How Do Businesses Measure Human Capital?

Human capital can be difficult to measure since it involves a variety of intangible elements, including education and skill development. There are a variety of variables that might affect whether individuals actually get to use the knowledge, skills, and experiences they have accumulated. Companies attempting to measure human capital will typically look at several factors that can be quantified, including turnover, recruitment, salary and wages as a percentage of total revenue, training costs, and human resource department costs.

A firm might measure human capital in terms of overall production efficiency and revenue generation. One way to isolate the effectiveness of a company's staff is to determine the amount of revenue one full-time employee contributes to the company. This is done by simply dividing the amount of the company's total revenue by the number of its full-time employees. The danger in this is that the calculation only returns an average, as some employees undoubtedly contribute more to the bottom line than others.

An additional drawback to taking an average amount of revenue produced per full-time employee is that revenue could be affected by conditions that are beyond the employees' control. Things such as a poor macroeconomic environment will pose a challenge to any sales team, regardless of their skill level. In addition, the manner in which a job is designed might also make it difficult for employees to solely concentrate on increasing sales and revenue for the organization. This can make it difficult to get a true picture of the return potential of an organization's human capital.

Another area that companies consider when measuring their human capital is staffing. They might look at absenteeism rates and lost productivity, which then translates into lost revenue. Turnover and recruitment costs are two of the biggest areas that organizations try to control. Skilled and experienced employees who leave, particularly in their first few months of employment, can represent an enormous amount of human capital loss. This is because it takes the organization a lot more money, time, and internal resources to recruit and train a new employee than it does to keep a seasoned one.

Companies also measure the efficiency of their human resources departments to measure human capital. They might calculate the average amount of human resources costs per full-time employee. Organizations could very well examine how many full-time employees are assigned to a particular human resources department. This is especially true in larger corporations that are comprised of several divisions, business units, and regional locations.