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Becker (2008) explains that capital is not always tangible, not like how it is perceived by many people --- bank accounts, shares of stock, assembly lines, or steel plants. The quality of education acquired, the training courses fulfilled, and the values practiced by a person (honesty and punctuality) can also be termed as capital. It is for the reason that those things can actually increase the rate at which a person is earning and promote his/her status in life. Specifically, the mentioned types of characteristics are human capital. Just like financial and physical assets, these qualities cannot be separated from a person. According to Becker (2008), the most important investments in human capital are education, training, and health.
"Fourthly, of the acquired and useful abilities of all the inhabitants or members of the society, the acquisition of such talents, by the maintenance of the acquirer during his education, study, or apprenticeship, always costs a real expense, which is a capital fixed and realized, as it were, in his person. Those talents, as they make a part of his fortune, so do the likewise that of the society to which he belongs. The improved dexterity of a workman may be considered in the same light as a machine or instrument of trade which facilitates and abridges labor, and which, though it costs a certain expense, repays that expense with a profit."
The concept of human capital first appeared in1961 which was coined by economist and Nobel laureate, Theodore W. Schultz. It was then revolutionalized when Adam Smith defined four types of fixed capital, characterized as that which affords a revenue or profit. The four types were: 1) useful machines, instruments of the trade; 2) buildings as the means of procuring revenue; 3) improvements of land; and 4) human capital. His exact words were:
Therefore, human capital can serve as the driving force of productivity and progress. People are assets whose value can be enhanced through investment. That is the reason why human capital approaches should be designed, implemented, and assessed by how well they can help a specific agency achieve strategic results and pursue its mission. According to the US Government Accountability Office, there are three enablers for management of an organization, namely, people, process, and technology. The most important according to the office is the people because they define an agency's character, drive its capacity to perform, and often constitute the largest budgetary expense.
The most significant value any enterprise has is the experience, skills, innovativeness and insights of its people. The success of any company will depend on its ability to understand how human capital links to its performance and its wealth. The most competitive companies will have the best strategies and methods for attracting, hiring, managing, developing and retaining top performing talent. Managers need training on how to apply human capital management (HCM) principles and methods to business strategy and performance (HireSmart 2008).
The Human Resource Department (HR) of an organization functions on human capital management and development. Unfortunately, some companies view HR as compliance police or just a necessary administrative process. On a more broad sense, the roles of HR are evolving from administrative (personnel function) to strategic partner. It specifically has a consultative role of coaching managers to run their resources within the laws & ensure maximum potential. It also has a change management role and administrative roles like records maintenance. It helps in effectively managing & utilizing people, tying performance appraisal &compensation to competencies, developing competencies that enhance individual & organizational performance, and increasing the innovation, creativity & flexibility necessary to enhance competitiveness.
Human resource management (HRM) has already emerged as a separate discipline to personnel. In personnel management, people management strategy is developed through a process that is separate to the development of the business strategy and in which the primary focus of attention and effort is within the HR function and on the current state. In HRM, people management strategy links to and cascades from the business strategy. It looks forward from the current state, focusing on making incremental changes to the way people are currently managed in order to implement the objectives in the annual business plan (Ingham 2006). The HRM strategy is developed based upon a diagnosis comparing the way people are currently being managed against the requirements of the new business plan. It deals with key issues about people management, such as whether the organisation should buy in or build its own talent. Once the strategy has been developed, these activities then need to be followed by implementation, evaluation, and reporting.
Moving up from personnel management to HRM strategy has served many organisations well. However, in today's business environment, organisations need to make transformational rather than incremental improvements in their products, services and the way they operate and manage their businesses. A strategic approach to human capital management (HCM) responds to this requirement by focusing on people's current and potential skills and abilities as a source of human capital and organisational transformation.
HCM goes beyond just adding value to the business by supporting the delivery of business objectives for today. Instead it is about creating value by developing capability which can sustain and transform an organisation over the longer term. This capability provides the basis for delighting an organisation's stakeholders, such as a company's investors, and which is the reason why a company's market worth can be so much more than just its book value. The focus here is on the future state, looking at what needs to be different and then working backwards from this future position. This results in more transformational and innovative approaches to people management than HRM's focus on the current state (Ingham 2006).
