Human Capital Investment: Coming of Age
By: Libby Trostle
Most organizations define capital as cash, buildings, equipment, and machinery. Human capital, being far less tangible, may easily be overlooked but is just as critical to the success of organizations. Human capital is the collective knowledge, skills, and abilities possessed by employees that enable them to function effectively within their organizations [1]. Investment in human capital may include expenditures for higher education, employee skills training, leadership development, performance management systems, employee morale and engagement programs, and other organizational development interventions that help to create and foster a well-educated, highly-skilled, motivated, and productive workforce.
There are several compelling economic and business reasons to invest in human capital. As the baby-boomer generation prepares to exit the workforce, experts predict America is headed for a talent gap, as well as a leadership crisis. In 2010, the American Management Association (AMA) conducted a survey of business executives identifying critical thinking, problem-solving, communication, collaboration, creativity, and innovation as skills necessary for organizations today. These skills were also seen as even more critical for the future. Many executives contend the current labor pool is lacking in these skill areas and that these gaps must be addressed in order for American businesses to compete in the global marketplace (AMA).
Many jobs available today and in the future will require more specialized skills and industry credentials. Middle skills jobs—those jobs that require more than a high school diploma, but less than a four-year college degree—are in demand in America. The Bureau of Labor Statistics reports there were four million job openings in the United States at the end of 2013. Close to 70% of those jobs fell into the middle-skills job category [2]. One estimate referenced by J.M. Lozano, Texas State Representative, in an April 17, 2013 opinion published in the Alice Echo-New Journal states, “…there are as many as 600,000 American manufacturing jobs that cannot be filled because American workers lack the [necessary] training.” Even well-educated college graduates entering the workforce will require some sort of specialized training once they obtain a job. Depending on the industry and the position, this training could last from several weeks for less complex jobs to several months for jobs that are more technical in nature.
When individual businesses and organizations perform better, they add to the success of the overall economy. Nobel Prize-winning economist Gary Becker best explained the relationship between human capital and economic growth when he wrote, “Economic growth closely depends on the synergies between new knowledge and human capital, which is why large increases in education and training have accompanied major advances in technological knowledge in all countries that have achieved significant economic growth” 1. Research shows that investment in human capital through both formal and informal (on-the-job) training and development programs can result in increased business performance, greater productivity, employee loyalty, and innovation. In strictly economic terms, these trained employees are able to provide increased output per labor hour.
Investing in the development of people has also been shown to increase employee engagement. Engagement is defined as “the extent to which employees are motivated to contribute to organizational success and are willing to apply discretionary effort to accomplishing tasks important to the achievement of organizational goals” (Kenexa.com). Employee engagement fosters increased productivity, enhancing organizational profitability. In addition, companies that enjoy high employee engagement experience reduced turnover – once again, benefitting the bottom line. A global study of 50,000 employees conducted by the Corporate Leadership Council demonstrated that “engaged employees were 87 percent less likely to leave their companies than their disengaged counterparts” (www.mkcpeople.com).
Laurie Bassi, a human capital analyst, professor of economics, and thought leader, co-authored a groundbreaking study that showed a link between investment in employee training/development and an organization’s success. Her research indicated companies that spend more on training on a per-employee basis perform better in the stock market in the year following the investments than companies that spend less [3]. Firms that spent more heavily in training and development were more successful, showing more net sales and gross profits per employee 3.
A study by WorkTrends surveyed 1,171 employees in 97 organizations about the training and development provided by their employers. The survey showed the companies that were rated most favorably by their employees in the areas of training and development realized a Return on Assets (ROA) three times higher than those companies that were rated the lowest [4].
So if the benefits and return on human capital investment is considerable, why do so many organizations fail to commit to it? According to Mark Salsbury in his book, Human Capital Management: Leveraging Your Workforce for a Competitive Advantage, “While difficult to believe, many companies haven’t realized that human capital is not a commodity. These companies haven’t made human capital part of their business plans, nor do they utilize human capital as a competitive weapon or tool.” In fact, leaders in many businesses fail to realize that while there will always be the next best product, innovation, or idea, there is one competitive advantage businesses have which can stand the test of time – their people [5].
Often, when businesses trim their budgets, training dollars are the first to be cut. Given the importance of human capital investment to business success, this strategy seems counter-intuitive. After all, if in tight budgetary times a company’s best piece of machinery broke down, would the company not invest the money to repair it? Many businesses, particularly small businesses, fail to recognize that continual investment in human capital allows businesses to adapt, grow, and remain competitive.
Some businesses, on the other hand, do recognize the value in human capital investment and see such investments as critical for success. Bersin by Delloitte, a leading human resource and training consulting firm, recently collected data from nearly 300 large U.S. organizations regarding their training expenditures for 2013. Organizations in the survey reported spending on average $1,169 per learner [6]. And, from 2012 to 2013, training expenditures overall rose 15% 6. Not surprisingly, organizations in the technology sectors had the highest dollar spending at $1,847 per learner 6, as these companies must consistently upgrade employee skills and knowledge to remain competitive.
As larger organizations seem to appreciate the value of investing in employee training and development, smaller businesses can learn from their lead. The investment amount may not be as great, but it is just as critical. When a company, no matter its size, commits to human capital investment, it will not only realize greater returns, but will be benefitting the local, national, even global economy.
[1] Gary S. Becker, “Human Capital.” The Concise Encyclopedia of Economics. 2008. Library of Economics and Liberty. 20 April 2014. http://www.econlib.org/library/Enc/HumanCapital.html.
[2] Dave Claborn, “Helping Foreign Investors in the U.S. Satisfy Their Workforce Needs”. Area Development Online, 2014. Retrieved from the web April 12, 2014 www.areadevelopmentonline.com
[3] Ed Frauenheim, “A (Weary) Champion for Employee Investment.” Workforce Magazine. August, 2009. Retrieved from the web April 10, 2104
[4] Haiyan Zhang, Investing in Training and Development Pays Off – Literally! Retrieved from the web April 19, 2014. http://blog.kenexa.com
[5] Mark Salsbury, Human Capital Management: Leveraging Your Workforce for a Competitive Advantage. Create Space Independent Publishing Platform, 2013. Print.
[6] Bersin by Deloitte, What Works Brief. The Corporate Learning Factbook 2014: Benchmarks, Trends and Analysis of the U.S. Training Market. www.bersin.com/factbook