Measuring the Human Capital
The term human capital or human assets relates to the organisations workforce or employees, as this is an organisation's most valuable asset, its workforce.
Although this term can be perceived as dehumanising. However, Davenport in his book, Human Capital: What it is and Why Do People Invest it? describes the workforce as the owners of their own human capital. This is an important distinction. Employees decide how much of their capability to use in a company or whether they will move on. Human capital refers to individuals’ performance of knowledge, skills, aptitudes and attitudes (often clustered into competences), which are relevant to economic activity. What needs to be identified and measured is the human capital or competence performance of employees.
There are three commonly used human capital measures associated with the balanced score card, intellectual capital reporting and human resource accounting approaches to business planning and reporting. Although these approaches have distinctive origins, there is considerable overlap between the measures they advocate.
The balanced scorecard involves the systematic measurement of financial and non-financial measures that are linked in a coherent system to translate strategy into operational terms for strategic decision-making. Four quadrants are identified. These are: financial, customer, internal business process, and learning and growth. There is no clearly identified human capital dimension. Evidence of the contribution that people make to the success of the organisation can be found amongst other measures, in all four of these quadrants. The economic value added (EVA)1 would appear in the financial sector; the number of training days, and expenditure on training and research and development, in the learning and growth sector, the customer service data in the customers’ quadrant, and the company culture survey results in the internal business processes.
Intellectual Capital Reporting
Intellectual capital reporting is a supplement to an organisation’s annual report that lists the stocks and flows of structural, customer and human capital. Examples of the common human capital measures are: indexes for monitoring leadership and motivation; data on the number of employees, managers, women managers, and training days; averages for age of employees, and years with the company; percentages of turnover of staff, and managers with advanced degrees; value added per expert and per employee; and costs of training. The data is presented and usually graphed to show the trends from year to year.
Human Resource Accounting
Human resource accounting is accounting for an organisation’s employees among its assets by measuring both their cost and value. Common human capital measures are the goodwill value of a firm, return on investment2, inter-unit comparison of costs, replacement costs3, and economic value added.
All of these approaches use measures that contribute information about the workforce that is useful for decision-making. They give reliable, objective metrics. However, they all skirt around the issue of measuring the ‘substance’ of human capital. They do not tell you anything about what it is that people do that is of value. If you see the outcomes of human capital in the form of increased profits, as displayed in the economic value added and the return on investment you might ask, isn’t this what counts? Unfortunately these measures are historical data, and do not indicate which people and which competences produced these results, or, if they are still the relevant people and competences for the future.
For more information on this article, please click on the article listed below Measuring Human Capital written by Heather Lees for HRINZ publication.