What is Human Capital?: Definitions, scope and examples

Have you heard the term "Human capital"? You've surely seen it in many places. Although the definition of this word is always linked to the economic value that a person contributes within an organization, this approach is not absolute.  

Does the phrase make sense to you? “A company is only as good as the person who works in it.”? Fairly, applying the concept of human capital has that objective. Any practice, policy or incentive that stimulates the productivity, well-being and progress of a person in the workplace is part of an initiative framed to improve the human capital of any organization.

In the following Ninja Excel article, you will find valuable information that will ground the concepts in relation to Human Capital. 

What is human capital? Definition and scope

Organizations that invest in human capital improve their productivity and profitability. ¿Did you know that companies like Do Johnson & Johnson, IBM, Adobe or Google have examples of good practices in the development of human capital? And it is precisely these companies that apply the concept of human capital to the maximum. 

We can define the concept “human capital” according to BetterUp as:

“the economic value that a person, or group of people, contributes to an organization based on their training, skills, motivation and well-being.”

BetterUp

Another definition is the one provided by BBVA, an entity that in your article, defines human capital as: 

“the investments made in workers, so that they can produce more. That is, a part of the resources we have are dedicated to carrying out activities that improve the productivity of workers; In a way, they achieve more 'quality' workers.”

BBVA

In short, we can then say that human capital refers to the economic value of the skills and qualities of a worker. These skills – whether their development or refinement – influence a person's productivity. Thus, according to The Balance Money, the framework to understand what human capital is, it's based on:  

• Recognize the intangible assets of a collaborator. 
• Recognize the qualities that improve the performance of workers.
• Have initiatives in hand that benefit the improvement of knowledge and skills. An example of this would be a corporate training.
• Get out of the box: Also to improve and stimulate human capital, we must consider incentives such as: well-being, work environment, salaries, worker support, benefits, among others. 

What is the theory of human capital? 

This theory dates back to the late 1950s and early 1960s in the United States. Thanks to research by economists Theodore W. Schultz, Jacob Mincer and Gary S. Becker. 

In Becker's first research, he found that the differences between “good” and “bad” workers were not superfluous. “The human capital approach assumes that income is measured by how much the skills and knowledge of workers have been invested,” stated in his research. 

From this analysis, the determinants of dismissals and resignations began to be problematized, “income inequality, the effect of work experience on income (variables such as age-experience-origins) and in many other variables that labor markets consider.” 

According to The Balance Money, Becker differentiated this concept:

• Specific human capital: Training or education that benefits a single company.
• General human capital: Training or qualities that benefit the individual in any company.

What is the management of human capital?

Let's get down to business. If we have already discovered the intangible variables that we can enhance in a collaborator, it is time to manage it. And how to do it? Understanding what the management of this is will help us understand it. 

We define human capital management – or HCM for Human Capital Management in English – like:

The set of organizational practices related to the acquisition, management, and development of the human workforce, or human capital, within an organization.

Human Capital Management

In short, human capital administration generates a new look at administrative processes. For Oracle, hiring, training, payroll, compensation, performance evaluation, among other processes, should be taken as “opportunities to promote commitment, productivity and business value.”

What are the objectives of human capital management?

In accordance with Evaluating Software, these are some objectives that you should keep in mind when managing human capital. Check out!

• Capture the greatest number of people with potential.
• Create mechanisms to return them within the organization.
• Develop the potential of your workers.
• Create creative participation mechanisms.
• Provide workers with decent conditions.
• Create spaces for worker participation.
• Generate spaces that allow greater productivity.
• Enforce the various regulatory frameworks that allow healthy exercise and coexistence.
• Make social dialogue a practice for coexistence.

Why is it important to do this management?

If you need reasons to start managing and investing in human capital, the Gallup's Global Workplace 2022 provides powerful insights. In its report it states that there is low overall engagement and high stress in workers. 

Only 21% of workers in the world feel a commitment to purpose at work. Given this, the consultant suggests that the well-being of collaborators is the new “imperative in the workplace.” 

“The relationship between well-being and engagement is vital because the way people experience work influences their lives outside of work, and general well-being influences life at work.”

But does increasing investment in well-being and work engagement have effects? Of course! The consulting firm offers some statistics that will be of interest to you. Let's review the metrics offered by Gallup. 

• High engagement achieves 41 % reduction in work absenteeism and a 17 % increase in productivity. 
• Also a high commitment decreases rotation by 24 %.
• Improves product quality by generate 40 % fewer production failures. 

How can we bring these effects to our organization? Let's apply some examples of how we can improve human capital. 

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Examples of human capital

Kelly Kubicek, member of the Forbes Human Resources Council, makes a very specific definition of this concept:

This is about the innate power that workers have. It is about your knowledge, skills and ideas, which cannot be sold or bought.”

This phrase lands us in the essence of the concept: we can apply it to a specific quality that you can enhance in a collaborator. However, the assets considered in human capital are intangible, therefore, quantifying them or adding a KPI and/or OKR can be difficult. 

However, we can shorten these variables as examples. The information is collected from Personio. 

On-the-job training

The Training helps develop technical skills or reinforce knowledge so that workers can perform their tasks and increase their productivity. Have training plans to enhance or reinforce skills or knowledge of workers is an imponderable in every organization. 

Health

It is important to help improve the physical health, mental health and well-being of workers. These variables are closely related to your performance, productivity and motivation. Therefore, associated insurance, programs or discounts in instances of physical and mental activity will help in this purpose. Finally, maintaining communication channels, surveys or periodic consultations about the situation of employees will provide important inputs to improve their well-being. 

Puntuality

Punctuality contributes significantly to achieving greater productivity and guaranteeing the quality of the work performed, among others.

Problem resolution

In accordance with Personio, improving highly decisive people who manage to “analyze the situation, identify the problem and find an effective solution or alternative in an agile way”, is a characteristic to be enhanced in the management of human capital. 

Communication skills 

This is a variable of utmost importance for companies. It is essential that organizations provide the necessary tools for communication. Above all, in hybrid work environments. Also potential communication channels and inform what the procedures are to communicate in the event of any inconvenience.