Importance of Human Capital Essay

Human capital is the collective value to the capabilities. Knowledge. Skills, elite experiences, and motivation Of an organization’s workforce. It is also known as intellectual capital which is the knowledge, creativity, and decision making that people contribute in an organization (Zinnia et al, 2011). Many companies focus far too much on measuring return on invested capital (ROCCO) rather than measuring the contributions made by their talented employees (Aryan, 2007).

Organizations should realize the importance Of human assets and how hey can he used to predict the corporate performance and remain competitive in their specific industry. Prom the article “Blind Investment” by Robert L Grossman, the main reasons for why Wall Street analysts are not interested in the human capital of a firm are due to their narrow view Of corporate worth and lack Of understanding Of HER strategies _ The investment analysts are hooked on short-term cost-control which means that they can easily lose sight or misinterpret the big picture on long-term or short-term investments. (Grossman, 2005).

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They tend to valuate a company by focusing on a narrow set of numbers from financial statements which can create a biased or one-sided judgment. They also lack the knowledge to recognize the importance of huh man assets. This is all due to their limited exposure to strategic HER from their own HER department,’ employer. The HER departments in the financial industry are rigorously concentrated on cleaning up employee relation problems and implementing sops estimated compensation packages and they are neglecting the importance of continuous competency improvement or succession planning for their employees (Grossman, 2005).

Combined with the deficiency in HER awareness and the analysts’ narrow-minded, self-confident personality, the importance of Human Capital will continue to be a foreign measure to them in appraising the potential of selected organizations. Pharmacies Inc. (found in 1983) is the largest generic pharmaceutical company in Quebec and it is ranked the third largest Canadian pharmaceutical company in terms of prescriptions drugs. Permanence’s annual sales exceed CAN$700 million and it has over 1,300 employee in its quarters, research laboratories, manufacturing plant and logistics facilities in Montreal.

To support business decisions and provides direct links to organizational results in quantitative terms will require to recognized the benefits of Human Capital Metrics (Evans, 2007). From the five Human Capital measures, I would use Human Capital ROI as one of the major metrics to evaluate the effectiveness of my organization. As Lockwood (2006) stated “Based on corporate culture, organizational values and strategic business goals and objectives, human capital measures indicate the health of the organization”.

The rational is that people are the profit levers; all other assets are passive resources that require human application to generate value. Thus, the key to sustaining a profitable company or a healthy economy is the productivity of the workforce (Fits-NZ, 2000). Using this metrics as a benchmark is particularly useful when used on a year over year basis, so that improvements can be identified and linked to specific strategies or programs at the corporate level (Evans, 2007).

Additionally, research has shown that executive, who use this Human Capital measurement approach to people management, consistently outperform those who do not (Fits-NZ, 2000). The Revenue per Employee and Profit per Employee are very similar and can be effective tools to assess my organization. Both of these metrics can help human resource professionals gain an understanding of employee productivity and better manage compensation, training and staffing.

The two measures of revenue and profit per full-time equivalent (PET), especially when viewed over time or in comparison with similar firms, can provide a credible indication of employee productivity (Karol, 2006). The differences between these two measures are: Revenue per Employee tells how effectively employees generate sales whereas Profit per Employee provides an indication of the employees’ abilities both to bring in sales and to manage expenses.

It is important to control how a company classifies full-time equivalent because confounding issues like contract workers and part-time employees are always present in most industries (Karol, 2006). Since FETE is the denominator of the two formulas, it is crucial that the correct values are used n order to interpret the results accurately. The two other metrics, Labor Cost as a percent of Revenue and Voluntary Separation Rate are less effective tools in determining the efficiency at my organization.

This is because the values of compensation, benefits cost, revenue and total head count are highly volatile on a quarterly or yearly basis. All of these values can change dramatically due to mergers and acquisitions, expansion and downsizing which make it difficult to analyses these metrics. For example, pharmacies has recently acquired Eager Therapeutics Inc. This acquisition can dramatically alter these metrics and as a result effect the overall market-value of the company. Another important aspect is the total voluntary separation used to determine the Voluntary Separation Rate can be another unpredictable value.

Voluntary separation is when an employee decides to leave the company. There are a numbers of possible reasons that can affect this value such as, poor screening efforts in hiring employees, poor compensation programs, and an employee’s satisfaction or other personal reasons for leaving. For a id-size company like this, most of these factors can be controlled through HER strategies, however it is still unavoidable that voluntary turnover contain sues to exist resulting in inconsistent data for benchmarking purposes at the organization.

Intellectual Capital is an important asset to an organization because these are the talented people who are driving the organization. With effective management of the Human Capital, a company can achieve the maximum output from its own human capital and be superior to its competitors. Successful management needs a system of metrics that describe and predict he cost and productivity curves of its workforce, and it needs qualitative measures that focus on value Of human resources (Fits-NZ, 2000).