INTRODUCTION TO

HUMAN CAPITAL
MANAGEMENT
HCM Lecture 1
Background
 The bedrock of human capital management is: the
belief that
 the contribution of people to organizational
performance is crucial and
 that their contribution can be managed to a more
positive or higher value outcome
 The first step:
 Recognize the role of people in adding value
 Research by the Chartered Management Institute in
2006 (Scott-Jackson et al., 2006) found that
 86 percent of directors agreed that they value their
employees as key assets and
 77 percent believe that their workforce
development is aligned to business goals.
 only 68 percent actually measured the contribution
of employees
What is Human Capital?
 Human capital is most commonly defined as
 an element of intellectual capital along with social
capital, consisting of the relationships and networks
that enable the creation and transfer of knowledge,
and organizational capital, including the firm’s
policies and procedures together with patents and
other forms of knowledge owned by the
organization rather than individuals.

Baron, A. (2011). Measuring human capital.

Strategic HR Review, 10(2), pp. 30-35
 What is your human capital?

 Skills
 Knowledge

 Experience

 Personal qualities
Critics of Human Capital
 In 2004, "human capital“ was named the German
Un-Word of the Year by a jury of linguistic
scholars,
 who considered the term inappropriate and
inhumane, as individuals would be degraded and
their abilities classified according to economically
relevant quantities
Linkage with other capitals
 Intellectual capital
 Human capital
 Social capital and
 organizational capital
Converting Human Capital to Intellectual Capital
Intellectual Capital
 Intellectual capital is the amount by which the
market value of a firm exceeds its tangible
(physical and financial) assets less liabilities

 Market Value = Tangible Assets + Intellectual

Capital - Liabilities
 Intellectual Capital = Market Value - Tangible
Assets + Liabilities
Intellectual capital
 It is sometimes considered as
 the stocks and flows of knowledge available to an
organization.
 the intangible resources associated with people which,
together with tangible resources (money and physical
assets), comprise the market or total value of a business.
 Bontis (1998) defines intangible resources as
 the factors other than financial and physical assets that
contribute to the value-generating processes of a firm
and are under its control.
Social capital
 It consists of the knowledge
 derived from networks of relationships within and
outside the organization.
 The concept of social capital has been defined by
Putnam (1996) as
 ‘the features of social life – networks, norms and
trust – that enable participants to act together more
effectively to pursue shared objectives’
Conceptual Model - Firm
Conceptual Model - Nation
National
Wealth

Financial Intellectual
Wealth Capital

Human Structural
Capital Capital

Market Organizational
Capital Capital

Renewal Process
Capital Capital
Human Capital
Teachers' comp Educ exp Edu Exp
% of Educ Exp as % of GNP as % of Gov Exp
Australia 5.5 13.5
Canada 18.0 6.9 12.9
China 21.5 2.3 12.2
Finland 17.3 7.5 12.2
France 18.9 6.0 10.9
Germany 17.0 4.8 9.6
Italy 11.3 4.9 9.1
Japan 21.0 3.6 9.9
New Zealand 7.3 17.1
Norway 7.7 16.8
Russia 17.6 3.5 9.6
Singapore 25.3 3.0 23.3
Sweden 12.3 8.3 12.2
United Kingdom 19.1 5.3 11.6
United States 15.4 5.4 14.4
 History Human Capital
 The concept of human capital is not new.
 Adam Smith [Economist: 1723-90/Scotland] used the term in 18 th
Century. He defined HC as
 “Fourthly, of the acquired and useful abilities of all the inhabitants
or members of the society. The acquisition of such talents, by the
maintenance of the acquirer during his education, study, or
apprenticeship, always costs a real expense, which is a capital fixed
and realized, as it were, in his person. Those talents, as they make
a part of his fortune, so do they likewise that of the society to
which he belongs. The improved dexterity of a workman may be
considered in the same light as a machine or instrument of trade
which facilitates and abridges labor, and which, though it costs a
certain expense, repays that expense with a profit.”.
Smith, Adam (1776). An Inquiry into the Nature And Causes of the Wealth of Nations
 Gary Becker (USA; 1930 - today) – an Economist
 specializes in human capital theory won Nobel
Prize in 1992
 Human capital theory
 explores the ways individuals and society derive
economic benefits from investment in people.
 From an economist’s point of view,
 human capital designates investments in improving
competencies and skills
 Several articles on HC published in Journal of Political
Economy
 Mincer (1958, August). Investment Vol. LXVI, No. 4
 Becker's book entitled Human Capital, published in 1964,
 became a standard reference for many years
 In Economics, human capital is
 a means of production - additional investment yields
additional output.
 Human capital is substitutable, but
 not transferable like land, labor, or fixed capital.
Two Types of the Human Capital
 Use of “human as labor force” related to economic added-
value
 that is generated by the input of labor force as other
production factors such as financial capital, land, machinery,
and labor hours.
 Human capital as the target of investment through education
and training
 The human capital expansively includes the meaning of
“human as creator”
 who frames knowledge, skills, competency, and experience
originated by continuously connecting between “self” and
“environment”.
The Importance of Human Capital
 Firm’s core competences or competitive advantage
 (Lepak & Snell,1999).

