Importance of Human Capital

Topics: Labor theory of value, Capital accumulation, Human resources Pages: 6 (1107 words) Published: January 12, 2015


Importance of Human Capital

Human capital is the collective value of the capabilities, knowledge, skills, life experiences, and motivation of an organization’s workforce. It is also known as intellectual capital which is the knowledge, creativity, and decision making that people contribute in an organization (Zinni et al, 2011). Many companies focus far too much on measuring return on invested capital (ROIC) rather than measuring the contributions made by their talented employees (Bryan, 2007). Organizations should realize the importance of human assets and how they can be used to predict the corporate performance and remain competitive in their specific industry.

From the article “Blind Investment” by Robert J. Grossman, the main reasons for why Wall Street analysts are not interested in the human capital of a firm are due to their narrow view of corporate worth and lack of understanding of HR strategies. The investment analysts are hooked on short-term cost-control which means that they can easily lose sight or misinterpret the big picture on long-term or short-term investments. (Grossman, 2005). They tend to evaluate a company by focusing on a narrow set of numbers from financial statements which can create a biased or one-sided judgment. They also lack the knowledge to recognize the importance of human assets. This is all due to their limited exposure to strategic HR from their own HR department/ employer. The HR departments in the financial industry are rigorously concentrated on cleaning up employee relation problems and implementing sophisticated compensation packages and they are neglecting the importance of continuous competency improvement or succession planning for their employees (Grossman, 2005). Combined with the deficiency in HR awareness and the analysts' narrow-minded, self-confident personality, the importance of Human Capital will continue to be a foreign measure to them in appraising the potential of selected organizations.

Pharmascience Inc. (found in 1983) is the largest generic pharmaceutical company in Quebec and it is ranked the third largest Canadian pharmaceutical company in terms of prescriptions drugs.  Pharmascience's annual sales exceed CAN$700 million and it has over 1,300 employee in its headquarters, research laboratories, manufacturing plant and logistics facilities in Montreal. To support business decisions and provides direct links to organizational results in quantitative terms will require to recognized the benefits of Human Capital Metrics (Evans, 2007). From the five Human Capital measures, I would use Human Capital ROI as one of the major metrics to evaluate the effectiveness of my organization. As Lockwood (2006) stated “Based on corporate culture, organizational values and strategic business goals and objectives, human capital measures indicate the health of the organization”. The rational is that people are the profit levers; all other assets are passive resources that require human application to generate value. Thus, the key to sustaining a profitable company or a healthy economy is the productivity of the workforce (Fitz-Enz, 2000). Using this metrics as a benchmark is particularly useful when used on a year over year basis, so that improvements can be identified and linked to specific strategies or programs at the corporate level (Evans, 2007). Additionally, research has shown that executives, who use this Human Capital measurement approach to people management, consistently outperform those who do not (Fitz-Enz, 2000).

The Revenue per Employee and Profit per Employee are very similar and can be effective tools to assess my organization. Both of these metrics can help human resource professionals gain an understanding of employee productivity and better manage compensation, training and staffing. The two measures of revenue and profit per full-time equivalent (FTE), especially when viewed over time or in comparison with similar...

References: Bryan, L. L. (2007). The new metrics of corporate performance: Profit per employee. McKinsey Quarterly, 1, 56.
Evans, G. (2007). ROI: Measuring the Contribution of Human Capital. Network Spring pg 33-35. Retrieved from http://www.wynfordgroup.com/whats_new/Measuring_the_Contribution_of_Human_Capital.pdf
Fitz-Enz, J. (2000). The ROI of human capital: Measuring the economic value of employee performance. Amacom Books.
Grossman, R. J. (2005). Blind investment. HR Magazine, 50(1), 33-35.
Kroll, K. M. (2006). Repurposing metrics for HR. HR MAGAZINE, 51(7), 64.
Zinni, Deborah; Mathis, Robert; and Jackson, John. (2011). Human Resource Management. Second Canadian Edition. Thomson Nelson. ISBN-10: 0176501967; ISBN-13: 978-0-17-650196-9
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