Measuring Human Capital ROI
Price Waterhouse Coopers describes Human Capital Return on Investment (ROI) as the single measure that consolidates everything to do with people management, tracking performance, peer comparison and business planning.
Why? Because Human Capital ROI is the fundamental baseline measure of employees’ contribution to creating value.
In simplistic terms, the purpose of HR is to ‘help the organisation have the right people, with the right skills, in the right places, at the right time to work in ways that deliver on business strategy’. Human Capital ROI then looks at the per unit expenditure on employees (workforce cost) against company profitability to get a profit return figure.
Other traditional measures are:
efficiencies in non-people cost arenas
better controlling the number of Full-Time Employees (FTEs) employed
managing people costs and/or improving the alignment of remuneration structures to desired business performance goals.
Human Capital as investment not cost
Juliet Bourke, Partner, Human Capital at Deloitte is excited about the growing credibility of Human Capital. She says, ‘If you think about human capital as an investment in people it’s obvious my work domain is all about leadership, culture, learning, well-being, flexibility, workforce planning, strategy, change management, diversity, inclusion… the list goes on and on. Now who doesn’t want to work on those issues?’
She argues that the term Human Capital elevates the work of human resources, such as payroll, from being a subordinate cost item on a spreadsheet to an investment and would like to see the term HR replaced by HC. Perhaps then business leaders will connect the dots between achieving strategic objectives with great workplaces and investing in people.
Human Capital Trends
These thoughts seem to mirror the global trends reflected in Deloitte’s annual Global Human Capital Trends report. ‘Culture and employee engagement’ were the theme of the report in 2015, putting the workforce in the driving seat. In 2016 the trend was, ‘The new organisation: Different by design’, a new model of management that drives empowered teams to create effective organisations, highlighting people again.
The emerging trend in 2017, is technology redefining the context of workforce, workplace and the world of work, summarised as ‘Rewriting the rules for the digital age’. Overall, people and their human capital are being placed front and centre, ahead of past management icons of strategy and leadership.
The Australian Bureau of Statistics (ABS) cites the trend in Australian labour market being towards more skilled and qualified employees, thus increasing the overall quality of the labour force. The ABS see Human Capital as being ‘widely accepted as a key driver of productivity growth.’
Formal Learning as key to increasing Human Capital in Australia
The Australian Workforce and Productivity Agency report, Human Capital and Productivity, March 2013 provides a conclusion that human capital productivity is increased by:
formal learning (learning leading to a qualification)
non-certified learning (on the job training, work experience, other learning not leading to a formal qualification);
and management and leadership skills
A key measure of productivity is changes in wages. Tellingly, for each additional year of learning an individual’s wage can increase between 5 and 16 percent.
Another measure highlighted in the report is management and leadership skills. When skills are properly used and complemented by technology, then performance and rates of innovation increase.
The OECD takes a global approach when they define Human Capital as ‘the knowledge, skills, competencies and attributes embodied in individuals that facilitate the creation of personal, social and economic well-being’.
The report states that learning has correlations with improved health and positive societal and environmental outcomes. A hypothesis exists that investment in the learning of one worker will increase the productivity of all co-workers. The benefits then are twofold – firstly to the organisation and secondly to the economy as a whole.
Three ways to invest in your people’s learning and productivity
- Begin by finding a quality online human resources diploma or online business management course that allows the flexibility of on the job learning credits. The faster your people can qualify, the quicker you will realise the productivity returns.
- Ensure the course is tailored to adults and not school leavers so that content and networking opportunities become relevant and meaningful.
- Check the course is fully accredited and supported by Australian-based learning mentors who understand the value of human capital in the Australian and global economy.
Share your experiences of increasing human capital and productivity through learning below.