CIPD - Human capital

Corporate and HR strategy

Revised November 2008

This factsheet gives introductory guidance. It:

defines ‘human capital’
considers the relationships between human capital and other forms of capital
looks at human capital measures, reporting and identifying business drivers
includes the CIPD viewpoint.

This factsheet gives practitioners a starting point to think about how they might generate better information on human capital, how this might be communicated both internally and externally and what impact this might have on management decision making and business performance.

It is now commonly accepted in both the management and finance communities that the value of organisations is expressed by a mixture of tangible assets in the form of equipment, money or land or other physical objects and intangibles in the form of brand, reputation, knowledge and or course people. In other words, there are many forms of capital that make up the real value of a business and in an increasingly knowledge-based economy, human capital is fast becoming the most important.

However, despite a number of academic models and theories the evaluation of human capital is still difficult for most companies. There are a number of reasons for this.

The contribution of people is difficult to isolate from other factors such as the economic situation, market forces and fashion. The value of people is expressed in qualitative rather than quantitative terms which make it difficult to represent in traditional accountancy models. HR data is more often collected for administrative rather than evaluation purposes. HR people do not always have the skills to interpret data to evaluate the contribution of people to business performance.

These difficulties have been further compounded by the numerous definitions of human capital over the years. In fact the term is still hotly debated as to whether it is appropriate to equate people in the same terms as other inanimate forms of capital. However, the term has now become common in HR language to describe people and their collective skills, abilities, experience and potential.

Definition

In our research work at CIPD, we have found it helpful to describe human capital as one of three elements to make up intellectual capital. Intellectual capital describes the knowledge assets that are available to the organisations and is a large part of intangible value. It can be described as:

Human capital – the knowledge, skills, abilities and capacity to develop and innovate possessed by people in an organisation
Social capital – the structures, networks and procedures that enable those people to acquire and develop intellectual capital represented by the stocks and flows of knowledge derived from relationships within and outside the organisation
Organisational capital –the institutionalised knowledge possessed by an organisation which is stored in databases, manuals etc. This would also include HR policies and processes used to manage people.

In order to be effective, organisations must be able to understand the relationships between these different forms of capital. Human capital alone will not create value. People have to be motivated and managed by the use of good HR practice and given the opportunity to develop and use their skills to create goods and services which can be sold. If the knowledge they are creating cannot be embedded in goods and services that are in demand, then this human capital will have no value to the business.

Measuring human capital

Once people have been recognised as assets, it then becomes important to be able to quantify the value of this asset. This is vital for informed decision making about how to manage, and maximise the return on investment.

Most human capital measurement has been designed with the aims of proving the value of people - assessing the impact of human resource management practices and the contribution of people to bottom-line performance. However, the methods of measurement differ from company to company. Research carried out for CIPD in 2001 concluded that there was no single measure or set of measures that would provide a value for human capital.

Find out about our Evaluating human capital research report

This was confirmed by the Task Force on Human Capital Management report in 2003¹. This task force was set up by the Department of Trade and Industry under the chair of Denise Kingsmill to address the lack of reporting on human capital in business which is was felt was inhibiting competitiveness.

Measurement difficulties

Measurement is notoriously difficult because the things that human capital is likely to influence such as customer satisfaction, innovation and service delivery are at the mercy of numerous other contextual factors. Whereas it can be relatively easy to collect data to describe the workforce and the prevalence of certain practices, particularly where sophisticated human resource information systems (HRIS) exist, it is more difficult to develop credible and reliable measures and decide what the measures will tell us.

One of the reasons why measurement is difficult is that human capital is not owned by the organization but secured through the employment relationship. Many of the things which could give us an indication of the contribution of people are out of the control of the business. Employees can decide how much effort above the absolute minimum required to retain their job they put into their work; this is sometimes called discretionary effort. To secure the extra effort from their employees which will really make a difference to their business, organizations must identify the triggers which will encourage this discretionary effort. This argument is discussed comprehensively in the report Understanding the people and performance link: unlocking the black box produced for CIPD by John Purcell and his colleagues in Bath University.

