HUMAN CAPITAL

The value of human capital has ballooned from 20% of the value of companies (in the Standard and Poor’s 500) to 70% today. The proportion of American workers with jobs that call for complex skills has grown three times as fast as employment (in general). In business terms, human capital might be described as a combination of the following:

• The traits one brings to a job
• One’s ability to learn
• One’s motivation to share information and knowledge

Definition

As an economist interested in the plight of the world’s underdeveloped countries, Nobel Prize winner Theodore Schultz argued that improving the welfare of poor people did not depend on land, equipment or energy, but rather on knowledge. He called this qualitative aspect of economics human capital (Owens, 2005).

Gary Becker, a Nobel Laureate economist, drilled deeper into human capital and pointed out several other forms, arguing that they raise earnings, improve health, and/or add to a person’s good habits over much of his/her lifetime through activities such as:

• Schooling
• Computer-training course
• Expenditures of medical care
• Lectures on the virtues of punctuality

Economists regard expenditures on education, training, and medical care as investments in human capital. They are termed human capital because people cannot be separated from their knowledge, skills, health, or values the same way they can be separated from their financial and physical assets.

Economists sometimes refer to human capital as a component of the hidden balance sheet because the assets are mostly unaccounted for in today’s accounting world, which has been slow to adapt to change. “The great irony is that the only economic component that can add value in and by itself is the one that is most difficult to evaluate,” notes Jac Fitz-Enz, author of The ROI of Human Capital.

Strategy

The human capital strategy is developed to directly support the business strategy, which defines where the company wishes to compete in the future and outlines the company’s differentiators. The strategy:

• Defines the leadership skills required by managers, as well as core skills required by all employees
• Includes metrics and benchmarks for measuring human capital, and should measure how individuals will be measured and held accountable for achieving the benchmark metrics

It should also include an employee value proposition that is consistent with the customer value proposition. The employee value proposition outlines the differentiators that cause people to want to join or stay at a company, and determines where the company will recruit, develop and promote from within to achieve the desired objectives.

Action Plan

The most important first step towards building human capital is to determine what is critical to the survival of the organization, since the very nature of competition requires the best talent to respond. The awareness step includes building a tangible business case for what the future looks like, along with a strategic approach to human capital. The CEO, board of directors and leadership team must be aligned, and each leader will be given the task of developing talent.

Leaders must develop the talents of their people to drive increases in sales and customer satisfaction, as well as deliver a steady stream of innovative new products and services. According to The War for Talent, 72% of organizations strongly agreed that it is critical that they win the war for talent. Surprisingly, virtually no company has held every leader accountable for the talent pool they build.

The study concluded with the idea that most companies are poor at talent management, and discovered the following:

Alan Todd, Chairman of the Board