Human capital — why it matters and 5 tips to improve it

July 20, 2021 - 12 min read

multi-ethnic work team sitting on couch human capital

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What is human capital?

How does human capital affect organizations?

The types of human capital

How to increase human capital

Prioritize human capital in your organization

What is the value of your workforce? 

Your company holds many assets. But some of them are easier to quantify than others.

For example, you can easily pull up a balance sheet to determine your economic assets. There’s a simple number to showcase how much you have.

What these balance sheets don’t tell you is how much your employees are worth.

It’s difficult to put a number on intangible values like leadership, education, creativity, and past work experience. But it’s clear that these have value for any company.

These assets allow employees to perform and thrive.

That’s why it’s crucial to the health of any organization to be aware of this value — so they can improve it.

The term used to describe the value of these assets is human capital.

Let’s explore what human capital means and how you can increase the human capital in your own organization to achieve economic growth.

What is human capital?

The human capital definition can be explained as an intangible asset stemming from a person’s talent and experience.

Human capital isn’t an official asset you can quantify on a balance sheet. But it’s still considered an economic value for a company.

That’s because human capital empowers a company to service its clients, create its products, and innovate for new offers.

Human capital can be made up of several factors, including:

infographic-what-makes-up-human-capital

For the human capital of an entire economy, people calculate it a bit differently.

The Human Capital Index breaks down human capital scores (for an entire economy) between 0 and 1. It uses the following as indicators:

  • Probability of survival to age five
  • Expected years of school
  • Harmonized test scores
  • Survival rate from age 15–60
  • Fraction of children under five not stunted

With better human capital, companies — and entire countries — can increase their productivity and profitability.

How does human capital affect organizations?

Every company is what it is because of its employees. Individuals who make up a company’s workforce are responsible for its success or failure.

Think of it this way. If your organization employs people who have more education, more developed skills, and more work experience, it’ll be able to accomplish much more.

A higher human capital means employees are more capable of doing their job. But it also means they can innovate and find creative ways to solve a crisis.

They’ll also be able to do their job more efficiently if they have higher human capital.

That’s because they probably have more experience doing the job. But they can also achieve efficiency because of their rich life experience. This experience gives them a wider perspective on their problems.

Keep in mind that human capital can migrate from one place to another. Companies that don’t do what it takes to retain human capital can experience a "brain drain."

Brain drain describes the phenomenon that occurs when human capital migrates from developing areas to urban and developed areas.

The same can happen to companies if they don’t value their employees. Data from an MRI network study shows that  25% of employees leave their job to seek more compensation.

You can also lose human capital if you don’t give advancement opportunities. 30% of employees leave their job due to a lack of career advancement, according to the same survey.

Furthermore, human capital has a huge impact on the success of not just an individual company, but also the economy.

For example, according to the Human Capital Index, 80% of the world’s poor live in economies with a human capital index under 0.5.

graphic-people-putting-up-people-'s-portraits-on-a-wall-human-capital

The types of human capital

You can separate human capital into three types: knowledge capital, social capital, and emotional capital.

Let’s look at some examples of each:

Knowledge capital

  • Trade school education
  • College degree
  • Hard skills
  • Work experience
  • Situational knowledge
  • Intelligence

Social capital

  • Relationships
  • Fame
  • Social status
  • Professional network
  • Health

Emotional capital

How to increase human capital

An obvious way to increase human capital is to hire more people.

But human capital isn’t static. You can perform actions to improve it within your existing workforce.

Here are five ways that you can increase the human capital in your organization:

1. Improve education for your workforce

A highly educated workforce will be capable of achieving more.

You can provide training related to your industry. You can also sponsor employees to get college degrees or additional certifications. Leading companies also make sure they are providing ample opportunities for learning and professional development within the work itself. That might mean giving more decision-making authority, enabling people to pursue side initiatives, or pairing people with others they can learn from on collaborative projects. All of these options will help prepare them to take on more advanced roles in your organization.

People can always learn more. A company that invests in its employees’ continued learning will keep growing its human capital without having to change anything else.

You’ll also experience more employee productivity if your workforce sees that you value them. You will also see an increase in employee retention.

2. Provide a work culture that encourages creativity

Make some room for your employees to be creative. Creative thinking can lead people to innovate more. It can also lead to better employee engagement.

They can think outside the box and have better potential to solve problems in new ways.

Compare this to a culture that stifles creativity — such a culture limits what each person can achieve. The overall human capital suffers as a result.

3. Divide labor into specialized niches

Structure your company in a way that encourages specialized skill development.

The more someone specializes, the more they can focus on their zone of genius.

Instead of spending their resources learning several jobs, they can maximize their potential in one area of specialization.

By doing this, you get a workforce that’s highly specialized and talented in several fields.

This is often better than a generalist workforce that does everything in a mediocre way (although many people and organizations have found successful ways to allow generalists to rotate through multiple specialties).

4. Hire a diverse workforce

A diverse workforce is made up of people from a variety of backgrounds.

When more people have different life experiences, they bring different competencies and points of view to the table.

According to a recent McKinsey study, executive teams with gender diversity are 25% more likely to achieve financial outperformance. The case for ethnic diversity is even better at 36%.

This is why embedding diversity, equity, and inclusion in your organization’s DNA can help you increase your human capital.

5. Provide ongoing coaching

Education doesn’t have to come in the form of traditional training or formal education.

You can also coach your workforce to:

With the right coaching, you can help more individuals in your organization reach their full potential.

Imagine running a business with people at their top potential. This is what it means to maximize human capital.

infographic-five-ways-to-increase-human-capital

Prioritize human capital in your organization

Without human capital, a company is just objects and bank accounts. The true value of a company stems from its workforce.

That’s why it’s worth investing in your people to increase your human capital.

Even if it temporarily decreases your bottom line, this investment will allow your employees to efficiently produce more revenue and profit for your company in the long run.

They’ll also stick around for the long term if they know you care about their development.

BetterUp can help you increase your human capital by providing high-performance coaching, improving leadership skills, and building inclusive workforces.

Schedule a demo to see how it works.

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Published July 20, 2021

Erin Eatough, PhD

Sr. Insights Manager

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