Find out more about our 'black box' report

Human capital therefore represents the fit between the demand for and supply of human capabilities. Organisations will not value and therefore not measure aspects of employee behaviour or capability which they cannot use in the pursuit of their business objectives. At organisation level, therefore, the contribution of human capital is contingent on the supply and relevance of employee competencies to the business needs of the organization as determined by its strategy. This context-dependent quality makes it impossible to identify a standard set of measures which will be relevant and applicable in all circumstances.

Measurement and data

Measurement can be regarded as a way of analysing and interpreting data which already exists. For example, if a measure of organisational capability is a desirable outcome, then performance management data, training data or skills data may be used to achieve this. In this case, how the existing data is used and interpreted rather than how it is collected will determine the outcome measure.

In some cases the data itself may be an outcome of measurement. For example, data on absenteeism is usually the result of an effort to measure absenteeism.

Measures are therefore important both in determining how data is collected and also how it is used. It is not surprising, given that there are these different ways of looking at measurement, that the measurement and analysis of data are often inseparable and sometimes become confused in the search for meaningful human capital information.

Types of human capital data

There are many different types of data which can be useful in measuring human capital. Generally these fall under the following headings:

demographic data: data on the composition of the workforce, age, gender, ethnicity
recruitment and retention data: data on number of applications for vacancies, number of people leaving, length of service, numbers of vacancies, length of time to fill vacancies
training and development data: number of days training given, money spent on training, types of training given, length of time to reach competence levels, data on training needs
performance data: performance management data, productivity and profitability data, targets set and met, levels of customer satisfaction, customer loyalty
opinion data: data from employee attitude surveys.

Data can be collected at a number of levels within organisations. At the most basic level data can be collected for simple monitoring purposes, such as controlling absence or monitoring retention difficulties. At the highest level data can be used to identify performance drivers by correlating different types of data with performance data organisations can begin to understand what the real benefits are of improving levels of motivation or retention.

The following table summarises the different levels of data collection which might take place and the likely outcomes of data collection.

	Basic level	Intermediate level	Higher level
Action	Collect basic input measures such as absence data, turnover data Identify useful data already available such as data from pay reviews, performance management, job evaluation, training, the recruitment process Use this data to communicate essential information to managers about absence, turnover or accident levels, compared by department Look for trends or patterns in the data and investigate their causes	Design data collection for specific human capital needs. For example, conduct an employee attitude survey to measure satisfaction, or follow up on training activity to monitor implementation and use Use this data to inform the design and implementation of people management policies and processes Look for correlations between data – for example, whether high levels of job satisfaction occur when certain HR practices are in place, such as performance management, career management or flexible working Communicate the value of processes to line managers and identify specific actions to improve people management	Identify key performance indicators relating to the business strategy, and design and implement data collection processes to measure against them Feed both quantitative and qualitative information into an analysis model such as a balanced scorecard Provide managers with indicators on a range of measures designed to inform them on performance and progress in their department Accompany this with specific actions to be taken informed by the resulting human capital data Interpret and communicate data in ways that will be meaningful to a range of audiences
Outcome	Measures of efficiency and effectiveness Basic information for managers on headcount, make-up of the workforce, and so on Identification of any action that might be needed as a result of these measures – for example, to reduce accident rates, to improve the diversity profile of the workforce or to reduce absence	Measures of process Information to help design the HR model that's most likely to contribute to performance Communication to managers not just how to implement processes but with accompanying information on why they are important and what they can achieve	Identification of the drivers of business performance Information that will enable better-informed decision-making both internally on the management of people and externally on the progress with regard to strategy

Basic level

Intermediate level

Higher level

Action

Collect basic input measures such as absence data, turnover data

Identify useful data already available such as data from pay reviews, performance management, job evaluation, training, the recruitment process

Use this data to communicate essential information to managers about absence, turnover or accident levels, compared by department

