“Human capital,” according to Investopedia’s definition, is the economic value of a worker's experience and skills. The term includes assets like education, training, intelligence, skills, and health, as well as other things that employers value, such as loyalty and punctuality.
Human capital is intangible and cannot be listed on a balance sheet, but it is nonetheless real. All employees bring a certain value to their companies. Because of this, organizations increasingly understand that to maximize their success, they must recognize the value of human capital and manage their workforce accordingly.
This responsibility falls both on the company as a whole and on individual leaders within the company. The company (often the human resources department) creates and maintains policies for managing human capital. Managers help by upholding these policies, but beyond that, they can support employees through positive, inspirational leadership. A good boss thus makes an important contribution in leading and managing human capital.
These types of leadership skills come naturally to some people and less to others. The skills necessary for human capital management can, however, be learned through programs such as Washington State University’s Online Master of Business Administration. Providing the tactics and theoretical knowledge used by today’s foremost business leaders and the cross-cultural fluency to use them in any setting, WSU’s Online MBA degree program can position graduates for success in human capital management and other leadership duties.
The Turnover Problem
The core issue in human capital management is how to attract and keep the best employees. According to the Work Institute, which released a major report in 2018 on employee retention, the problem of turnover—the percentage of workers who leave an organization and are replaced by new employees each year—is increasing. The report estimated that in the United States, 1 in 4 employees would voluntarily quit their job in 2018. The trend was expected to escalate, with 1 in 3 employees quitting their job each subsequent year through 2020.
The report identified several reasons for this trend. Key turnover drivers included:
- A thriving U.S. job market that offers easy opportunities for employees to change jobs.
- Demand for workers outpacing supply due to declining population growth, older workers exiting the workplace, younger workers delaying entering the workplace, and other factors.
- The U.S. unemployment rate approaching historic lows.
The ease of job change is good for workers, but it presents many challenges for companies. Viewed through a strictly economic lens, every employee who quits to seek work elsewhere is money walking out the door. The Work Institute reports that every time an employee quits and must be replaced, the cost to the company is about one-third of that worker’s salary. Multiplied by one-quarter of the U.S. workforce, this amounts to about $600 billion annually.
Turnover has intangible costs as well. When an employee quits, it impacts the people he or she worked with, possibly leading to decreased productivity, morale issues, and other problems. The lost employee also takes his or her job-specific knowledge away, leaving a gap that takes time and effort to fill. For these reasons and others, companies should strive to minimize employee turnover—and human capital management is one way to accomplish this goal.
What Causes Turnover?
Companies that want to reduce turnover must first understand the roots of the problem. The Work Institute report identifies the 10 primary causes of turnover. 3 of these causes—relocation, retirement, and involuntary layoffs—are difficult or impossible to control. The other 7 causes, however, are deemed “more preventable,” meaning that they fall squarely within the area of human capital management and an organization has some influence over them. These preventable causes, in order from most to least cited by respondents, are:
- Career development. 21% of respondents left their jobs to seek opportunities for increased growth, achievement, and security.
- Work-life balance. 13% of respondents wanted better work schedules/reduced hours or fewer travel requirements.
- Manager behavior. 11% of respondents left their jobs because of dissatisfaction with their manager.
- Well-being. 9% of respondents quit their jobs because of physical, emotional, or family-related issues.
- Compensation and benefits. 9% of respondents felt inadequately compensated and quit to find more rewards elsewhere.
- Job characteristics. 8% of respondents just didn’t like their jobs and sought more satisfying enjoyment elsewhere.
- Work environment. 6% of respondents left because they were unhappy with the physical or cultural surroundings of their workplace.
The report sums up the situation with these words: “The reasons employees report leaving show that they believe their expectations can be met elsewhere. . . . Employees demand more—because they can—and employers refuse to meet their needs.”
Corporate Responsibilities
Human capital management is first and foremost a corporate-level task.
Entrepreneur magazine explains why this effort is so important: “The collective profile of skills for all your employees ideally meets your company’s needs, but more importantly, it also adds to your company’s intrinsic value.
“Developing that capital—that is, investing in the further enhancement of those skills in a way that adds to that value—is a smart financial investment in your own company. It’s also a way to increase employee satisfaction and engagement levels. Put simply, when employees feel that management understands and appreciates their value, they’re likelier to stay with the company, further enhancing the company’s value.”
The article goes on to list some practical ways, beyond compensation and benefits, that companies can effectively manage human capital:
- Help employees keep up with necessary skills. Employees must keep up with a company’s needs and the changing landscape of their field. Improving employee skill sets or helping them acquire new skills and abilities has a direct benefit to the company through greater skills and improved productivity.
- Make life easier for static-skill employees. Some employees’ duties require fixed skills, such as machine operation, sorting, or point-of-sale duties. Investing in these employees may mean making their lives easier in some way that does not directly relate to job performance, but rather to their overall contentment and satisfaction.
- Invest in the best supplies, tools, and equipment. A pleasant and well-equipped workplace boosts satisfaction and helps employees to be more productive.
- Empower human resources professionals to develop new ways to invest in human capital. Organizations should make it clear to HR that human capital management is a priority, then ensure that this goal is adequately funded.
Leaders Who Inspire
A strong corporate commitment to human capital is essential, but a truly effective organization goes beyond this goal and brings its leaders into the mix. In today’s work environment, says consulting organization Bain & Company, “leaders can no longer rely only on traditional leadership skills to be effective. They can no longer simply issue directives. Nor can leaders rely heavily on the traditional tools of motivation—the classic carrot-and-stick approach. Instead, they now must have the ability to energize the people around them, foster engagement and create a trusting atmosphere. They must inspire their teams.”
The human capital benefits of inspirational leadership are clear. Data shows that people who work for inspiring leaders are more committed, satisfied, and productive, and they are less likely to leave their jobs. Best of all, according to Bain & Company, inspirational leadership is not innate; it can be learned. By committing themselves to acquiring and implementing these skills, individuals play their part in leading and managing human capital—and contribute to not only their organization’s well-being but also their personal success in the process.
About WSU’s Online Master of Business Administration Program
One way to learn human capital management skills is with advanced education. Washington State University’s Carson College of Business offers one of the top-ranked MBA programs in the nation. Its curriculum is designed to equip students with the tactics, knowledge, skills, and strategies favored by today’s high-profile business leaders.
WSU’s Online MBA degree program offers several MBA concentrations—marketing, finance, hospitality business management, international business, and a general MBA. For more information, visit WSU’s Online MBA website.
Recommended Reading:
An Overview of Executive Leadership Styles and Traits
The Four Benefits of Employee Training
Sources:
Human capital definition and HR role – Investopedia
The turnover problem – The Work Institute
Causes of turnover – The Work Institute
Corporate responsibilities – Entrepreneur
Leaders who inspire – Bain & Company