What is human capital?

Human capital is your employees’ collective economic value. It’s an intangible concept, meaning you can’t list it on your company’s balance sheet. However, it can directly impact productivity and profitability, making it one of your most prized assets.

Effective human capital management begins with taking steps to hire the right people to fill job vacancies in the first place. Having said that, managing human capital is an ongoing process. As workplaces adapt to rapid technological advancement, it’s more important than ever to invest in developing your team. Not only does training and development help with employee engagement and retention—it adds value directly to your business.

Human capital examples

Let’s explore some examples of human capital:

• Education: Degrees, diplomas and certifications employees have relevant to their jobs enhance performance.
• Experience: Time spent working in your industry helps them fulfill their duties.
• Training: Specialty courses relate to an employee’s job role.
• Hard skills: Technical skills, such as data analysis, languages, programming, writing and graphic design, enable task completion.
• Communication: Employees who can listen, speak, write and navigate social media well are assets.
• Health and well-being: Healthy and well-adjusted employees perform better and have fewer sick days.
• Creativity: Innovation is one of an employee’s most valuable skills.
• Cultural competence: High-performing teams can navigate global markets and multicultural workplaces.
• Ethics: Honesty, integrity, a strong work ethic and the desire to do the right thing are all highly valuable assets for your company.
• Emotional intelligence: Employees who can preempt customer needs and show empathy are better brand ambassadors.
• Resilience: Constant change is the new normal, and resilience helps staff members adapt.
• Loyalty: If you can inspire a loyal workforce that rejects gossip and internal criticism in favor of working toward common business goals, it’s much easier to succeed.
• Problem-solving: Employees with the confidence and competence to problem-solve are great for business.
• Autonomy: An independent workforce requires less supervision, helping managers be more productive.

When employees know you understand the unique set of strengths they bring to the table, they feel seen and valued. Because it’s clear their efforts make a difference, they’re more likely to be engaged and loyal.

What happens if you neglect human capital?

As society grows ever more aware of how important mental health, positive relationships and self-esteem are, people seek out modern workplaces that take human capital seriously.

The biggest consequences of not developing human capital are high turnover and low retention rates. High-performing employees tend to have the highest standards and may seek out other opportunities if they’re unsatisfied with their current role. When you lose talented workers, your company incurs institutional knowledge, recruitment and onboarding costs.

Companies with high employee turnover often struggle to innovate and perform well, mostly due to gaps in staff knowledge and low morale. Ignoring the importance of human capital could cost your competitive edge, diminish your employer brand and hamper growth. On the other hand, investing in human capital helps you build a team that’s aligned on working toward company goals and genuinely invested in the business’s success.

What’s the ROI on developing human capital?

Here are examples of the return on investment you can expect from developing human capital in the workplace:

• Increased productivity
• Lower recruitment, onboarding and training costs
• Innovative products or services
• Competitive advantage
• Bolstered customer experience
• Better employer brand
• Improved operational efficiency
• Team cohesion

Human capital: How to engage and retain employees

Human capital reflects the collective intelligence, competence and potential your team has. As business gets increasingly crowded, carving a competitive edge gets harder. Having a strong, aligned team is no longer a luxury—you must cultivate it to stay relevant.

Below are five strategies to develop, maintain and magnify human capital in your workplace.

Understand the individual

Take the time to delve deeper than the surface of each potential and new hire. Read between the lines of a person’s CV. Ask them about their dreams, goals, aspirations and worries. Get to know who they are and not just what you need to know for the context of the role.

Ensure managers regularly have one-to-one time with each employee to check in with them and demonstrate there are open communication channels. Remember, when employees know you care about them as people, they’re more likely to engage and invest in their job role. Plus, the better you understand them, the more able you’ll be to help them develop and grow in the right direction.

Offer opportunities for growth and development

Modern employees value development and growth almost as much as remuneration. Offering regular training sessions, seminars, workshops and subsidies for education is a win-win situation. Your company benefits from the upskilling and increased loyalty afforded by investing in an employee—and they receive a perk that lasts a lifetime.

Pay people well

While employees are motivated by development and a positive work environment, good pay and company benefits are paramount. Packages should at least be on par with industry standards to inspire loyalty and keep your workforce happy. Don’t forget additional benefits, such as life insurance, flexible working hours, remote working options and other relevant perks.

Recognize and reward effort and outcomes

Making an effort and performing duties well has intrinsic value. However, it’s natural to work harder when those efforts are noticed and valued. Regularly recognizing and rewarding team members who perform well is one of the best ways to develop human capital.

Keep in mind that every employee will be motivated slightly differently, and you’ll need to approach them as individuals. To get the best out of one person, you might need to praise and reward effort as they grow. With another, it might be more motivating to reward them based on outcomes. As you learn what drives your team, you should become a beacon of praise, public recognition and monetary incentives.

Cultivate a people-centric company culture

Ultimately, how well your company manages its human capital comes down to how well-designed and well-defined its organizational culture is. The majority of the power to shape how employees behave in the workplace is in your and your leadership team’s hands. If you can cultivate a culture of respect, constructive communication and continual learning, employees reflect those values back at you. Team building exercises, feedback sessions and anonymous suggestion boxes can help you shape company culture.

People are more productive when they feel valued

Human capital is a cornerstone of successful businesses. It represents the collective economic value of your employees, including their hard and soft skills. And the ROI on well-managed human capital can be extraordinary. It can result in higher productivity, more innovation, better retention rates and overall business growth. For employers seeking novel ways to be more competitive, human capital could be the key.

Human Capital FAQs

What is human capital risk?

Human capital risk includes employee-related threats that could hinder your company’s ability to reach its goals. Skills shortages, loss of key staff members, lack of embedded institutional knowledge and lack of talent development are examples. Ways to combat human capital risk include investing in employee training, leadership development and an environment that values open communication.

Is human capital the same as human resources?

Human capital isn’t the same as human resources. Human resources is usually a department that develops strategies and processes to manage, recruit and develop employees. On the other hand, human capital refers to staff members’ knowledge, skills and potential to add value to your business.

Who invented human capital?

The concept of human capital dates back to the 18th-century economist Adam Smith. However, it was developed by Gary Becker and Theodore Schultz in the 20th century, who highlighted the importance of investing in education and training. Both economists won Nobel Prizes in economic science for their contributions to human capital theory.