The linking of HRM with strategic goals and objectives by any organization will help to improve business performance and develop organizational cultures that foster innovation and flexibility. This is primarily because HRM would entail the following functions that will directly affect the performance of the business in the industry: a) recruiting and hiring the best available talent, b) developing and motivating people to reach their fullest potential, c) retaining talent (and the investments made in them), d) minimizing risk and cost on the human side of the business, e) designing talent management information systems, f) implementing performance based compensation systems, g) designing coaching and mentoring programs, and h) applying performance management technologies. If the Human Resource Management is very much linked to the goals of the organization, then, most probably, the organization will promote and follow the human capital driven business model, rather than the finance driven business model. The finance driven business model focuses on tangible assets and the valuation of physical and financial assets only. It focuses on the past (cost measurement) capital and investment costs. In this business model, people are treated as expenses and salary costs. It also centers on short-term profitability. On the other hand, the human capital business model focuses on tangible and intangible assets-the valuation of physical, financial, human and structural assets. Its decision criteria are based from knowledge and human capital investments. It gives value to customer cost and treats people as expenses and investments. More importantly, it centers on present cash flow and future revenue streams, short-term and long-term profitability, added-value, and sustainability.
The HR should consider developing a strategy for its management. ACCEL, an online team development site suggests steps in developing HRM strategy. The first step is to "Get the 'big picture'" or the current state of the organization. The HR should scrutinize the business strategies. This would involve a) highlighting the key driving forces of the business (e.g. technology, distribution, competition, and the markets), b) finding the implications of the driving forces for the people side of your business, and c) listing the fundamental people contribution to bottom line business performance. The second step is to develop a Mission Statement or Statement of Goal that considers the people side of the business. The third step is to conduct a SWOT analysis of the organization that will focus on the internal strengths and weaknesses of the people side of the business. Current skill and capability issues should be discussed and considered here. The HR should dynamically research the external business and market environment. If possible they should stress the opportunities and threats relating to the people side of the business. The impact of those opportunities and threats to the business performance should be discussed along with skill shortages ad new technology on staffing levels. From this analysis, the HR should then review the capabilities of the personnel department. Complete a SWOT analysis of the department - consider in detail the department's current areas of operation, the service levels and competencies. The fourth step involves conducting a detailed human resources analysis that would concentrate on the organization's COPS (culture, organization, people, HR systems). The HR should consider their current position in the industry and their ideal goal. The HR should see if gaps exist between the reality of where the organization is and where it wants to be.
The fifth step is to determine critical people issues. This would mean going back to the business strategy and examining it against the SWOT and COPS Analysis. The HR should identify the critical people issues must be addressed and those which have a key impact on the delivery of the business strategy. The HR should prioritize critical people issues for them to know where their resources and efforts should be focused. The sixth step is to realize consequences and solutions for the issues. For each critical issue, the HR should highlight the options for managerial action --- generate, elaborate and create. The HR should think about the consequences of taking various courses of action. They should consider the mix of HR systems needed to address the issues and the implications for the business and the personnel function. Once the HR have worked through the process it should then be possible to translate the action plan into broad objectives. These will need to be broken down into the specialist HR Systems areas of employee training and development, management development, organization development, performance appraisal, employee reward, employee selection and recruitment, manpower planning, and communication. The last step is the implementation and evaluation of the action plans. The ultimate purpose of developing a human resource strategy is to ensure that the objectives set are mutually supportive so that the reward and payment systems are integrated with employee training and career development plans.
Some HR strategies that organizations must consider, in my opinion are employee selection, motivation, evaluation, services, and development. In the light of employee selection, the HR should take note of the main sources of recruitment -- internal promotion and internal introductions , careers officers (and careers masters at schools), University appointment boards, Agencies for the unemployed, and Advertising (often via agents for specialist posts) or the use of other local media (e.g. commercial radio). The HR should be very careful in setting qualifications for specific job positions. Before letters of appointment are sent, any worries about medical fitness or capacity (in employments where hygiene considerations are dominant) should be resolved by requiring applicants to attend a medical examination. Interviews can be done by individuals (e.g. supervisor or departmental manager), by panels of interviewers or in the form of sequential interviews by different experts and can vary from a five minute talk to a process of several days. Personal skills in judgment are probably the most important, but techniques to aid judgment include selection testing for: aptitudes, attainments, and general intelligence.
After selecting the best employees from the applicants for a specific position in an organization, the next strategy of the HR should focus on how to keep the employees' passion for the job burning. Basic financial rewards and conditions of service (e.g. working hours per week) are determined externally (by national bargaining or government minimum wage legislation) in many occupations. The fact is 50 percent of the gross pay of manual workers is often the result of local negotiations and details of conditions of service. The wage package should be accepted by the employees as fair, else there will no motivation for them to work at their best. Hence while the technicalities of payment and other systems may be the concern of others, the outcome of them is a matter of great concern to human resource management. However, the wage package is not the only factor that can increase the motivation of the employees, some benefits and services can also be sources of motivation. Some of these are listed below:
Schemes for occupational sick pay, extended sick leave and access to the firm's medical adviser;
Schemes for bereavement or other special leave;
The rehabilitation of injured/unfit/ disabled employees and temporary or permanent move to lighter work;
The maintenance of disablement statistics and registers (there are complicated legal requirements in respect of quotas of disabled workers and a need for 'certificates' where quota are not fulfilled and recruitment must take place);
Provision of financial and other support for sports, social, hobbies, activities of many kinds which are work related;
Provision of canteens and other catering facilities;
Possibly assistance with financial and other aid to employees in difficulty (supervision, maybe, of an employee managed benevolent fund or scheme);
Provision of information handbooks,
Running of pre-retirement courses and similar fringe activities;
Care for the welfare aspects of health and safety legislation and provision of first-aid training.
