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What is 'Human Capital'

Human capital is a measure of the economic value of an employee's skill set. This measure builds on the basic production input of labor measure where all labor is thought to be equal. The concept of human capital recognizes that not all labor is equal and that the quality of employees can be improved by investing in them; the education, experience and abilities of employees have economic value for employers and for the economy as a whole.

BREAKING DOWN 'Human Capital'

Economist Theodore Schultz invented the term "human capital" in the 1960s to reflect the value of human capacities. He believed human capital was like any other type of capital; it could be invested in through education, training and enhanced benefits that lead to an improvement in the quality and level of production.

An organization is often said to only be as good as its people. Directors, employees and leaders that make up an organization's human capital are critical to its success. Human capital is typically managed by an organization's human capital management (HCM) department, commonly referred to as the human resources department. A HCM department oversees the organization's workforce acquisition, management and optimization. The HCM department's other directives include workforce planning and strategy, recruitment, employee training and development, and reporting and analytics.

Techniques to Keep Employees Content

To ensure employees are effective contributors to the organization, it is critical they remain content and are made to feel part of the company's culture using effective human capital strategies. Employers need to remain transparent. Employees value the truth in regards to an organization's overall financial performance and operations. Work-life balance rates highly with employees. It is important for employers to foster a culture where the employees feel that their lives outside of the company are respected and valued. An organization that values open communication should consider establishing common areas where employees can congregate and share ideas. Employers need to have a clear career pathway in place for employees who are focused on career advancement. Employees are motivated by feeling recognized by the organization and their peers. This can be as simple as issuing an employee with an achievement award.

Human Capital Management Outperforms

Ultimately, an organization's goal is to generate a profit. Companies that utilize human capital initiatives outperform their peers. Research from business management consulting firm McKinsey & Co Inc. indicates that ethnically diverse organizations outperform their peers by 35%, and gender-diverse organizations outperform their peers by 15%. Other studies have concluded that organizations with more female board members outperform those organizations that don’t.

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