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Human capital is the term for the collective capability, knowledge and skills of the people that are employed by an organisation. Measuring human capital provides a data-driven approach to identifying effective people management practices, which, if done well, can help ensure that value creation is long-term and sustainable.
This factsheet explores the challenges surrounding the measurement of human capital and the three clear levels of data collection and analysis for human capital data. It introduces the different types of reporting suited to various stakeholders, including external reporting, narrative reporting and internal reporting. Finally, the factsheet explores the investor perspective on human capital reporting.
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Whilst leaders remain adamant that ‘people are the most important asset’, business has yet to come to an agreed way of valuing and reporting on the value of a workforce’s knowledge. Unlike financial accounting standards, there’s little agreement on how to report the value and impact of the workforce. This aside, HR's role in collecting, analysing and communicating information on the value of people and their contribution to the business is vital and will assist in the design and implementation of HR policies and practices that enable organisations to achieve long-term sustainable business performance. Transparent reporting is also important for building trust in business.
HR's ability to analyse and report on human capital data differs significantly across the profession. Understanding the context of data is key and as such there is no single measure, or set of measures, which can adequately convey its human capital value. Organisations need to decide which measures are relevant to them and will give them the information they need to effectively communicate the value and contribution of human capital both internally and externally.
What is human capital?
The term ‘human capital’ is widely used in HR to describe people at work and their collective knowledge, skills, abilities and capacity to develop and innovate. Human capital reporting aims to provide quantitative, as well as qualitative, data on a range of measures (such as labour turnover or employee engagement levels) to help identify which sort of HR or management practices will drive business performance.
Our research The intangible workforce: do investors see the potential of people data? shows that external stakeholders such as regulators and investors are increasingly interested in understanding the quality of human capital in organisations.
It’s now commonly understood that the value of organisations is drawn from a mixture of tangible assets in the form of equipment, money, land or other physical objects together with intangibles in the form of brand, reputation, knowledge and people.
Read our report Human capital theory: assessing the evidence for the value and importance of people to organisational success to find out more about human capital theory.
Human capital standards
In 2015 the British Standards Institution, the business standards company, issued BS76000, the first national standard to recognise the importance of valuing people in organisations. Find out more in our HR and standards factsheet.
Measuring human capital
Given the complexity of organisations and the various approaches to managing human capital, measurement can be challenging. The context of the organisation is also a fundamental aspect of human capital measurement: the emphasis for measurement is no longer on absolute measures of human capital, but instead context specific information to enable informed decision making.
Human capital data can be grouped according to the different aspects of HR they refer to. Some data groups are cross-cutting and can combine to create additional data groups, for example:
workforce composition: demographics data including age, gender and ethnicity
recruitment and retention: number of resignations/vacancies/applications, length of service
skills, qualifications and competencies: levels of expenditure on training, types of training provided, length of time to reach competence levels, data on training needs
performance management: performance management results, productivity and profitability data, targets set and met, levels of customer satisfaction, customer loyalty
employee relations and voice: findings from employee attitude surveys
pay and benefits: overall wage bill costs, distribution of individual performance-related pay awards, level of total reward package
regulatory compliance: includes data on the compliance of employees to established standards and guidelines for working practices in particular disciplines
organisation development and design: includes data on spans of control, skills mix and talent pipelines.
Valuing your Talent, led by the CIPD, developed a simple framework that illustrates the different types of data HR professionals can collect to understand human capital. Measures are categorised as Inputs, Activities, Outputs and Outcomes, which relates to their position in the business value creation cycle.
- The contribution of people is difficult to isolate from other factors such as the economic situation, market forces and customer or social trends.
- The value of people is often expressed in qualitative rather than quantitative terms that make it difficult to represent in traditional accountancy models.
- HR data has traditionally been collected for administrative rather than evaluation purposes.
- HR practitioners do not always have the skills or resources to interpret or explain data to evaluate the contribution of people to business performance.
Find out more in our HR analytics factsheet or read about collecting and analysing data in the CIPD/Oracle report Talent analytics and big data - the challenge for HR.
Different levels of data collection
There are three clear levels of data collection and analysis for human capital data:
Operational data analysis - simple monitoring data with no analysis, for example, reporting absence and retention data.
Basic insights - basic data is analysed and correlations are explored between types of data to draw simple human capital insights.
Insights driving performance - human capital data is triangulated with other business data to identify performance drivers; and may be used to illustrate how organisations can leverage human capital to drive performance more effectively.
