Human Capital Theory

All employers should aim to improve their workforce as well as their business. This is the main focus behind the Human Capital Theory.

Investment in Human Capital can benefit workers on an individual level, whilst building your business output and revenue.

It’s your duty to care for your employees whilst they work for you. And this can include career progression and wellbeing support.

Poor relations with your staff can lead to them feeling unvalued and unmotivated. This could lead to potential effects towards productivity and retention.

Read why you should introduce the human capital theory to your business. And how you can develop employee skillsets and talent by introducing human capital management.

What is the Human Capital Theory?

Human capital theory is about the idea of humans increasing their productivity and efficiency through a greater focus on education and training.

Human capital is the study of human resources. It talks about the development of economic value from how we function as a society.

The basic theory of human capital goes like this:

• We invest in the physical means of our business, like machinery or technology.

• This allows us to produce our stocks or products; and profit from it.

• So, we should invest in human capital the same way – through education and training.

Investing in human capital allows you to see growth - measured through your staff’s abilities, values, and skillset. This will increase business productivity, and in time, revenue, and brand-name.

Who invented the Human Capital Theory?

The first writings on human capital comes from the 18th century Scottish economist, Adam Smith.

But, the American economist, Greg Becker, was arguably the biggest pioneer for the human capital theory. Through his works in economic sciences, he coined the idea of investing in people.

His works allow us to view the link between human labour and production. And how human capital can enhance the workplace today. We shouldn’t view the theory as selling humans as a commodity.

But rather as investing in their talents and performance, benefiting themselves and the business.

Human Capital Theory examples

Human capital includes means for improving human qualities which can affect financial output and productivity.

These qualities might be classed as tangible. But through consistency, you can increase financial performance and talent. Human capital can include qualities like:

• Education

• Communication skills

• People management

• Workplace training

• Problem solving skills

• Physical, mental, and emotional wellbeing

Human Capital Theory in HRM

The managing department of any business will always benefit from a well-functioning workforce. Their main work tasks are to oversee your staff’s performance rates. Human capital management allows your mangers to:

• Set achievable goals – for both daily and in the long-run.

• Provide coaching and training for your staff.

• Deliver constructive feedback on improvement.

In some ways, human capital management may be complicated phrase for performance management. But in the end, these managers can help create your foundations for profitable human capital management.

Advantages of Human Capital Theory

One of the most important attributes your managers should own is leadership skills.

Managers must be able to educate, train, and lead your workers every day. They should stand as a focal point for guidance in the workplace. And aim to maintain strong organisation abilities, social awareness, and operational skills.

Managers should aim to understand how their team-members function; and aim to grow their talents.

They should also have emotional intelligence; and know how to manage work-related (and non-work-related) problems. By showing empathetic qualities, employee relations will be built on unity, trust, and respect.

Through all these methods, you can figure out the best means to utilise human resources management.

Criticism of Human Capital Theory

Whilst the positive points for human capital may seem attractive, the theory isn’t without its critiques.

The concept of human capital theory is for humans to invest in themselves. But many might critique employees are assets first and then humans. Some find it discouraging to be referred to as “business tools” or possessions of the business.

Other accounts argue the human capital development theory doesn’t allow concise measures for talents and skills. To mark or even award employees against these is intangible. And it can lead to claims of favouritism and prejudice in the workplace.

Whilst developing employee skillsets and abilities is important, it’s not enough to fuel your entire business.

How to determine if your Human Capital Management is working?

The main aim for the success of human capital management is to prioritise your staff.

Your staff should stand as valuable members in your business. And they should be looked after, from their first day. Through effective management, you can increase long-term performance and business outcome.

If your staff don’t feel encouraged or supported in the workplace, it will reflect through the results. Managers should push motivation and engagement through their own tasks, as well as through their managerial jobs.

You need to allow your staff to develop themselves whilst they perform their everyday tasks. Provide useful resources for training, advisory groups, and any other means to build themselves as employees.

Get expert advice on Human Capital Management with Health Assured

Well-managed human capital practises can help employees gain self-confidence and skills. Meaning your business will be pioneered for career development and advancement.

Without investing in your people, you risk impacts to your employee relations. – This could heavily affect your business productivity and reputation.

Wisdom Wellbeing can help you introduce human capital management into your business. We provide a 24/7 helpline, that’s open 365 days a year – and can help you manage and care for your staff, their careers, and welfare.