Employee evaluation and development are the last two areas that HR should strategically plan. An organization needs to constantly assess the performance of the existing employees' jobs for three reasons: a) To improve organizational performance via improving the performance of individual contributors (what has been done to improve the performance of a person last year? and what can be done to improve his or her performance in the year to come?), b) To identify potential, i.e. to recognize existing talent and to use that to fill vacancies higher in the organization or to transfer individuals into jobs where better use can be made of their abilities or developing skills, and c) To provide an equitable method of linking payment to performance where there are no numerical criteria (often this salary performance review takes place about three months later and is kept quite separate from 1. and 2. but is based on the same assessment). After the evaluation procedure, development activities can be done with the assessed employees. The development procedures can include talks, seminars, training, lectures, or demonstrations.
PEOPLExpress Airlines is a similar example of, a cost efficient thrust. Unifi, McDonald's, and Honda assist in the HRM practices of their customers, distributors, and suppliers, :respectively, in order to help them keep costs down as well- as to ensure a competitive, and thus enduring, set of customers, distributors, and suppliers. IBM was able to differentiate itself from competitors by providing programming training for customers' employees. Pepsico was able-to-differentiate itself from competitors by providing merchandising training and store management training to a fast growing distributor group-the medium-sized urban supermarket. General Electric Power Systems division recognized that its sale of large equipment contracts worldwide depended on a challenging combination of traditional technical skills and radically new financing skills, so they systematically staffed up to secure these skills and now have differentiated themselves as producers of power systems, with affordable financing options, in third world countries.
Companies such as AT&T, Bank America Corporation, Sun Company, and Eastman Kodak Company are trying to gain this flexibility and skill currency by offering attractive early retirement packages for carefully selected groups of employees. The Baltimore Orioles also attain differentiation through their staffing practices, this time with their suppliers. Its farm clubs combine a selection policy emphasizing internal promotion and support this with an extensive training system (the farm clubs). The practice of careful selection to ensure a better fit between company and employee is also a critical HRM practice at Goldman Sachs. There, every partner interviews every MBA job applicant to ensure that the new employees "fit" the company.
GTE performance appraisals are viewed as one of the most important tools in the management store. According to GTE Chairman Theodore F. Brophy, the GTE,appraisal system complements the emergent strategic planning emphasis in all areas of the corporation. The appraisal reviews assist executives in clarifying and articulating objectives and expectations for themselves and their employees. They give GTE a realistic assessment of its strengths, weaknesses, and future requirements. The company is now able to better utilize its human resources than in the past.
In addition to PEOPLExpress Airline and Lincoln Electric, who use compensation practices to gain a cost/efficiency competitive advantage, TRW and the Hewlett-Packard Company use compensation to drive their search for innovative products and services. At Hewlett-Packard, entrepreneurial behavior is stimulated in project leaders by tying more rewards to their success. Successful project leaders are being given banquets, stock options, and personal computers. At TRW, units or teams are given credit for sales generated in another department in return for helping that department. Consistent with the prescription by Rosabeth Moss Kanter in The Change Masters, TRW fosters innovation by stimulating interdependence through its compensation practices. When Delco-Remy trained its employees in participative management, it succeeded in differentiating itself from all competitors in the eyes of Honda and others. The success of this training and resultant competitive advantage are described by Delco's Keith W. Wander.
Dayton Hudson Corporation is using training and development skills to create future customers. B. Dalton Bookseller Division has earmarked $3 million over four years for a literacy training program. Their goals are to recruit volunteer tutors and to tell people without basic skills about the free teaching programs available in their communities. As a part of this, Dalton gives grants to local school districts to hire speakers who will persuade teachers to put more emphasis on teaching reading skills. IBM has followed a similar strategy for many years in teaching programming skills to customers' employees-capturing unending loyalty of the firms and the employees to IBM products. McDonald's uses training to ensure its distributors of a competitive advantage through cost/efficiency. McDonald's uses its intensive training program at Hamburger University to ensure that its franchisees or distributors run as efficiently as possible. Although training is also done in order to attain consistent quality, its competitive advantage from training is attained from a cost/efficiency thrust (Schuler 1984).