How do you quantify Human Capital
Jac Fitz-enz in his book The ROI of Human Capital : Measuring the Economic Value of Employee Performance says that “We all know that people–not cash, buildings, or equipment–are the lifeblood of any business enterprise. Yet, astonishingly, there has never been a reliable way to quantify the contribution of human capital to corporate profit…until now.”
Quantifying human capital in an organization involves assigning a monetary value to the skills, knowledge, and experience that employees bring to the company. This allows organizations to better understand the impact of their human capital on their financial performance and make informed decisions about how to allocate resources.
There are several methods used to quantify human capital, including:
Human Capital Value-Added (HCVA)
HCVA is a method of calculating the financial impact of human capital by subtracting the cost of labor from the overall revenue generated by that labor. The resulting value is a measure of the contribution of human capital to the company’s financial performance. For example, if an organization spends $1 million on labor and generates $2 million in revenue, its HCVA would be $1 million.
Return on Investment (ROI)
ROI is a commonly used method for calculating the return on investment in human capital. It measures the return on investment in training and development programs, employee benefits, and other human capital initiatives. For example, if an organization invests $100,000 in employee training programs and sees an increase in productivity of $150,000, its ROI on human capital initiatives would be 50%.
Economic Value Added (EVA)
EVA is a measure of the value that an organization adds to its shareholders after accounting for the cost of capital. It takes into account the cost of labor, as well as other expenses such as training and development, and compares it to the organization’s financial performance. A positive EVA indicates that the organization is adding value for its shareholders, while a negative EVA indicates that it is not.
Net Present Value (NPV)
NPV is a method of calculating the present value of future cash flows generated by human capital. It takes into account the cost of labor, as well as the expected future benefits, such as increased productivity and reduced turnover. For example, if an organization invests $100,000 in employee training programs and expects to see a return of $150,000 in increased productivity over the next five years, its NPV would be $50,000.
There is still no standard agreement on how to calculate or measure Human Capital. Not many organisations have attempted to quantify them as Assets or even account them in their Balance Sheets or Annual Reports. It is still in nascent stage. But it must be acknowledged that quantifying human capital is an important tool for organizations to understand the impact of their human capital on their financial performance and make informed decisions about how to allocate resources. By using methods such as HCVA, ROI, EVA, and NPV, organizations can gain a more comprehensive understanding of their human capital and the value it brings to their organization.
Additional Reading
https://workforce.com/news/10-measures-of-human-capital-management