Human Capital

Financial capital is regarded as an asset and shows up as such on the balance sheet of a company.  Labor is treated as a cost and shows up on the profit and loss report.  The potential value of a merger or acquisition may be perceived as largely dependent on reduction of labor costs in the combined entity.  Any profit-challenged company will typically see labor as its single highest-cost expense and seek to improve profitability by reducing labor costs.  All of this is rather straightforward - obvious, if you will.  So why do people choose to complicate matters by fashioning this hybrid concept of capital + labor = human capital?

As the industrial age has given way to the information age, investors have felt increasingly disadvantaged by traditional methods of market valuation.  They have seen little correlation between book value and predictability of future earnings, for instance.  The reason is clear enough: organizations with inspired leadership, energized employees, integrity, creativity, and agility have won business and outperformed their competition.  These intangibles have accounted for a greater and greater portion of market value of publicly traded companies over time, but financial accounting has largely stayed focused on the traditional tangibles.

Business leaders may be torn between a perceived need to invest in people and a traditional sense of financial discipline.  This dilemma has not been helped, in the experience of many, by a questionable return on investment from typical corporate training.  The framework we prefer was described by Dave Ulrich and Norm Smallwood in How Leaders Build Value, i.e. people as a corporate asset can be understood by the concept of competence x commitment.  Competence reflects the knowledge and skills required to do the job.  Investments in competence should show a return that is demonstrated by improvements in job performance.  Commitment is demonstrated by behavior, e.g. making discretionary effort.  Investments in commitment take the form of management/leadership time and attention, engagement, and involvement. 

If employees are committed, but not competent, they might do more harm than good.  If they are competent, but not committed, performance will be far from optimal.  If they are neither competent nor committed, their business leaders ought to be ashamed.  Use of a multiplier in the formula competence x commitment is to emphasize that deficiencies on one side cannot be remedied by surplus on the other side.

People who are competent and committed are the essence of a high-performing culture.  They will win the business, keep the business, and refresh the business.  They will find ways to become more efficient and effective.  They are worthy of investment in their development and in their rewards, and that investment will be a bargain compared to the cost of employing those less competent and less committed.

Bruce Lewin at Four Groups recently posted an article on talent and strategic HR. You can read the rest of the article here.

Comments

[Bruce Lewin]

Dear Jon,

This was a really useful piece and I've linked to it in a follow up I wrote called "Dismal, Disastrous, Ouch!" I tried to do a pingback, but I'm not sure if it worked, so I thought I'd say hello the old fashioned way!

btw, the piece I wrote is at http://www.fourgroups.com/blog/archives/01/dismal-disastrous-ouch/

Best wishes...