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 through 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, therefore, certain risks for employers in relation to human capital. These include the costs incurred by absences, such as sick leave, or projects being delayed due to interpersonal conflicts within a team that can’t agree on how to resolve a particular issue. It also includes employee turnover: talented team members may decide to look elsewhere if they feel 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 help your business to retain a competitive edge. 

What is human capital management?

As human capital is a complex social construct, managing it is important for ensuring the smooth running of a business. Human capital management ensures that all your employees work well together, keeping your business 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 may build human capital by taking some of the following actions:

• 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 strategies
• 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 may help you to achieve the following:

Collect data to improve decision-making

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

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 could help you 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 employees 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.

Keep your business competitive

Another positive aspect of HCM is that it could help you identify skills that are 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 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:

• 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 may help your business make more informed decisions about employee engagement, productivity and retention. By using a combination of empathy and HR strategy, your business may 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 could potentially better 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, you may help your business to grow by helping your pre-existing staff to progress in their roles while also attracting new talent.