The human capital index is an index that quantifies the impact of human capital management on shareholder value. In any organization, every investment is expected to give a return. Investment in infrastructure, technology etc. is required to give a return in the form of higher productivity or reduced costs and thereby measurably increase shareholder value. However, an investment in human resources provides results that are not easy to quantify or measure. Organizations are asked a series of questions pertaining to their human capital management. These include questions on topics such as compensation, training, development etc. Companies are given a score of 0 to 100 based on the responses received. In this scale, 0 signifies a weak score while a score of 100 represents the highest. A group of researchers compared the human capital index (HCI) with the other financial indicators for the company such as market value, return to shareholders etc. Researchers found a clear linkage between its human capital index and its financial performance. This indicates that organizations which place importance and emphasis on their human resources are more likely to be successful financially and add value to shareholders. The study also identified areas of human capital management which are linked to enhancing shareholder value. They are :
1. Excellence in the field of recruitment and retention 2. Creation of a comprehensive reward and accountability orientation 3. Establishing a friendly, flexible workplace 4. Increasing communication between the employees and the management 5. Implementation of focused HR technologies
The research found that excellence in all human resource practices was found to be linked to an increase of 47 percent in market value. Further analysis was able to determine the degree of increase in financial performance that can be achieved by improvement in each area. For example, excellence in the area of recruiting and retention alone was linked to an increase of 7.9% in the market value. One of the main functions of the human resource department is to increase employee retention and ensure that there are processes in place which enable employees to remain in the company. An efficient method of posting jobs within the company, for instance, will make employees aware of opportunities within the company and may satisfy their desire for advancement. Therefore an effective internal job posting system will reduce turnover. The research suggests that simply designing practices that improve retention alone can have a positive impact on the market value to the extent of 3.2 %. Besides, improving employee services can have a positive impact of 2.3%.