Look for trends or patterns in the data and investigate their causes

Design data collection for specific human capital needs. For example, conduct an employee attitude survey to measure satisfaction, or follow up on training activity to monitor implementation and use

Use this data to inform the design and implementation of people management policies and processes

Look for correlations between data – for example, whether high levels of job satisfaction occur when certain HR practices are in place, such as performance management, career management or flexible working

Communicate the value of processes to line managers and identify specific actions to improve people management

Identify key performance indicators relating to the business strategy, and design and implement data collection processes to measure against them

Feed both quantitative and qualitative information into an analysis model such as a balanced scorecard

Provide managers with indicators on a range of measures designed to inform them on performance and progress in their department

Accompany this with specific actions to be taken informed by the resulting human capital data

Interpret and communicate data in ways that will be meaningful to a range of audiences

Outcome

Measures of efficiency and effectiveness

Basic information for managers on headcount, make-up of the workforce, and so on

Identification of any action that might be needed as a result of these measures – for example, to reduce accident rates, to improve the diversity profile of the workforce or to reduce absence

Measures of process

Information to help design the HR model that's most likely to contribute to performance

Communication to managers not just how to implement processes but with accompanying information on why they are important and what they can achieve

Identification of the drivers of business performance

Information that will enable better-informed decision-making both internally on the management of people and externally on the progress with regard to strategy

Reporting human capital

Almost more important than measuring is the communication of human capital information. Different types of information will be of value to different audiences within the business:

Shareholders want to know what is likely to influence long-term financial performance.
Customers want to know if they will get good service and after sales support.
Employees want to know their jobs are secure and how they can develop themselves and their skills.
Managers need to know what actions they can take to improve the performance of their business units.

External reporting on human capital is still limited and mostly takes place to comply with the requirement for companies to produce a business review or a narrative report of those issues likely to affect performance. CIPD has produced a suggested framework for external reporting which offers a suggested list of primary and secondary indicators under the headings of:

human capital strategy
acquisition and retention
development
management and leadership
human capital performance.

Go to our Human capital: external reporting framework Change agenda

Internal reporting is much more prevalent and takes a number of forms. Some companies make detailed information available to their managers on a regular basis along with suggested actions if this data implies there are improvements to be made in performance.

Generally any human capital data reported internally should be:

reliable and open to scrutiny
accompanied by adequate explanation
presented in a manner which is easily understandable for the audience
related to business needs
enable managers to identify appropriate actions which will improve business performance.

Identifying business drivers

The ultimate aim of human capital management is to identify what sort of interventions in terms of HR practice or management behaviour will drive business performance.

There are a number of good examples of organisations such as the Nationwide Building Society who have successfully correlated human capital data with performance data to identify what interventions are likely to produce results. Many of these are reported in our guide on internal human capital reporting.

Go to our guide Human capital reporting: an internal perspective

As stressed above, because human capital is context dependent, the key to identifying business drivers lies in developing a better understanding of the people element of the business and what policies and practices to manage them are likely to achieve results. It is not enough, therefore, to just monitor human capital information we must be able to accompany this with the analysis which underpins understanding of the contribution people make to business performance and how this can be maximised.

CIPD viewpoint

There is now a great deal of evidence that the contribution of people is the largest driver of organisational performance. Systematically collecting, analysing and communicating information on the value of this contribution is vital and will assist in the design and implementation of HR policies and practices that will maximise the impact on business performance. However, all of our research to date indicates that human capital is highly contextual and therefore no single measure or set of measures can adequately convey its value. Organisations need to decide what measures are relevant to them and what will give them to information they need to effectively communicate the value and contribution of human capital both internally and externally.

For more information on human capital, see CIPD's latest research.

Go to our Human capital research webpages

Useful contacts

References

KINGSMILL, D. (2003) Accounting for people: report. London: Task Force on Human Capital Management. Available at http://www.berr.gov.uk/bbf/financial-reporting/business-reporting/
Accounting%20for%20people/page38836.html

Human capital