Measuring and reporting financial metrics to prove the return of investment (ROI) of human capital proves to be an ongoing challenge for HR leaders. In the modern workforce, there are emerging directions and opportunities on how to define human capital metrics in financial terms. To realise this would enable a complete shift in the thinking, investment and overall design of work, the workplace and employee engagement for future generations. Financial capital, and its use, continues to dominate business strategy, employee management and economic models. As we pivot our focus to the future of work and the workplace, we also unlock ways to maximise the value of human capital.
Human capital analytics mainly focused on measuring and analysing naturally captured data from Human Resources Management System or HRMS. Moving forward, HR is tasked to determine the strategic linkage between human capital and financial gain. This means finding human capital measures strongly associated with organisational performance. The most common approach is to determine enhanced profitability from human capital investments through simple addition and subtraction. However, there are more important factors at play when measuring human capital.
There are different indicators to measure ROI including productivity, employee retention, skill levels, employee engagement, job vacancies, diversity, employee care and health, and training effectiveness. Every single one of these indicators must have a counterpart and must be connected to each other. For example, retention has attrition. High employee turnover is costly and results in low morale on both employees and organisations.
The most important indicator is employee engagement because it concurrently and subsequently impacts all others. An engaged workforce is a workforce to be reckoned with.
Amidst the Covid-19 pandemic, employee care and health also took the centre stage with employees demanding better health practices and protocols from organisations.
Despite the meaning of human capital being clear, many organisations still question its value and see it as cost. Human capital is an intangible asset represented by experience, knowledge, critical thinking and skills possessed by individuals and groups within an organisation. Human capital is the strongest asset of any organisation. Investing in human capital, meaning in your employees, is the smartest business decision you can make. Human capital drives forward not only employee engagement but leadership development, workforce optimisation, communication management and knowledge accessibility as well.
We’ve heard sentiments like ‘employees first’ and ‘we value our employees,’ and yet, employees are managed and considered as costs. 85% of employees worldwide ‘are not engaged or are actively disengaged’ according to Gallup’s 2017 report ‘State of the Global Workplace.’ Three years passed and we are seeing great developments in employee engagement, candidate experience, employer response and workplace culture. Why is that? Because more and more business leaders and executives are seeing the value in human capital. More value is given to human capital as the modern world gives more emphasis and significance to both intellectual and innovation capital.
Things make more sense if we look at human capital as not merely an HR issue but a financial one as well. According to the founder and CEO of HCMoneyball, Dr. Solange Charas, ‘human capital is really a financial issue’ and is the ‘single largest line item expense’ for most organisations.
Human capital experts John Boudreau and David Creelman echoed similar sentiments back in 2015. In their Harvard Business Review article, they wrote ‘Human capital deserves to be treated with the same rigour as financial capital and other tangible resources and to bring that rigour by applying frameworks developed in more quantitative disciplines.’
As more executives see more strategic value in human capital, new HR roles are emerging to prepare for the future of work. According to a Harvard Business Review article by Jeanne Meister and Robert Brown released last August, there are more than 20 new HR roles in the future including a Strategic HR Business Continuity Director and a Human Bias Officer.
Integrating human capital ROI on the balance sheet is still difficult to comprehend for many organisations. Mainly because most executives don’t see any value at all. That itself is a big challenge for HR. But it also opens HR up to abundant opportunities in redesigning and rebuilding the workplace like further enhancing the recruitment process for better candidate experience as well as improving both client and employee engagement.
The endgame in understanding human capital in financial terms is to not save and make more money. The main objective is to build the future of work that puts humans first at the heart of every organisation.
Will’s next post will provide more information about human capital reporting and the most actionable metrics to measure among organisations. Follow us on LinkedIn for more.
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