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Human Resources

What is Human Capital?

Tonya Fletcher SPHR, SHRM-SCP
by Tonya Fletcher SPHR, SHRM-SCP on November 18, 2022

Human capital is said to be the single most vital asset of a company – above an organization's data, technology, or even its physical building. Human capital is defined as the intangible qualities and economic value of employees, such as knowledge, skills, and attributes.

Companies that invest in human capital reap the benefits of improved employee satisfaction, productivity and profitability, company culture, and higher retention rates. But, many organizations fail to prioritize their workers, favoring the physical assets of the company instead. The bottom line is: Companies that invest in their human capital see long-term economic gains.

Read on to learn more about why you should invest in your company’s human capital.

Human Capital Theory

The modern theory of human capital was introduced in the early 1960s. American economist Theodore W. Schultz argued that if a company wants to see economic growth, it would need to invest in both physical and human capital, with an emphasis on the latter. Because human capital is essential to managing physical capital effectively, he theorized that of the two, human capital is the factor more likely to limit overall growth.

Companies are quick to invest in physical capital or tangible assets that assist in production. Physical capital consists of the assets found on a company's balance sheet, such as cash, real estate, machinery, and office supplies. However, many companies shy away from investing in their people, despite the reality that it's linked to economic success. According to a Talent Mobility Research Report, over 40% of companies say they very rarely, or never, provide career planning or development to their employees.

How to Invest in Human Capital

When it comes to factors that impact employee satisfaction and development, there are three areas you can start to focus on and invest in: employee well-being, education, and training. Take a look at the three ways you may consider investing in human capital.

  1. Wellbeing. Emphasizing employee well-being helps promote a healthy work environment. Consider offering health insurance benefits to your employees, an Employee Assistance Program (EAP), flexible work arrangements, access to financial services and resources, and programs for healthy habits and lifestyles such as smoking cessation or weight loss.
  2. Education. Employers who are willing to invest in their employees' education show their care and commitment to the development of their workforce. This, in turn, builds loyalty. Consider offering tuition reimbursement so that employees can further their education. You could also consider implementing a Learning Management System (LMS) that allows you to create and store customized educational content and learning paths.
  3. Training. From operations to physical capital – no company runs in the same manner. Set your employees up for success and train them properly. Consider developing internal programs for company onboarding, development of management and leadership skills, as well as role-specific training. Offer to pay for participation in industry conferences.

Benefits of Investing in Human Capital

Companies that spend on employee well-being and invest in their employees' development reap the ongoing benefits that stem from a more advanced and healthy workforce. When employees are engaged at work, that's when real organizational growth begins. Here are some of the benefits of investing in human capital.

Increase Retention Rates

Making an effort to increase employee satisfaction on the job can save companies the cost of high employee turnover. Companies that lose employees must bear the costs associated with constant hiring, onboarding, and training new workers, plus the loss of productivity when a role remains unfilled.

Employees that perceive their employer cares about their well-being and growth tend to develop a sense of loyalty and appreciation for their organization. When employees feel valued, they are more likely to stay with their company, increasing the organization's retention rates.

Drive Employee Engagement

Your best employees want to learn and grow. So, when companies invest in human capital through education and training, it demonstrates to employees that their professional development is valued. This not only makes employees feel appreciated, but allows them to set goals, grow professionally, and stay challenged at work.

A disengaged employee puts out negative energy. They impact company morale and drag down productivity. And, when disengagement or quiet quitting becomes the norm, your company suffers exponentially. Beware of disengaged employees. Stay vigilant in keeping employees feeling challenged and appreciated.

Build A Positive Company Culture

Another approach for investing in human capital is to build a resilient company culture. Culture consists of shared beliefs and values that are communicated and reinforced. Employees who share a common purpose tend to outperform those in environments of confusion and lack of cohesiveness.

Company leaders also play an influential role in upholding a strong company culture. Modeling the appropriate values and behaviors as well as promoting an inclusive work culture are connected to increased and sustainable business results.

Committing to employee well-being and development can shape a stronger, more stable workforce, and improve individual productivity and motivation. Aligning human capital to business goals makes smart business sense. As an employer looking for economic gains, the recipe for success may be found in your human capital strategy.

Tonya Fletcher SPHR, SHRM-SCP
Tonya Fletcher SPHR, SHRM-SCP

Tonya is the Labor Compliance Manager at FrankCrum. In this role, she leads the FrankAdvice team of HR consultants and manages the delivery and content of best practice HR information to client owners and managers. When she’s not at work, Tonya enjoys international travel.