Investing in Humans to Raise Human Capital
Investing in humans is similar to investing in equities.
Investing in humans shares similarities with investing in equities. Workforce management parallels portfolio management. A workforce is a collection of human capital, much like how an equity portfolio is composed of stocks and bonds representing both variable and fixed investment instruments. They both seek to maximize return on investment (ROI) through prudent risk management that maximizes gains while minimizing losses. Human resource managers are the portfolio managers of human capital, faced with the challenges of cultivating and protecting the investments.
The Two Types of Human Capital
American economist Gary Becker identified two types of human capital, specific and general. Specific human capital refers to the nontransferable knowledge, experience and skill sets applicable and beneficial to a specific organization. This could apply to specialized expertise in proprietary models, applications and processes suitable to a single firm.
General human capital is knowledge, experience and skill sets that can be applied broadly and is immediately accretive to many organizations, like fluency in spreadsheet analysis or a programming language.
Human Capital Investment Preferences
According to Becker's theory, companies prefer investing in specific human capital since they benefit directly from the training. The non-transferability of company-specific training assures that poachers won't benefit from their investment and minimizes the inclination for the employee to leave.
Companies can be reluctant investing in general human capital. Training workers to become fluent in creating and analyzing spreadsheets is a skill set that can be applied to any finance department of any organization. Companies are hesitant to provide this type of training for fear of losing the employee to a competitor after making the investment in the training.
The HCM Sequence
Organizations prefer to start with the highest value of human capital first and then mold the hire with specific human capital investments to acclimate them into the organizational ecosystem.
An organization can make the human capital investment with training only to have the employee take the skill sets to another firm for more pay and benefits. This leaves the investing firm with a loss on the investment in training as well as a gap in the workforce. This will then require more investment to replace the position.
Invidual Investment in General Human Capital
Investment in general human capital is usually made by the individual through schooling and education. As the individual attains more knowledge, experience and skill sets, their human capital rises. Organizations seek out the individuals with the highest level of general human capital and invest in specific human capital with those employees.
This is the nature of the traditional educational sequence, where individuals cultivate general human capital through schooling from kindergarten to college. Additional general human capital investment can be parlayed through graduate and specialized training to acquire advanced degrees and certifications.
Economically speaking, higher general human capital investment is proportional to higher incomes. This explains why the belief that more schooling (and debt) increases an individual's value, thereby increasing the expectations of higher wages. Aside from the knowledge gained, many firms view attainment of advanced degrees as a testament to the discipline, commitment and perseverance of the individual.
British economist Arthur Pigou devised the term "human capital" when elaborating on his belief that companies are inherently hesitant to make general human capital investments in workers for fear of losing them to competitors. Cultivating capital, for both human and investment products, is fruitless if it can't be protected. Ultimately, it boils down to how your organization can protect its human capital investment.
Enhancing ROI and Retention
Organizations start to see ROI improve as turnover slips when tenure reaches the three- to five-year mark, as illustrated in the ADP Workforce Vitality Index data. Procuring hires with the affinity to reach that tenure mark is key. When investing in humans, retention concerns will always be at the forefront especially when it pertains to top performers. Integrating variable pay incentives are a popular retention tool with reciprocal benefits for both employers and employees. However, be mindful of the 28 percent gender pay gap that could sabotage efforts.