Many large corporations make statements in their annual reports like “Our employees are our most important asset.” Yet if they really believed that, why don’t they make any attempts to assess human asset performance ie human capital performance?
Bradley C&E is available for consulting in this area: contact us for further information
The Nature of Human Capital
There are two sides to Human Capital – what you have and what you paid for it:
What you have
What you have as measurable, concrete attributes:
What is important to remember here is that none of the attributes above can be second-guessed by the person undergoing the test. They are all Hard Measures. No self-evaluation questionnaires are included. In fact, there are no other measures of human ability that are not self-evaluated. Hence only these four measures can really be scientifically used.
Furthermore, all four of these attributes are easily measured – Experience and qualifications are in the company’s HR files. Health can be measured at a medical clinic for a small amount. Typically, health can be measured on four scales. As regards IQ, there are many online tests, not all of them reliable, but some give consistent results. These tests are given in more detail below
Consult the company’s personnel records for relevant experience, useful to the company, as measured in years. Add up the total years of relevant experience, divided by the number of persons, to derive an index of Average Experience in Years
This metric can be simply measured in years of school and post-school education. For example, a PhD qualification might count as 12 years of school + 4 years of first degree + 1 year of Masters degree + 2 years of Doctoral degree, giving a score of 19. Other measures might be chosen: for example, the South African Qualifications Authority (SAQA) ranks a PhD as a score of 9, according to their internal formula
The Health Check
The Health Check is a simple and convenient set of the most essential health screening and preventive tests. This includes:
- Blood pressure
- Blood glucose/HbA1c
- Weight assessment/BMI
- Non-smoker's declaration
One can complete a similar Health Check at several clinics in the country of reference.
Intelligence, as measured by IQ tests, is the most robust and repeatable tests that a human can undergo. It is useful as a predictor of many other things which are less quantifiable, such as performance on the job, conscientiousness and initiative. It is a valuable attribute at all staffing levels. Higher levels of IQ may be required for higher levels of responsibility in the company, but at all levels a minimum IQ for that level is required. There are numerous internet-based IQ tests. Many are not valid, but some are.
A test that emulates the long-established Raven’s Matrices is a good measure to choose, as it is culture and language free and hence universally applicable
Indices of Human Capital
Various indices of Human Capital Value may be determined, to specifically suit the company and industry in question. Bradley C&E may be contacted for further information
What you paid for the Human Capital
This is easily determinable from the payroll records. Calculate the remuneration of all the employees from now to their retirement date, discounted at the firm’s long-range average cost of capital. This represents the de facto investment of the company in these assets.
This human capital evaluation can then be compared with the traditional accounting capital on the balance sheet. For an IT firm, most of the capital is human. For a steel mill, very little, but in all cases the human capital is the coxswain that steers the boat.
It may be possible to correlate the level of human capital with the financial performance of the company, given the caveat, if market conditions are stable.
It is hoped to construct a database of companies that are prepared to evaluate their human capital in the above way and then compare results. For example:
- What is the ratio between human capital and hardware capital in various industries?
- Could some company, in a specific industry, improve its performance by increasing its human capital?
- Is there an optimum level for human capital for a company in a specific market and a specific industry?