The different levels of data collection that might take place, with their likely outcomes, are:
ActionOperational data analysis:
- Collect basic input measures such as absence data, turnover data.
- Identify useful data already available.
- Use this data to communicate essential information to managers.
- Design data collection for specific human capital needs.
- 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.
- Identify key performance indicators relating to the business strategy, and design data collection processes to measure against them.
- Communicate data in ways that are meaningful to differing audiences.
Operational data analysis:
- Basic information for managers on headcount and make-up of the workforce.
- Information to help design the HR model most likely to contribute to performance.
- Communication to managers not just on how to implement processes, but with accompanying information on why they are important and what they can achieve.
Insights driving performance:
- Identification of the drivers of business performance.
- Information that will enable better-informed decision-making internally and externally.
To find out more on measuring human capital, and some of the important HR theories related to human capital, read our report Human capital analytics and reporting: exploring theory and evidence.
Reporting human capital
Different types of information will be of value to different stakeholder groups:
- Leaders are interested in understanding how effective employees are at creating value for the organisation, and whether people enable the organisation to be sustainable over the long term.
- Shareholders seek information on the employee attributes or behaviours that are likely to influence short- or long-term financial performance.
- Investors are interested in knowing how organisations value and grow their pools of talent, and whether long-term decision making takes place with people in mind.
- Customers wish 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 require information on which actions they can take to improve the performance of their business units.
- Regulators and policy makers are interested in understand whether organisations are operating within the correct ethical, moral, social and environmental governance boundaries.
Reporting is typically done in one of four ways:
- unstructured voluntary
- systemised voluntary
- voluntary for reward
Organisations are becoming more able to capture and report on data, and thus expectations from external stakeholders are that reporting will become standardised and may even become compulsory. Some examples of different types of reporting are:
Method: Unstructured voluntary
Explanation: Isolated pilot studies are initiated by individual enterprises or consultancy companies/ researchers develop and promote approaches and methods.
Example: social reports, knowledge accounts, human resource audit, holistic balance sheet, intellectual capital statements.
Method: Systemised voluntary
Explanation: Develop a consistent framework which can be operational across sectors and countries and promote this at large scale through the inherent rewards and image gains.
Example: ISO 9000 standards, benchmark programmes.
Method: Voluntary for reward
Explanation: Develop a consistent framework supported by rewarding mechanisms once it is introduced and approved at enterprise level.
Example: Investors in People (UK), European Label for Innovative Projects in Language Learning (EU).
Explanation: Identify disclosure on human capital as a public concern and prepare (inter-)national regulations and standards.
Example: Green accounts (Denmark)
The Department for Business Innovation and Skills (BIS) has issued regulations for the future of narrative reporting which are a clear call for improved reporting on aspects of human capital:
require all companies (except small companies) to prepare a strategic report which will be presented separately to the directors' report and will replace the current business review. The aim of the strategic report is to pull together the company’s strategy, business model and risks facing the company and link this through to the financial statements and remuneration of company directors. The regulations regarding directors’ remuneration, which include the requirement for quoted companies to disclose a single remuneration figure for each director, are expected to be laid before parliament shortly. Quoted companies will need to ensure they include specific information on the company’s strategy, business model, human rights and gender diversity;
require quoted companies to include information on greenhouse gas emissions in their directors’ report. This report will be required to contain an annual quantity of emissions, in tonnes of carbon dioxide equivalent, in respect of emissions produced by “activities for which that company is responsible”, including fuel usage and resulting from the purchase of “electricity, heat, steam or cooling” by the company. Companies will be required to disclose the methodology used to calculate these figures including prior year comparative information for the second and subsequent year of reporting;
remove a handful of other currently required disclosures in the director’s report such as the principal activities of the company during the course of the year, and;
replace the option to prepare summary financial statements with an option to provide a ‘strategic report with supplementary material’. The supplementary material consists of some administrative details, details of any qualifications made by the company’s auditor in its report on the full annual accounts and, for quoted companies, the “single total figure table” for directors’ remuneration.”
Published human capital data
Integrated reporting is an initiative designed to help organisations to report on the mix of tangible and intangible assets for their stakeholders. The International <IR> Framework advocates a “process that results in communication, most visibly a periodic integrated report, about value creation over time. An integrated report is a concise communication about how an organization’s strategy, governance, performance and prospects lead to the creation of value over the short, medium and long term”. Human capital is seen to be one of six principal capitals contained within the integrated report, and which comprise the value of the firm, along with financial capital, manufactured capital, intellectual capital, social and relationship capital, and natural capital. There's more information on the Integrated Reporting website.
