Human capital concept - definition and explanation (article)

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In this article, Derek Stockley defines and explains the term: human capital.

Derek Stockley provides training and performance management consulting services from his base in Melbourne, Victoria, Australia. Derek Stockley conducts one day in leadership courses.

Human capital definition

I define human capital:

The term human capital is recognition that people in organisations and businesses are an important and essential asset who contribute to development and growth, in a similar way as physical assets such as machines and money. The collective attitudes, skills and abilities of people contribute to organisational performance and productivity. Any expenditure in training, development, health and support is an investment, not just an expense.

Importance of human capital

Although an organisation or business is a separate legal entity, its ceases to exist if it has no people - leaders, directors, members, employees - are required to maintain an organisation’s existence.

In a society which places a strong emphasis on competition, financial return and viability, the people issues can sometimes be neglected.

Increasingly however, business and political leaders are starting to recognise that having good people who are skilled and motivated can make a significant difference.

Competition is so fierce and change is so fast, that any competitive edge gained by the introduction of new processes or technology can be short-lived if competitors adopt the same technology. But to implement change, their people must have the same or better skills and abilities.

To grow and adapt, the organisation’s leadership must recognise the value and contribution of people.

Treating money spent on people as an investment in an important asset is a far more appropriate mindset that treating such expenditure as an expense, to be kept to the minimum amount necessary.

Problems with the term "human capital"

Over the years, the terms used to describe staff and employees in businesses have changed. We have moved from "personnel" to "human resources" (HR) and now "human capital".

Other phrases, such as "talent management" have also emerged.

These terms can appear to be dehumanising. That is why some HR manager titles include the word "people" in preference to "human resources".

The important point is the mindset behind the organisation’s operation.

If people are valued, and all management and leadership actions demonstrate that, then the terminology is not so important.

In summary, people should be treated as an asset rather than an expense item. Every effort should be taken, whether formally or informally, to develop skills and abilities and to provide opportunities for people to maximise their contribution.

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