Human capital management is vital for organisations that want to fulfil their strategies and create value. They see the importance of understanding how they create value through their people, and of reporting on this value creation process to investors and other stakeholders.
According to the International Symposium report: ‘Measuring and Reporting Intellectual Capital: Experience, Issues, and Prospects’, human capital encapsulates individuals’ attributes, which are of use at the labour market, while reporting on human capital, on the other hand, is primarily associated with the enterprise level.
This apparent paradox is partly due to the fact that the identification of individual’s knowledge, competencies and skills as well as its acquisition, maintenance and upgrading, i.e. the input side to human capital, is only rarely related to the output, i.e. human capital, irrespective of the former being the very substance in the latter.
This lack of interconnection is primarily due to different traditions where human capital is considered a purely economic terms whereas the individual’s acquisition of knowledge is primarily related to the pedagogical, sociological and psychological fields. One reason for this being, that the notion of human capital does originate from within economy and, further, that economists still relate human capital primarily to the enterprise level and/or at macro-economic level while generally neglecting the individual’s level.
Defining human capital
Human capital can be defined strictly within an economic context, i.e. as a production factor, or it can have a more universal meaning. Treating human beings as economic entities in a purely market related context entails a distinction between general and vocational education: general education provides the individual with knowledge in order to participate in society i.e. the social, cultural, economic, etc. life spheres, whereas vocational education is targeted entirely for the demands at the labour markets, i.e. the economic sphere only.
Human capital defined within an economic context: human capital embodied in both individuals and in organisations, and the acquisition of human capital is a process which nevertheless also has a fixed value albeit not necessarily in economic figures.
Given these considerations, human capital is defined as “the knowledge, skills, competencies and other attributes embodied in individuals or groups of individuals acquired during their life and used to produce goods, services or ideas in market circumstances.”
This is the basic understanding of human capital being formed around the formation and utilisation of knowledge, be it in individuals or in organisations. A further level can also be identified, i.e. the societal level, which in effect is the crude accumulation of individuals’ and organisations’ human capital.
According to Peter Cheese is chief executive of the Chartered Institute of Personnel and Development (CIPD), is not just about better understanding these critical value drivers of enterprises, but also about understanding the risks – people risks, cultural and behavioural risks that have so evidently been at the heart of some of the major business and financial sector failings in recent years.
Technological, commercial and organisational developments have changed the labour market. Shorter life cycles of goods and services, increased and globalised competition, the growing importance of intangible assets at all stages in the production cycles and new forms of work organisation have transformed both the work place and the skills required to perform a given task. This requires new qualifications from employees and a new perception for the management and organisation of work.
Achieving the competitive edge for individuals, enterprises and societies alike is increasingly becoming synonymous with the notion of human capital
Human capital has therefore become the focal point for theoretical and methodological considerations and analyses subject to various levels and dimensions, as illustrated in table below:
Measuring human capital
The identification of human capital does not in itself imply that it will be measured. Rather, given the intangible nature of human capital and the difficulties in establishing reliable measuring techniques, proxy indicators such as market value over booked value or costs of input over output activities at enterprise level have been used rather than actual measurements.
Essentially, two different methods can be identified, one used to measure human capital and one used to measure the costs related to acquire, maintain and develop the stock of capital.
Non-economic measurement methods can be linked either to formal or to real human capital. Formal human capital will be measured through proxy indicators, such as educational attainment, years of schooling and/or other indicators such as job positions, number of years in job positions, etc. This is primarily related to individual and society level. Real human capital can be measured directly at the individual level by means of interviews, tests and/or examinations.
Economic measurement methods are related to the costs and benefits of acquiring, maintaining and developing human capital. This is related to all three levels, individual, organisation and society. This includes direct and indirect education and training costs and alternative costs as well as the returns to any given investment, be it time and/or money. Further, it does also include the returns to the existing stock of human capital and the depreciation of it.
The inability to establish reliable and verifiable measurement systems is the biggest challenge for reporting on human capital. However, and despite the shortcoming so far in establishing a coherent measurement methodology, a number of ways can be identified for the promotion of a reporting framework, as outlined in the table:
At the enterprise level, reporting on human capital has to be related to practice, i.e. its usability should be clear for the management. The best way of securing this is either through financial indicators, i.e. showing the relation between a given procedure and the costs and benefits, or through improved management, i.e. showing that the policies introduced clearly improve overall performance level.
The interesting aspect of the ISO model is the training cycle presented in figure above, which provides a detailed overview of the competencies and qualifications of the work force, i.e. the enterprise’s human capital.
what should be reported
Reporting on human capital is still surrounded by a high degree of indecisiveness regarding its direction. Although human capital is becoming part of mainstream, it still falls short of being used in a coherent manner.
Furthermore, in the light of a rapidly ageing population, which will make the labour force with the right qualifications scarce, enterprises must find new means to attract and retain labour.
Finally, the decentralised and individualised bargaining pattern will contribute to the mobility of the well-qualified labour force, that will in turn will add difficulties to the attempt to capture the investments in enterprises’ formation.