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Human Capital Index

Classical economics defines the “main factors of production” as: 

- Land 
- Labour 
- Capital 
- Organization

It goes on to conclude that optimizing these ‘factors of production’ result in a high performance organization i.e. increase in shareholder value.

The modern economics studies highlight a limit to which the above ‘factors of production’ can be optimized; the studies identify the importance of human capital (e.g. employees of an organization) in increasing shareholder value. UNESCO defines human capital as “people and their ability to be economically productive.” Economically productive people can result in better shareholder value. The Human Capital Index is a numerical representation of the human capital.

Watson Wyatt conducted a survey on the relationship of human resource policies like compensation, people development, communication and staffing on three and five-year return of shareholders and Tobin’s Q (an economic ratio to measure the organization’s ability to produce returns beyond its physical assets). The statistical analysis showed that key HR policies contributed to a significant increase in the market value (~ 30%). The important question for today’s managers is what constitutes an “ideal environment” that can raise the Human Capital Index? In the light of the Watson Wyatt study findings, the ability of a company to attract and retain talent assumes paramount importance.

Two key factors that contribute to attracting and retaining employees are :

a) Compensation and Benefits
b) Framework to manage and realize employee aspirations

Compensation and Benefits

While a plain vanilla ‘match-your-competition’ compensation strategy would be disastrous for a company, a performance linked short-term rewards would be much more effective. It energizes the employee to go that extra mile; the employee sees a direct link between her work and rewards. Taking the participation theme to the next level, stock options form an excellent long-term reward mechanism. It makes the employee a part of the company in the true sense. Indian companies such as Infosys and Wipro have used stock options to their advantage. The entry of multi-national corporations introduced an unprecedented difference in the pay scales, thus triggering a wage game. Given the Indian economic boom, the stock options doled out by these Indian corporations changed wage game in their favor.

Realizing Employee Aspirations

Making the employees realize their aspirations empowers them appreciably. An empowered employee outperforms herself. The key factors in realizing aspirations are :

- Find the right person for the right job. 
- Show a career path

The above are achieved by defining function and role based competencies, and, a career map that each employee can refer to, to chart their individual career paths. Thus an employee knows from day one :

- What it takes to achieve his career goal 
- How to go about achieving the same

To this, add effective mentoring and buddy programs, you have an organization with highly motivated staff.

Clear and regular communication plays an important role in making the employees participate in company’s success and difficult times. Improper communication is one of the major causes of employee distress in many companies. To achieve the long term goals, alignment of individual and group objectives plays a significant role; hence, the importance of an effective communication system.

The return on investment for efforts put in increasing Human Capital Index is significantly high. Human capital index helps in attaining the business strategy by improving the productivity and technical expertise by providing a healthy environment, thus resulting in a win-win situation for shareholder, the employee and the organization.

Comments Listing
Posted: 22/07/2011 06:51:48


Posted: 22/07/2011 06:51:02

Love to make it here

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