Human Capital: Why Your Business Needs It

Dr. Ryan Giffen

It is a well-known fact that an organization is only as good as its people. Each employee is an asset to the company and it would not be able to function without them. There is a term for what people are bringing to the table within an organization: Human Capital. 

What is Human Capital?

Human capital is not found on a company’s balance sheet with all the other tangible assets. More precisely defined, human capital is the value of resources held by individuals within the organization. Resources that individuals have are generally skills, talents, knowledge, experience, and other such qualities. Human capital is an asset that is far too commonly neglected by organizations. However, it should be one of their largest focuses. 

Human resources technically manage the human capital within the organization. They are responsible for new talent acquisition, workforce optimization, and management. In addition, they should work to improve the current human capital in the organization, through training, development, monitoring and reporting analytics, and more.  However, don't let this fool you. Human resources are only part of the equation.  Hiring managers and supervisors are also responsible for selecting employees and managing them once hired.  

Calculating Value

Calculating this may seem impossible, but it is actually quite simple. First, consider the investments made into human capital, such as training, continuing education, recruiting costs and campaigns, and other such expenses. Then calculate profit prior to human capital investments and then after the investments are made. Any increased profit as a result of the investments would be the return on investment (ROI) of the human capital. 

Many organizations do not consider the growth that could be seen by improving their human capital. Training and continuing education may be an initial expense, but it pays for itself in the return. Investing in employees is never a poor choice and it will only bring improvement for the overall organization. This is especially true of long-time employees, as they have already proven themselves as an asset and will be even more so after training or education. In addition, it pleases employees to see their employers invest in them. This can increase morale and make them more likely to refer to other qualified candidates. 

Depreciation of Human Capital 

Just like any other asset, human capital can depreciate. Wages and the ability to work are often good metrics for this type of depreciation. This capital can depreciate in several different ways, whether it be through injury, inability to stay updated, mental decline, age, and more. Consider someone who has a specialized skill, but does not stay up to date with innovation in that skill. They may have once been a massive value to an organization years ago. However, their skills have become outdated. Therefore, they offer less capital. This also happens often with positions that become automated, such as hotel front desk check-in kiosks or table-side tablet ordering and cash-out.

Human capital has shown to be a significant factor in economic growth. To put it in somewhat simple terms, employees who gain more capital often make higher wages. Those with higher wages tend to spend more and this leads to growth in the economy. Numerous governments around the world recognize this. Therefore, this is why many of them offer free or low-cost education. Those with higher education typically make more than those with lower education, so it follows the same pattern as above. 

Invest In Your Employees

These days, a wide array of companies are hiring and firing more often with little focus on retention and improving their current human capital. You see this in companies with a high turnover rate, where new employees are a dime a dozen. They do not necessarily concern themselves with human capital. Sure, they make a profit, but likely not as high as other companies that are focusing on this. Google is often a good example of this, as they focus heavily on their employees. They train their employees well. Additionally, the company has numerous on-site amenities and services that help staff relieve stress and stay productive.  

About Dr. Ryan Giffen

With over 20 years of experience, Dr. Ryan Giffen is an expert in human relations and business culture. His career began in hospitality, leading operations and human resource departments for Fortune 500 companies and the like. Not long after, Ryan found his passion for teaching and consulting. He earned a Ph.D. in Hospitality Management with a Human Resources focus from Iowa State University and now works as an assistant professor at California State University, Long Beach. For over a decade, he continues to research and speak on organizational culture, relationship intelligence, and leadership effectiveness. Ryan is also the founder of Inospire, a company helping bosses and employees build stronger relationships with one another.  Lastly, Dr. Giffen is producer and host of the Corporate Shadow Podcast. a show helping everyday employees overcome workplace nonsense.