How Do Managers Measure Human Capital?

Human capital is a concept that deviates slightly from other forms of standard capital. It is not necessarily like debt or equity capital that is more easily accounted for on the balance sheet. Rather, it falls more in the realm of intellectual property and intellectual capital, which is generally hard to quantify. That is because human capital refers to the value of the stock of skills that a company’s labor force possesses.

However, human capital comprehensively is something that is closely analyzed, followed, and possibly adjusted by organizations on a systematic basis.

Key Takeaways

Human capital refers loosely to the value that comes with the skills and knowledge possessed by human beings.
Economists have tried several approaches to accurately measure the value of a firm’s human capital.
Modified return on investment (mROI) is one way of trying to quantify and measure human capital.

Intellectual Property

Human capital can be observed as extraordinary knowledge or skill sets, inherent to certain employees or possibly acquired by a group of employees through special proprietary training. When this type of intellectual human capital is present, an organization may choose to assign a special value to it and thus book it as an intangible asset on the balance sheet. This type of intangible asset would go alongside the intellectual property values of patents, trademarks, and other special assets that are assigned an intangible asset value.

For human capital to have an intangible asset value, employees must have a special value that goes above and beyond what is paid to them in their regular salaries (as expensed liabilities). Intangible human capital value may be acquired when a company has very high-profile executives that contribute extraordinary value to an organization. This may come from a family name, positive media reputation, or innovator status.

Companies may also assign an extraordinary human capital value when they have developed proprietary training systems that make the organization’s offerings unique or more profitable.

Modified Return on Investment

To quantify some intellectual human capital assets, companies may use a modified return on investment (ROI) approach. In general, determining the enhanced profitability that any investments made in human capital bring to the company can be one way to determine an intangible value.

If a company makes a $10 million investment in human capital training and sees an increase of $20 million in profits over a year, all things equal, they may be able to assign an extraordinary human capital value to certain employees as an intellectual intangible that carries forward over several years.

Whatever the reason for extraordinary human capital, it is up to the company and its financial professionals to determine the assigned value. Oftentimes, intellectual human capital may be grouped together under one line item with intellectual property. In other cases, organizations may be more transparent about the value of intellectual intangible assets booked on their balance sheet.

Human Capital Management

On the balance sheet, one of the greatest expenses a company may have is its salary expenses for employees. It is up to an organization’s financial professionals, managers, and human resource individuals to collectively determine the salaried value of each employee. The salaried value is booked on the balance sheet as a liability.

Managers involved in the oversight of human capital expenses, review these expenses on a systematic basis to determine the efficiency of resources and the overall application for an organization. Each organization has its own unique way of managing human capital budgeting, compensation planning, and annual bonuses.

In retail store businesses, managers manage human capital allocations against store sales on a daily basis to determine the number of workers they need at any given time. In corporate settings, managers more holistically manage human capital typically on a quarterly, semi-annually, or annual basis.

Human capital can be one area where a company can reduce expenses by reducing hours, hourly wages, or employee headcount.

Economic Value

The economic value of human capital is a measure of each individual worker’s human capital value for the economy at large. Identifying the human capital value of a single employee can be somewhat challenging. At the base level, an employee’s value is generally the salary they are paid on an annual basis. However, beyond that, employees may have some extraordinary value assigned to them because of the reasons mentioned above, possibly their reputation or some special training that they have received either within an organization or on their own.

Employees may also be assigned an additional economic value because of certain traits they have such as punctuality, loyalty, location in relation to job openings, etc.

It can also be up to an individual person to understand and gauge the best approximation of their own economic value in order to rationally view market opportunities as well as obtain the best salary for themselves. There are several economic resources publicly available that can help an individual to ascertain their own economic value by viewing the average values of other workers with similar academic credentials, certifications, or experience levels.