What is Human Capital in an Organization?

by Diane Chinn; Updated September 26, 2017
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According to Nobel Laureate and University of Chicago economist Gary S. Becker, “The best resource in any company is its people. The best companies will be those who manage human capital in the most effective and efficient manner.” Human capital is the economic value that workers give to an organization. The value is determined by the knowledge, skills, experience and education each employee possesses. In the information economy of the 21st century, recruiting, developing and retaining the best human capital is essential to business success.

Human Capital Concept

Employees are not just the cost of doing business. They are an asset that generates long-term value for the organization. According to Becker, employees are considered human capital because “people cannot be separated from their knowledge, skill, abilities, health or values.” Simply stated, employees are not just job holders but unique, complex investments that must be carefully managed to support their growth and increase their value to the business. Businesses that invest in continuing education for their employees, develop effective employee relations programs and include workers in decision making increase the value of their human capital and reduce employee turnover.

Human Capital Strategy

Employee management is not just the responsibility of human resources or the immediate supervisors. Retaining, developing and making best use of human capital depends on work practices, supportive leadership and employee management strategies that support effective employee relations throughout the organization. Just as an organization sets strategic business goals, it should also set strategic human capital goals that align the business goals and create an organizational culture that supports employee performance and development.

Competency-Based Human Capital

Employees need certain knowledge, skills and abilities to do their jobs. Identifying these key competencies and using them as the basis for recruiting, hiring and managing workers is essential to effective human capital management. Competency models may be developed for individual jobs, job groups, teams, departments or the entire organizations. These models include core, functional and area-of-expertise competencies. Core or foundational competencies are skills that all employees must possess and demonstrate. These core competencies are frequently based on the organization, mission, vision or values statements. Functional competencies are the general skills required for a job or group of jobs, and area-of-expertise competencies identify the specialized knowledge and experience required for a specific job.

Human Capital Growth and Development

Successful businesses develop systems that support human capital growth. This includes management and leadership styles that reflect the organization's mission and goals. These organizations identify the essential characteristics of effective human capital management and then give managers and supervisors the training and coaching necessary to develop those characteristics. These firms use performance management systems, such as pay for performance, profit sharing or other incentives to promote performance and recognize high-performing individuals and teams. Effective human capital development requires measuring organizational, department, team and individual performance, along with employee and customer satisfaction. These measures help managers and organizations identify and implement human capital management strategies that support organizational success.

About the Author

Diane Chinn is a freelance writer with more than 15 years experience in many areas, including business and technical communications. She has a Bachelor of Arts in psychology from California State University and a Master of Arts in human resources and industrial relations from the University of Minnesota. She is a Six Sigma Green Belt .

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