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Human Capital Notes
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Human Capital—A Twenty-First
Century Oxymoron
The success factors in human capital investment are distinct from success factors in tangible asset capital investments. Here we introduce concepts and language to enhance the tools to manage human capital investment.
The phrase human capital is embedded in the business literature. A few examples make the point.
“Discounting traditional analysis of earnings derived from physical capital and replacing it with analysis of earnings power derived from human capital.”
“An increasingly competitive global economy and the realization that human capital is the key to ganizational performance…”
“What matters in the new economy, however, is human capital.”
Taking a step back to examine the commonly used phrase human capital is vital to the rigorous analysis of ROI on human capital investment. The battle is engaged when the HR manager represents the human agenda of the company’s relationship with the employees while at the same time the CFO represents the hard-nosed financial reality of the competitive markets. Both make resource allocation recommendations to their CEO. The only hope for the HR manager is to move toward the strong position held by the CFO where numbers win out over mushy words. Namely, human capital investment decisions need to look more like capital investment decisions—they need to have an ROI to compete with all of the other requests for corporate resources.
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Why Human Capital Investments Matter
Human capital is critical to company financial performance, and how to invest it is a major challenge for senior management. The book "ROI on Human Capital Investment" focuses on this challenge and defines the important data required to improve the ROI on human capital investment decision making. The impact of human capital on business performance has been growing and is predicted to continue to grow. In 1900, only 17 percent of all jobs required knowledge workers. Knowledge workers are employees who are valuable for what they do with their ideas rather than what they do with their bodies. Now, over 60 percent of the jobs demand the skills and competencies of an educated work force. In the face of this basic driver of demand, the outlook for the related supply of labor is poor. The immediate period through the year 2008 is especially critical. The Bureau of Labor Statistics predicts that by 2008, 25 percent of senior management positions will be vacant, mostly due to the retirement of baby boomers.
The supply of candidates to fill the vacancies is equally grim. Although the size of the total work force in the United States will grow a total of 12 percent between 1998 and 2008, the number of twenty-five to forty-five-year-olds, the primary pool for future managerial talent, will decline 6 percent during the same period. Another trend is that talented young managers are 60 percent more likely to leave their employer than older managers. This increased mobility is, at least in part, a result of the severing of the traditional loyalty bonds between the employer and the employee—learned by sons and daughters as they watched their parents get “downsized” after years of faithful service to a single employer. The intersection of demand and supply in human capital markets is not a speculation. The data has been derived from existing public demographic records. An excellent summary of the demographic and recruiting issues is available in the article “The Race for Talent: Retaining and Engaging Workers in the 21st Century.”
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