee for the vacated position.”
Not only does it cost money to replace employees when they leave, organizations also have to grapple with the loss of a worker who was familiar with their company and its values. “The value of human capital increases when you have employees with longevity at the company,” Pummell says. He adds that employees who have a history with the company are well acquainted with what has and hasn’t worked in the past, and they’ve developed trusting relationships with customers and coworkers.
Reducing turnover isn’t something that can be done in a day. “Many organizations may say that they do annual performance reviews to measure and improve human capital, but a brief survey conducted on an occasional basis isn't going to give the insight into why the company may be stalled,” Pummell says.
Employers must encourage their workers to voice their honest opinions about what they want from their careers and how their organization could improve their company culture. “Employees [must] truly recognize that they can speak freely when things are not going well,” Pummell says.
Putting employees first
Ultimately, human capital is about having an “employee first” attitude that allows people to grow in their careers while the company grows alongside them. Ross focuses on offering competitive pay, clear advancement opportunities, a positive work environment and other perks to entice employees to stick around.
“Employees should not dread coming to work,” Ross says. “As soon as they become unhappy, their work is going to suffer and their general sentiment is going to spread to other employees.”
In addition to creating an enjoyable work environment, employers can increase their human capital by giving work assignments that are interesting and a good fit for each employee’s natural skills and interests. Johns accomplishes this by administering skills inventories and personality tests to ensure that employees are in a position that’s a good fit for them and to fill any gaps in the company’s “collective knowledge.”
Assigning the right employees to the right tasks also gives them the opportunity to grow their skills and eventually advance higher in their career. “It's essential to know what matters to each employee and create a plan for them to achieve their goals,” Pummell says.
Capitalize on your career potential
What is human capital? Now you know that this HR principle is all about bringing out the best in employees so they can do great work for their organization.
If bringing out the best in others sounds like a worthwhile way to make a living, you might be wondering if you have what it takes for a career in human resources. Learn more about the skills you need to succeed in HR with our article, “9 Top Human Resources Job Skills Employers Are Seeking.”