Are People Your Best Asset? Measuring Human Capital

While it is highly lucrative for a company to have employees who are talented and highly-motivated, the exact cost of gaining this competitive advantage has yet to be quantified. Return on investment is the most practical way to measure the cost benefit of giving your employees that extra boost. Others may argue that competencies are the ideal method to measure human capital. What’s more telling here is the fact that human capital has a direct affect on the bottom line. It is imperative that productive individuals are employed. This fact itself is the hardest to measure.

The Standish Groups’ Chaos report gives a dismal outlook on the management of projects. 41% of projects are cancelled before completion, 25% cancelled due to scope changes, and only 16% of projects are completed on time and on budget. By implementing project management and developing consistent tools and processes for managing projects throughout the organization, this trend can be reversed. The benefits of utilizing a project manager on a project by project basis were measured in a study conducted by Wainscott Finch Associates. The study found that after taking into consideration the maturity level of the project manager, as well as the cost and schedule of the project, the return on investment was 13.4%.

When taking a measurement of job competencies, traditionally performance reviews were generated. The issue with this method was that the scale was not always clear and at the discretion of one’s superior. Also, performance appraisals were not always relevant to the employee’s job. Bottom line, whether or not an employee can successfully perform specific tasks to directly affect the productivity of that department or team should be the ultimate measurement of human capital. Competencies outlined in the job description should be rated on a five point scale and then put to the test after a training period. Based on salary, increase in competency after training, and the total dollar gained overall, the price of human capital will be revealed.

This formula was created by Dr. Dennis J. Kravetz. It quantifies the changes in human performance, and therefore the real return on investment. Companies are now starting to build human capital measurements into how they run their business. Human capital is seriously becoming a driver of competitive advantage. There are several different ways to measure human capital, and companies must now decide on a standardized method and factor that into their business model. Only then can “People are our greatest asset” be a bankable phrase.