 Worker’ productivity in the workplace

 (Griliches & Regev, 1995; Lucas, 1988; Rosen, 1999)

 Job-seeking activities increase with increase in human capital

 (Vinokur et al., 2000).

 Growth of an individual wage, firms’ productivity, nation’s

economy
 (Denison, 1962; Schultz, 1961).

 Receiving higher rewards in labor market

 (Edward, 1979).

 National economic growth

 (Romer, 1986).
What is HCM?
 The Chartered Institute for Personnel and
Development (CIPD) has described HCM as
 the “skill, experience and capacity to innovate, that
is owned by individuals”
 International School of Human Capital
Management (ISHCM)describes HCM as
 the term which is used to describe an organisation’s
multi-disciplined, integrated approach to
optimising the capabilities and performance of its
management and employees
Growth in literature
 Number of documents produced containing the
term ‘‘human capital’’ increased
 700 in 1993
 8,000 in 2003.
 14.7 million in 2013 (2 Sep)
Human capital theory
 Human capital theory argues that a person’s formal
education determines his or her earning power
HC Measurement
 Measurement is crucial for its management
 BUT it is not easy to measure
Issues in measurement
 Lack of interest of leadership in measurement
 Measuring employee behavior or capability
 Work for the CIPD in 2003 (Purcell et al., 2003)
concluded that:
 firms would not value and not measure aspects of
employee behavior or capability that they cannot use in
the pursuit of their business objectives
 Impact of individual activities is not assessed
 such as training interventions or performance
management processes
 The absence of generic measures makes is
impossible for human capital contribution to
 be compared across organizations or sectors
 Lack of capability in
 generation and communication of employee data
Use of HC Data
 Many organizations become competent in
generating and communicating employee data to
inform management action but
 fail to identify a framework where this can be used
for assessment and evaluation
Approach to managing human capital: Three distinct
steps

1. Understanding the sum total of the talents,

knowledge and skills of employees.
2. Developing the ability to grow and apply the
competencies productively
3. Measuring and reporting on key people metrics
Institution’s approach to measuring human
capital: Three dimensions
1. Measuring the efficiency of the HR function.

 This is managed by the HR operations team

 Purpose:
 functional performance management
 Such measures include
 the ratio of HR employees to total employees.
2. Measuring the effectiveness of people

 Measuring the effectiveness of people processes

 whether processes achieve their intended objectives.
 Example
 Growth of its talent pipeline
 Objectivity in selecting high-potential employees.
 Development of its best people
3. Measuring the impact or return on investment of
key people processes.

 Evaluating whether processes positively impact on

business performance, with measures (CIPD, 2006)
 productivity,
 revenue growth and
 customer satisfaction.
Common Measures
Acquisition
 Time taken to recruit
 Strength of brand recognition
 Number of applications in response to advertising
 Number of unsolicited applications
 Time taken for new employees to reach optimum
competence levels
 Number of difficult to fill posts
 Feedback from recruiters on ease of use of selection tools
 Data from equal opportunities monitoring
Development/
talent management

 Number of names appearing against roles for

succession planning
 Number of individuals on development programs
or acquiring professional qualifications
 Results of skills audits
 Identified skills gaps
 Feedback from training
Reward
 Numbers achieving performance-related bonus or
increments
 Comparability or reward package with other
employers
 Satisfaction with reward
Retention
 Turnover/attrition rates
 Number of people with transferable skills
 Percentage of staff with an active development plan
 Number of internal promotions
Exiting
 Feedback from exit interviews
 Demographic information on age and gender
profile
Motivation Engagement scores
 Absence rates
 Productivity data such as sales per employee or
revenue per employee
Performance
 Numbers achieving high performance ratings
 Numbers of instances of poor performance dealt
with
 Accident rates
 Numbers achieving objectives
Outcome measures
Acquisition
 Resources adequate for optimum customer service
 Successfully attracting high-caliber applicants
 Organization not experiencing significant skills
shortages
Development
 Can demonstrate agility and capability to cope with
changing circumstances
 Can demonstrate that new knowledge is being
acquired and embedded
Reward
 Compensation tied to business success
Retention
 Can demonstrate effective talent planning including
succession planning
 Can demonstrate that the organization is
successfully retaining vital skills
Exiting
 Demographic issues effectively managed
 Vital skills and knowledge effectively retained
Motivation
 Organization able to track the relationships
 between engagement and commitment
 Organization understands and demonstrates
 impact of high engagement on business factors
 such as customer retention.
Performance
 Organizational capability
 Ability to innovate

Baron, A. (2011). Measuring human capital. Strategic HR Review, 10(2), pp.

30-35
Thanks