How much is human capital, the measure of the economic value of an employee’s skill set, actually worth? It’s an important question when you think about all the money that’s spent on education, not to mention the opportunity cost of getting some sort of tertiary qualification instead of working. It’s particularly important for managers because the most effective companies and countries will be those that manage human capital in the most effective and efficient manner.
How do we know that? According to CFO magazine, two metrics – Return on Human Capital Investment and Total Cost of Workforce to net operating profit, which includes all direct and indirect cash and equity compensation for employees, employee benefits, perks and rewards, retirement costs and costs of training, recruiting, employee relations, severance and legal settlements – are powerful predictors of a company’s value.
Jeff Higgins, the CEO of the Human Capital Institute says a company’s share price these days is not just driven by net profit but by productivity. “Some might say Return on HCI (Human Capital Investment) and Human Capital ROI Ratio are synthetic profit metrics, but we see them as productivity metrics – the return on people’s productivity. And when those numbers improve, your stock price jumps.”
And that’s why managers have to measure it.
Commentator Sarah Ganly says the way it’s measured and priced really depends on the company, the line of business and management priorities. But it still has to be priced regardless.
“The role of management in organizing human capital slightly changes from organisation to organisation, but all organisations must value their human capital, or they will have a high turnover rate which will be detrimental to their business,’’ Ganly writes.
Commentator Alan Kohler talks to Carol Royal, director of Masters of Technology and Innovation Management at the Australian School of Business about how to measure it. She says you have to look beyond the financials.
She says managers need to measure leadership systems, governance, career planning and pathways, talent retention and creation, and remuneration. “Performance measurement for these areas really should be in place for an organisation to be sustainable,” says Royal. “The rhetoric at the top needs to be matched with the practice throughout the organisation. When they are out of line, then you can’t be managing effectively because the business is espousing one thing and doing something else.”
She says you need to evaluate and price the systems by which people are managed. “How are they recruited into the organisation and subsequently trained and developed?
How is knowledge managed around the organisation? What are the career plans in the organisation? Are the human capital systems appropriate and internally consistent? Do they complement each other? For instance, supermarket giant Woolworths does not always recruit the best and the brightest. At entry level, it recruits 16-year-old school leavers.
“‘What they do well is invest money in high-potential school leavers and train them up to be very effective store managers and beyond. They are very generous with their training and development. Woolworths has a set of management systems that are internally consistent and consistent with its strategy,”’ says Royal.
How would you price human capital?