June 27, 2008

Human Capital Measurement

Management of Human Capital has become one of the key HR objectives for many organizations.

What is Human Capital Management?

The term ‘Human Capital’ means – “the knowledge, skills, competencies and other attributes embodied in individuals or groups of individuals acquired during their life and used to produce goods, services or ideas in market circumstances”

It can be summed up in a formula devised by Consultant, Thomas Davenport:

Ability, knowledge, skill, talent + behavior x effort x time = quality of labor (human capital)

Human capital management involves getting the right people, with the right skills, in the right position, at the right time, rewarding them with the right incentives to perform the right function in the right environment, to most effectively perform the work of the organization.

Human Capital and Profitability

Watson Wyatt undertakes a study of the link between HC practices and competitiveness and performance. The Watson Wyatt HCI is an index from 0 to 100 awarded to surveyed company, based on the responses to a wide range of questions about the organization’s human resource management practices, including pay, people development, and communications and staffing.

The research shows that five key HC practice dimensions are associated with a 90% increase in shareholder value:

• Clear Rewards and Accountability

• Excellence in Recruitment and Retention

• A Collegial, Flexible Workplace

• Communications Integrity

• Prudent Use of Resources

Importance of Recruitment and Measurement

Effective recruitment has a positive impact on a company’s management of human capital. A study by Bernthal and Wellis showed that the cost of replacing an employee ranges from 29 to 46 percent of the person’s annual salary.

Despite its importance in HC calculations when it comes to measurement, Recruitment is one of the factors a company shies away from measuring.

Why are Companies not Measuring Recruitment Effectiveness (Quality of Hire)?

Recruitment has always been a poorly measured metric, with very few companies even recording the source of the candidates to recruitment campaigns, let alone the quality of those hires.

The reasons for this fall into 4 groups:

• No tradition of measurement

• Difficulty of measurement

• Lack of pressure from senior management

• The importance of measuring quality is underestimated


• Surveying Line Management

• •Performance Reviews

• Productivity

• Turnover

• Screening and Assessment Tools


Business performance and recruitment excellence are inter-linked. Most of the companies have been slow to measure Quality of Hire.

The good news is that in reality Quality of Hire can, with a little planning and determination, be easily measured, and it should soon start moving up the HR agenda.


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