What is Human Capital?
According to the World Bank, human capital encompasses the knowledge, skills, and health individuals acquire over their lifetimes, empowering them to fulfil their potential as valuable contributors to society. To bridge gaps in human capital development, the World Bank has initiated the Human Capital Project (HCP), aiming to mobilize collective efforts. As part of this initiative, the World Bank annually prepares the Human Capital Index (HCI), which assesses countries' effectiveness in harnessing their human capital resources.
The Organization for Economic Cooperation and Development (OECD) defines human capital as individuals' or groups' collective knowledge, skills, competencies, and attributes. These qualities are acquired throughout their lives and are utilized to create goods, services, or ideas within market conditions. In a broader sense, human capital is the collection of knowledge, skills, and personal characteristics that enable individuals to be productive.
Human capital refers to the idea that individuals invest in themselves through education, training, and other activities to increase their future income by raising their lifetime earnings (Woodhall 1987). Education and training are considered investments that increase future income levels for individuals and society, making people more productive. Human capital investment has been a major source of growth in modern economies during the past century (Langelett 2002). The profitability of investment in human capital can be measured using the same techniques of cost-benefit analysis and investment appraisal traditionally applied to physical capital (Woodhall 1987).
Related: Human Resources- What You Need to Know
The importance of human capital
Notable research papers collectively suggest that human capital is important for economic growth. Daniel (2011) argues that investing in human capital increases labor productivity, which is crucial in a knowledge-based economy. Schultz (1993) adds that human capital is the key to economic progress, as it invents new forms of physical capital. Gazieva (2019) discusses the role of human potential in the modern economic space and the two approaches to assessing the value of human capital: costly and profitable. Overall, the papers suggest that human capital drives economic growth and development.
McKinsey says, "Human capital represents two-thirds of wealth for the average individual—and work experience contributes almost half of that value". Human capital, the workforce's collective knowledge, skills, and attributes, is the most crucial resource in any economy or organization. While human capital development begins in early childhood and continues through formal education, recent research by the McKinsey Global Institute and McKinsey's People & Organizational Performance Practice shows a significant portion of workers in the US, Germany, UK, and India have the potential to move up one or more quintiles in estimated lifetime earnings from their initial career positions.
Research shows that human capital positively impacts company performance. Arsalan (2013) found that human capital investments have a strong relationship with firm performance, and employee satisfaction mediates the process between both variables. Kemalasari (2018) found that human capital has a significant influence on company performance, as well as relation capital, but structural capital does not have a significant effect. Vizano (2020) found that human capital has a positive but insignificant effect on performance, while leadership and strategy orientation also have positive but insignificant effects.
What is human capital management?
Human capital management (HCM) refers to a collection of practices that revolve around managing people resources within an organization. These practices are centred around meeting the organizational requirement for specific competencies and are implemented across three key categories: workforce acquisition, management, and optimization.
Human capital management (HCM) is a strategic approach to managing employees as valuable assets rather than overhead. It involves acquiring, retaining, measuring, managing, and leveraging the workforce to achieve organizational goals (Srivastava 2015). HCM is a system approach to people management that supports various organizational processes and helps achieve organizational goals using effective use of human capital and investment in human capital (Kucharčíková 2017). The unified methodology for human capital assessment and its effectiveness has not been accepted yet. However, it is essential to assess the value and efficiency of human capital to achieve organizational goals (Kucharčíková 2015).
Human capital management, as defined by the World Economic Forum, encompasses the strategic processes involved in acquiring, nurturing, and maximizing the skills and capabilities of employees to accomplish the objectives of an organization. The World Economic Forum has recently released a white paper called "Human Capital as an Asset: An Accounting Framework to Reset the Value of Talent in the New World of Work." This publication offers organizations a valuable model for restructuring human capital accounting. The framework's objective is to assist companies in establishing a system for evaluating and monitoring the returns on their investments in their workforce, similar to how they measure financial and intellectual capital.
According to McKinsey research, human capital management (HCM) is the strategic process of nurturing and enhancing employees' skills, knowledge, and expertise to meet present and future business requirements. HCM is pivotal in driving organizational success and can catalyze companies to gain a competitive edge in the market. The research has revealed that organizations prioritizing human capital development are more likely to elevate their employees into higher income brackets throughout their careers. Moreover, investing in human capital yields substantial benefits for companies, including enhanced earnings stability and increased resilience during times of crisis. These human capital-focused firms exhibit greater consistency than their industry counterparts and excel in talent retention, boasting attrition rates that are approximately five percentage points lower.
What are the pillars of human capital management?
Human capital management is a multifaceted discipline that encompasses various key areas. As outlined by the World Economic Forum, there are four fundamental pillars of human capital management:
- Workforce Planning and Development: This pillar strategically aligns the organization's workforce with its business objectives. It entails assessing current and future talent needs, identifying skill gaps, and implementing strategies to develop and optimize the workforce.
- Talent Acquisition and Retention: This pillar focuses on attracting and selecting top talent while ensuring long-term organizational engagement and retention. It involves effective recruitment practices, creating a positive employer brand, and implementing strategies to foster employee satisfaction and loyalty.
- Performance Management: This pillar involves setting clear performance expectations, providing regular feedback, and evaluating employee performance. It includes goal setting, performance appraisals, coaching, and development plans to enhance individual and team performance.
- Learning and Development: This pillar emphasizes continuous learning and growth opportunities for employees. It involves designing and implementing training programs, mentoring initiatives, knowledge-sharing platforms, and career development pathways to enhance skills, knowledge, and capabilities.
According to Gartner, the human capital management pillar encompasses key processes. Core administrative support encompasses various tasks and processes essential for an organization's smooth functioning. This includes personnel administration, benefits administration, payroll management, employee self-service portals, and service centre operations. On the other hand, strategic HCM support focuses on long-term planning and development of the workforce. This includes workforce planning, competency management, performance management, compensation planning, time and expense management, learning and training initiatives, recruitment and onboarding processes, contingent workforce management, and reporting and analytics for workforce insights. Together, these components form a comprehensive framework for effective human capital management.
Dom (2020) argues that effective human capital management focuses on human resources, human skills, and organizational development. Lee (2018) identifies five key drivers of performance in organizations: leadership practices, employee engagement, knowledge accessibility, workforce optimization, and organization learning capacity. Kucharčíková (2017) explains that human capital management involves investing in employees' education, training, health, safety, and ergonomics to achieve organizational goals. Mehta (2011) emphasizes the importance of an integrated talent management model to nurture employees holistically.
The importance of human capital management
Dom (2020) emphasizes the importance of managing human capital effectively by focusing on human resources, human skills, and organizational development. Lazarov (2020) argues that human capital is the most important factor for an organization, especially during a crisis, and that understanding employees' needs and abilities can help organizations overcome crises. Lee (2018) highlights the importance of exceptional human capital management for organizations to achieve profitability and identifies five key drivers for predicting performance. Kalinina (2017) discusses the importance of effective human capital management for municipal enterprises to attain competitive advantages and improve effectiveness. The papers suggest that human capital management is crucial for organizations to develop and maintain a competitive advantage.
Human capital is critical in driving economic growth and organizational success. This article has explored the concept of human capital, which refers to the knowledge, skills, abilities, and experiences possessed by individuals that contribute to their productivity and value in the workforce. We have seen how investing in human capital through education, training, and development programs can improve productivity, innovation, and competitiveness. Organizations that prioritize the development of their employees' skills and talents are better positioned for future opportunities.