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How do managers measure human capital?

Modified on: 2018/07/13
A:

Human capital is the knowledge, skill sets and intangible assets that add economic value to an individual. Human capital is not a static measure and can be improved. It is an intangible asset and is just as valuable as a tangible asset. A manager can use various measures to evaluate the economic value added by his staff. One approach a manager can use is measuring human capital as a return on investment (ROI).

Since human capital can be built upon through investing in employees' skill sets and knowledge through higher education and workshops, a manager can calculate the investments made on human capital. Managers can calculate the total profits a company generates before and after investing on its employees' capital. The ROI of human capital is calculated by dividing the company's total profits by its total investment on human capital.

For example, suppose company TECH, a technology company, launches a new program to invest in its employees' knowledge and skill sets in order to increase productivity and creativity. Assume the company invests $1 million into human capital and has total profits of $20 million. The managers of TECH can compare its human capital's ROI year over year so they can track improvements of profitability and whether it is linked to the current program.

Managers can also compare the ROI of human capital to other companies to gauge how well the company's investments in human capital are, relative to the industry. In the example above, TECH has a ROI of human capital of 20; managers can compare this to other companies of the technology industry. Suppose the industry average of human capital's ROI is 8; this signals to managers that the company's program is sufficient and outperforms other companies.


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