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What is human capital management

Human capital management (HCM) encompasses the entire process of managing your staff talent via learning and development, performance, productivity, pay, and engagement, via the perspective that all of your employees have what’s known as human capital. In this article, we’ll explain what the theory of human capital is, as well as how human capital management may benefit your ability to optimise your talent pool.

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What is human capital?

Human capital is the cost or value of the skills of your workforce or individual employees. It therefore involves assigning a value to their skill set and personal characteristics. Human capital can be broken down into three different types:

  • Knowledge capital;
  • Emotional capital;
  • Social capital.

People can boost their human capital by developing new skills such as during vocational training, or studying a degree in a relevant field – this is what’s known as knowledge capital. They can build their social capital by networking, such as at conferences, or via recruitment networking websites.

Human capital is not owned by the employer, as employees will take their skills, knowledge, and experience with them when they clock off at the end of the day. They can also take these attributes with them into other jobs if they choose to leave. There are certain risk elements, therefore, to employers because of human capital. These include the costs incurred by absence such as sickness leave, or projects being delayed due to interpersonal conflicts within a team who can’t agree to resolve a particular issue. It also includes employee turnover, if talented team members decide to look elsewhere if they feel that their skills aren’t valued highly enough.

Managing human capital is therefore important, as it means retaining a pool of employees with skills, qualifications, and personality traits that helps your business to retain a competitive edge. 

What is human capital management

As human capital is a complex social construction, managing it can become important in ensuring the smooth running of a business. Human capital management ensures that all of your employees work well together to ensure your business remains productive, with low turnover and high engagement. 

How to improve human capital management

Your human capital management systems usually need to be kept modern and relevant. You can help to build human capital by considering the following:

  • Creating internal talent pools and recruiting talented staff;
  • Monitoring and boosting employee performance;
  • Creating retention strategies that help you to keep talented staff on board;
  • Creating learning and development programmes for employees;
  • Using analytics to monitor performance and engagement;

Other aspects of human capital management involve the day-to-day tasks of managing a team of talented employees. This can include HR applications such as:

  • Payroll management;
  • Ensuring career progression opportunities;
  • Employee engagement strategy;
  • Onboarding strategy;
  • Staying compliant with regulations;
  • Monitoring attendance, absence, and clocking in and out of work;
  • Managing employee benefits;
  • Pension schemes.

Why is human capital management useful?

Human capital management can boost various strategies and processes across your business. It can help you to achieve the following:

Collecting data to improve decision-making

By collecting data on employee performance and engagement, you can help make better decisions regarding the management of your teams. Perhaps your employees are driven more by micro-goals, gamified learning, or perhaps they’re more driven by certain benefits than others. It can also inform you more about employee scheduling. You can use human capital management software to assess employee engagement over a specific length of time. 

Can reduce turnover and maintain a strong talent pool

Using human capital management tools can also help you to work out what keeps your employees motivated, as well as attract them in the first place. This part of human capital management can help you to identify what it is that draws employees to your workplace, and how you can keep them enthusiastic about working for you.

What’s more, HCM can help you to identify which employees in your talent pool meet the capabilities of other roles in your business. This means that if you’re advertising for a new role, then encouraging internal hires to apply for roles can not only benefit their career progression, but also your business by retaining pre-existing talent. Effective HCM tools can help you to match different individuals in your business with the right promotions, by identifying their key strengths and interests.

Can keep your business competitive

Another positive aspect of HCM is that it can help you to identify skills that would be important to develop in your teams, on a long-term basis. For example, if your business is undergoing digital transformation, then HCM can help you identify skills gaps that might be detrimental to the competitiveness of your business. Being able to train your staff in lucrative skills for the modern age not only boosts their human capital, therefore, but your ability to remain at the cutting-edge of your industry. 

Learning and development

Learning and development means that no matter what skills your employees come into your business with, they are able to adapt and learn as changes in technology and your industry. Their job specifications might change over time, meaning that upskilling can help them to reach new targets confidently.

Challenges to managing human capital

Employers might face various challenges when looking to manage human capital. Some of the most common ones include the following:

  • Using big data and people analytics on employees to inform decisions;
  • Remaining compliant with data privacy and other regulations when it comes to people data;
  • Maintaining an effective talent strategy in a competitive jobs market;
  • Identifying the most important skills gaps and how they can be resolved;
  • Succession planning;
  • Ensuring that performance and engagement management tools are relevant and up-to-date;
  • Keeping human capital management strategy up-to-date with challenges that can arise with hiring gig workers, remote workers, and multi-generational teams;
  • Managing costs while also maintaining a strong talent pool.

Solutions to human capital challenges

Keeping updated with the latest human capital management technology can help your business to make more informed decisions about employee engagement, productivity, and retention. By using a combination of empathy and HR strategy, your business can help to identify ways to close skills gaps, benefits that employees love, and what encourages them to come into work. It also means identifying how you can work better alongside remote or gig-workers to improve retention and keep them engaged. Finally, by prioritising different aspects of your human capital strategy in terms of importance, you can help to manage the costs of updating human capital management software and learning and development plans.

Human capital management encompasses attracting, retaining, promoting, and sustaining your talent pool. By seeing your employees as having an intrinsic value according to this system, you can help your business to grow by helping your pre-existing staff to progress in their role, as well as attracting new talent as it comes through. 

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