What is Human Capital and how does it influence the success of companies?

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Human capital has become a term widely used in economic theories of growth, in order to designate a hypothetical production factor that depends not only on quantity but on quality. Some of these qualitative factors are the degree of training and productivity of people who are involved in the production process itself.

This concept has been extended for the designation of the set of human resources owned by a company or organization. And is that little by little the Business and organizations have realized what a good management of human resources is capable of: more efficient, attractive and, of course, profitable companies.

Definition of Human Capital

Human capital is defined as a way of valuing the workforce that a company, organization or country has, thus being the most basic and important resource for generating economic growth accompanied by increases in productivity and efficiency.

In other words, human capital is crucial to improve the competitiveness of the company in the market.

The importance of human capital is that material means become a finished product as it goes through the production process. And this production process is carried out by the workers. It will therefore depend on the skill, experience and efficiency of workers producing goods and services for the market.

It is important to note that the Human capital term is closely related to technology. Since it is the people who, after all, will use the technological advances for the benefit of your company or organization. Therefore your learning ability and adaptation to new technologies and work processes. It will be crucial to the success of your activity.

On a global basis, a company is an economic entity where factors necessary for the production process are combined with dynamism. Being the essential factors for the production process:

The work is carried out by the human capital being the capital lent by the investors and the direction made by the managers and executives.

The Human resources department is responsible for establishing the relationship between workers and company’s needs in order to develop its activities efficiently. In this sense, a good administration of human capital will be able to boost operational performance and generate value throughout the company through:

  • Improve Productivity
  • Make human resources systems and processes more efficient
  • Align staff with objectives and goals
  • Ensure the company’s position within the market.

Human capital indicators

There are certain indicators that are key to be able to measure the success of the human capital of a company or organization. These are:

  1. Staff turnover rate: This is an indicator that measures compliance and employee motivation. Ideally, the turnover of the workforce should always be less than 5%, since having a high percentage of this index implies an increase in costs in recruitment, training, etc. for de side of the company. Likewise, it measures the success of human capital through the sense of belonging, motivation and commitment of workers towards the company.
  2. Talent retention: Refers to the seniority of the workers within the organization. This index is important because it identifies the key positions and collaborators in the company, in addition to the time they have been in the company. If you want to calculate this, you must divide the key collaborators who have worked throughout the year in the company among the total key collaborators.
  3. Training and Development: It is the acquisition of technical, theoretical and practical knowledge that are used for the development of professional activity. With this type of indicator, the success of human capital is measured and the investment that is made in relation to the training and work performance of each worker is known.
  4. Vacancies not covered: This index is used to measure the time that vacancies are available without finding the ideal person for the position. It is, therefore, an important indicator to evaluate the effectiveness of the Human Resources department when providing personnel for the company, since it will allow to know if the profiles of the positions offered are well defined or if the recruitment process and the channels used are being effective. It is necessary to really understand the reasons why a company can have a high vacancy rate, because trying to achieve the objective of reducing the number of days could be wrong when hiring a person who does not meet the requirements for selected position. Something that will affect the other indicators and will have an impact on the organizational climate, creating job instability.
  5. Work Absenteeism: The labor absenteeism index measures the absences of staff in the workplace during the work period, through work leave, delays or permits of various kinds. This indicator of great value serves to reflect a broader reality about the motivation of the employee and his commitment, but also of the operation of the company.

Elements of Human Capital

The elements of human capital are defined differently by several authors. Depending on your approach, these elements will vary. This time we will focus on two popular approaches: that of Thomas O. Davenport and that of Linda Gratton.

According to Davenport

Davenport determines four components of human capital that are capacity, behavior, effort and time. It is these components that establish an equation with which the company fully invests in human capital. Being like this:

  1. The capacity: This means expertise in a set of activities or forms of work, and in turn is composed of three subcomponents that are the ability (familiarity with the media), knowledge (mastery of facts to perform a position); and talent (innate ability to do a specific task).
  2. Behavior: It is a person’s way of acting when performing a certain task. It is the behaviors that combine inherent responses acquired in various situations.
  3. The effort: It is the conscious application of mental and physical resources for a specific purpose. The effort can also be seen as the core of work ethics, since you can excuse yourself for the weakness of talent or ability, but efforts can never be saved.
  4. Time: Time is considered as the chronological element of the investment of human capital. Being measured by hours a day or the years of a professional career. In general, time is excluded by economists from the definition of human capital because unlike other elements, it does not reside in the body or mind of the workers.

According to Linda Gratton

For its part, Linda Gratton affirms that there are three elements that make up human capital and potential:

  1. Intellectual capital: Intellectual capital or intangible capital is a valuable resource based on knowledge and intelligence. That is why in recent years it has become a key value to face the competitive challenge of the digital economy. The central part of the administration of intellectual capital is based on the use of knowledge and technology in order to create added value to goods and products. This is how companies can generate competitive advantages in the new economy, in a globalized world, where other companies rely on cost reduction.
  2. Emotional capital: Emotional capital is one that arises from emotional intelligence and represents a series of skills such as enthusiasm, self-control, perseverance and self-motivation ability. In itself, emotional capital is based on five aspects that are:
    • The recognition of one’s emotions.
    • Control over emotions as a means to appease us.
    • Employ the potential that is available using impulse control.
    • The creation of social relations through a pleasant and relaxed atmosphere.
  3. Social capital: Social capital is the sum of internal relationships that we maintain in the company and with other external organizations. This type of relationship will foster a collaborative approach and increase the chances of innovation.

Importance of qualified personnel in companies

Why is it important to invest in human capital?

Investment in human capital is a necessity for companies, but why? The answer is that the productive capacity of a company lies largely in the quality of training that its workers possess. These will be the last ones in charge of fulfilling the objectives of the company through the assigned tasks.

It should also be considered that the area of ​​human resources is of great importance, not only to recruit the best possible team, but for the adaptation and training of members belonging to an organization. The more involved the workers are and motivated to meet the objectives, their performance will be more satisfactory.

In a nutshell, human resources management should not be limited to administrative work, but to ensure a pleasant work environment that generates a sense of efficient belonging, in addition to the commitment among all workers. And is that improving this area is a task of lifelong learning.

Theories of human capital

Several authors have worked on the theory of human capital, which explains certain macroeconomic phenomena. The best known approaches are those developed by Theodore Schultz and Gary Becker.

Schultz theory

For Schultz there are five factors that have been useful for improving human capacity. These are:

  • health equipment and services, whose objective is to improve and expand people’s quality of life
  • job training
  • formal education
  • study programs not organized by companies
  • the emigration of individuals due to adjustment to job opportunities.

According to Schultz, complex and continuous learning is the starting point for the accumulation of human capital, which will evolve in turn with technological progress. For this, it is necessary that human capital find an economic applicability through the market. Put simply, people with more training will have more opportunities in the labor market since they will be able to perform their work more efficiently. This factor will mean an increase in productivity that will positively affect the economy growing.

Finally, it should be noted that for human capital to develop, there must be economic policies that conceive it as an asset aimed at encouraging economic growth and employ-ability of people.

Becker’s theory

For Becker, human capital is a set of productive abilities that a person acquires through the accumulation of knowledge in general (educational system) or specifically (within the company). Unlike Schultz, the acquisition of new knowledge is based on an individual decision in which the individual evaluates the investment that he will have to make (education, material expenses and the opportunity cost of not receiving financial compensation derived from the returns of his work during the training period) in the future to qualify for a higher salary.