Assessing the Value of Human Capital to Stay Competitive
- Personal Inventories
- Value Added
- Separation Cost
- Total Labor Cost
- Average Headcount
The increasing cost of doing business mandates managers to use human capital measurements to track the effectiveness of the workforce. New methods of doing this emerge constantly, but there are several conventional methods of looking at production and labor as coefficients. Best-in-class businesses use standardized tools to help managers and human resource departments link the assessments of investment in the workforce with changes in the revenue of the corporation. Here are five traditional methods of human capital assessment.
1. Personal Inventories
There are two main inventories that impact the value of an employee. One is the Skills Inventory and the other is the Personality Index. The Skills Inventory collects information about an employee’s skills, abilities, trainings and certifications. Companies that have a database of this information can identify gaps that may exist between job requirements and employee competency. The Personality Index uses psychological tests to identify attributes and traits that can either augment employee effectiveness or have a negative impact on productivity.
2. Value Added
The value-added measurement is not derived from a mathematical formula. It is an examination of an employee’s optimization of their own talent. Does the person take continuing education courses or is he in the process of earning a degree to build his value to the corporation? What do his supervisors say about his work ethic? Although employees may owe nothing more to a corporation than completion of their duties to earn compensation, an employee who strive to better his position and his ability to perform the job generally has more value to the business.
3. Separation Costs
When corporations terminate employees or employees leave voluntarily, there is a cost to the company. That cost is usually determined to be approximately six months of revenue per person. In addition to lost revenue, there is lost opportunity to develop talent and an increased level of stress for employees assuming the additional duties until the employee is replaced. If there is a high rate of attrition, managers will look at other factors to stop the “bleed” of talent.
4. Total Labor Cost
Total labor cost is the measurement of the total cost of human capital. The assessment shows how much of the revenue of the corporation is spent on recruiting, hiring, training and compensating employees as a percentage of company profits. Companies can look at the cost of contingent employees as well (those who are not on the active payroll) to see if they are draining revenue or contributing to it. If the total labor cost is increasing, it may be because the cost of compensation and benefits is rising, or because profits are decreasing. This is called “Return on Investment” (ROI) and allows companies to compare their figures with those of other companies to see how they are doing in utilizing human resources.
5. Average Headcount
This figure is expressed through several variants including age, sex and job tenure. Once the headcount is established, the total job tenure figure may be divided by the total headcount to calculate employee satisfaction. Some loss of productivity may be because employees who have been in a position for some time may be satisfied with minimal effort and managers can strategize how to motivate that group. The headcount may also be used to look at productivity as a function of employee age. That allows HR departments to target certain age groups in recruitment.
The best-performing corporations in the country use standard measures to assess the value to the company of its human capital. This allows them to compare findings to those of other corporations to achieve meaningful information about their business performance and ability to be competitive. New inventory methods and formulas are emerging, but it is important to use standard human capital measurements to ensure that data is relevant.