As part of the Valuing your Talent project, we have explored the quality and type of data reported in external reports by FTSE 100 organisations. Our report Reporting human capital: illustrating your company’s true value found that there are gaps in the types of data being reported, and that organisations are often missing key issues in their external reports. This means that more work needs to be done to improve the quality of human capital disclosures.
Internal reporting is far more prevalent than external reporting, as this is important in the evaluation of the effectiveness of HR interventions and guiding future HR strategy, while also protecting business confidentiality where desired. It takes a number of forms.
Generally any human capital data reported internally should:
- be reliable and open to scrutiny
- be accompanied by adequate explanation
- be presented in a manner that is easily understandable for the audience
- be related to business needs
- enable managers to identify appropriate actions that will improve business performance.
To find out more about human capital reporting, read our research report Human capital metrics and analytics: assessing the evidence for the value and impact of people data.
Investor perspectives on human capital reporting
Human capital reporting is an important way of demonstrating to key financial stakeholders the perspective and focus of an organisation on its long-term strategy, its approach to delivering through its business model, and the way in which an organisation is managing and mitigating key risks. A key audience of reporting is the investor community.
Our research reported in The intangible workforce: investor perspectives on workforce data investigated the investor perspective and showed that there are various key workforce dimensions investors are interested in:
Management quality: the quality of senior leadership, their ability to manage complexity and deliver results is the key human capital measure of interest to investors.
Diversity of senior teams: the representativeness of senior teams is highlighted as a way to understand if the organisation believes in the value of diversity and inclusion. Gender and ethnicity are particularly important to investors.
Employee satisfaction: investors are interested in online platforms, such as Glassdoor, which enable employees to rate their employer. These websites were considered to offer useful insights as to the experience of working for the organisation, beyond basic engagement measures.
Overall investors are interested in receiving more data and insights in the form of better-quality reports from organisations. To have value these reports must be transparent, with a clear and objective narrative that describes significant risks and opportunities related to the workforce. It is likely this information will help investors make more informed decisions over the long-term.
The International Integrated Reporting Council - improving corporate reporting with a holistic framework of capital
Shareaction Workforce Disclosure Initiative - a voluntary movement by investors and corporates to improve reporting standards on workforce and supply chain issues
Books and reports
BYERLY, B., FITZ-ENZ, J. and PEASE, G. (2012) Human capital analytics: how to harness the potential of your organisation's greatest asset. London: John Wiley & Sons.
HUUS, T. (2015) People data: how to use and apply human capital metrics in your company. London: Palgrave Macmillan.
MAYO, A. (2012) Human resources or human capital? Managing people as assets. Farnham: Gower.
CAMPBELL, B.A., COFF, R., and KRYSCYNSKI, D. (2012) Rethinking sustained competitive advantage from human capital. Academy of Management Review. Vol 37, No 3. pp376-395.
PHILLIPS, J.J. and PHILLIPS, P. (2014) Developing a human capital strategy in today's changing environment: eight forces shaping HC strategy. Strategic HR Review. Vol 13, No 3. pp130-134.
WRIGHT, P.M. and MCMAHAN, G.C. (2011) Exploring human capital: putting human back into strategic human resource management. Human Resource Management Journal. Vol 21, No 2. April. pp93-104.
CIPD members can use our online journals to find articles from over 300 journal titles relevant to HR.
Members and People Management subscribers can see articles on the People Management website.
This factsheet was last updated by Edward Houghton.
Edward Houghton: Acting Head of Research
Edward Houghton is the acting Head of Research at the CIPD. Since joining the institute in 2013 he has been responsible for leading the organisation's human capital research work stream exploring various aspects of human capital management, theory and practice; including the measurement and evaluation of the skills and knowledge of the workforce. He has a particular interest in the role of human capital in driving economic productivity, innovation and corporate social responsibility. Recent publications have included “A duty to care? Evidence of the importance of organisational culture to effective governance and leadership” for the Financial Reporting Council’s Culture Coalition, and “A new approach to line manager mental well-being training in banks” an independent evaluation of the Bank Workers Charity and Mind partnership to deliver mental health awareness training in the UK financial services sector.
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