The past years have seen a growing interest in measuring human capital. The days when company leaders could say, "our people are our most important asset" and gloss over the value in a financial statement are dwindling.
As Harvard Business Review reported, "… too many organizations aren't as demanding, as rigorous, or as creative about the human element in business as they are about finance, marketing, and R&D."
The change comes from transforming our economy into an innovation-driven, talent-driven, and knowledge-based economy. According to EY, intangible assets, including human capital and culture, now comprise an average of 52% of the company's market value.
Yet, as recently as 2018, only 16% of CFOs surveyed felt they "truly understood the return on our human capital investments."
Why is measuring human capital so tricky?
The Failure of Rating Scales.¶ Over the past century, businesses worldwide have created complex systems of competencies, traits, and behaviors to gauge human performance. Those structures have contributed little or nothing to learning the value of human performance. They may have created a perception of value differences within organizations, but when we apply those numbers to compensation, pay becomes the only thing that matters. There Is no correlation with value to the enterprise.
Misunderstanding of Intangibles. In How to Measure Anything, Finding the Value of "INTANGIBLES" in Business, Douglas W. Hubbard explains that we often misunderstand intangibles in two ways:
- We apply the word "intangible" to things not touchable or physical objects, but many of them are measurable in other ways. Examples are copyright, trademark valuation, and patent ownership.
- We misunderstand the word "intangible" to mean immeasurable in any way, either directly or indirectly.
We can measure many things we think of as intangible by evaluating how they impact measurable things or how they impact entities around them. Consider how astrophysicists discover new celestial bodies by observing objects around them and how nuclear physicists discover subatomic particles.
It comes down to a question: "What moved?"
Irrational Dependence on Hard Measurement. Hubbard observed cases where important strategic proposals were overlooked in favor of minor cost-savings programs because approvers couldn't immediately see how to calculate the value.
The truth is that the world runs on estimates. Consider these (Hubbard, p. 4):
- Revenue forecast for a new product
- The value of data
- Public image
- The value of R&D
- Every sales projection, ever
Businesses can't operate without these estimates, and the same principles of estimating can apply to the impact of people on the organization. It's a matter of estimating what will move before launching an initiative and what moved afterward. Much of the impact is in your current data, but it may not reside in HR.
Why Measure Human Capital?
HR has been traditionally focused on internal efficiency measures, with somewhat practical efforts at measuring the effectiveness—primarily in L&D.
External Pressures for Measurement
Recently, the demand for measuring the value and impact of human capital has grown exponentially. Investors and other stakeholders want to know how ready the company's workforce is to adapt to the new economy and unforeseen disruptions.
The US Security and Exchange Commission has published new guidelines for reporting human capital value in proxy statement disclosures.
The International Standards Organization has published ISO 30414:2018, which groups 23 metrics recommendations into nine core HCR areas, with two additional categories for internal reporting: organizational culture and succession planning.
- Compliance and ethics (grievances, disciplinary actions, training compliance)
- Costs (total workforce costs)
- Diversity (age, gender, disability, other indicators of diversity)
- Leadership (employee trust in leadership)
- Organizational culture* (engagement, satisfaction, commitment)
- Organizational health, safety, and well-being (lost time injury, occupational accidents, deaths)
- Productivity (revenue/profit per employee, human capital ROI)
- Recruitment, mobility, and turnover (time to fill, time to fill critical positions, internal hire rates, turnover)
- Skills and capabilities (total training & development cost, training participation, workforce competency rate)
- Succession planning* (retention of key talent, candidates filled from within, readiness)
- Workforce availability (number of employees, scalability)
We disagree that organizational culture and succession planning will evolve only as internal measures. They are vitally important to potential investors and critical measures of the organization's health and adaptability.
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