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c Thomas Davenport in his book, Ú 

says, ³Assets are passive
± bought, sold and replaced at the whim of their owners; workers, in contrast,
take increasingly active control over their working lives.´ It is about time that
workers no longer be treated as assets, inanimate objects without feelings,
needs, and aspirations. As author E. G. Flamholtz, says: ³To treat people as an
asset is to confuse the agent that provides services with the asset itself (the
expected service). The agent referred to here is the worker.
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This major paradigm shift from attaching financial value to human

resources as assets to one where the ³employee-investor´ is treated as an equal
partner in business is anchored on two underlying principles: ownership and
return on investment.

People come to work in a company with their so-called ³hard´ and ³soft´
skills. Hard skills are those easily discernable and verifiable qualifications such
as proficiency in typing and shorthand in the case of secretary, or knowledge in
word processing and other computer programs, as well as verbal and written
skills. Soft skills are those innate qualities and behavioral aspects that are
fundamentally needed for the successful performance of a job. Again, using the
secretary as an example, soft skills required are his or her intelligence, energy,
integrity, maturity, ability to interact with others, and other similar qualities that
can only be observed and discerned during and after an in- depth interview, and
subsequently validated on the job.

These elements make up the human capital or the tools of currency, if you
will, that workers bring in to invest in their jobs. Being investors, they are
therefore part owners of the company, where they have a stake in its future, a
right to participate in its operations, and a right to expect a fair return on their
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While the term S  

 as cited earlier, first appeared in
publications in 1961, Adam Smith, more than two centuries ago, already
conceived the image of workers as investors. The famous economist wrote, ³The
work which he learns to perform, if must be expected, over and above the usual
wages of common labor, will replace to him the whole expense of his education,
with at least the ordinary profits of an equally valuable capital ³. Very clearly,
Smith refers to the acts of the workers as an investor who is expecting return of
his capital.

After Theodore Wrtichultz picked up the concept in 1961 in his article

   S   , the term never gained popular usage in reference
to human resources until the late 1990¶s. Thomas Davenport, a principal with
Towers-Perrin, an international strategy, organization, and human resources
consulting firm, wrote book Ú    in 1999. Several books on human
capital followed thereafter.

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Author Thomas Davenport breaks human capital into three elements: ability,
behavior, and effort.

å Ability means proficiency in a set of activities or forms of work. Ability

comprises these subcomponents.

å Knowledge- command of a body of facts to do a job. Knowledge is

broader than skill; It represents the intellectual context within which a
person performs. A medical representatives of a pharmaceutical company,
for instance, must not only have the skills for promoting his or her products
and interacting with the doctors but also must have a general knowledge
of the pharmacological qualities of these products.
å Skill- facility with the means and methods of accomplishing a particular
task. It may range from physical strength and dexterity to specialized
learning. Being a good secretary, for example, requires not only
nimbleness and dexterity in touching the appropriate keys of the computer
but also knowledge of the intricacies of word processing and other
software programs such as Excel and Power Point.
å Behavior ± means observable ways acting that contribute to the
accomplishment of a task. Behaviors combine inherent and acquired
responses to situations and situational stimuli. The ways we behave
manifest our values, ethics beliefs and reactions to the world we live.
When a worker has smooth interpersonal relationships with other in a
company, he has demonstrated a behavior important in a team-based

å Effort is the conscious application of mental and physical resources

toward a particular end. Effort activates skill, knowledge, and talent and
harnesses behavior to call fourth human capital investment. In a ³ 
culture, one may forgive lapses of knowledge, skill or competence, but
no effort because without effort, a wealth of knowledge and skills are
useless. How many times have we heard an exacting boss telling a
subordinate, ³Your study and recommendation may not be acceptable but
I could give µA¶ for effort.´

Included in this human capital equation is . Time refers to the hours
per day a worker expends his ability, behavior, and effort to achieve a work
objective. Time spent to accomplish a given task may vary depending upon one¶s
ability, behavior (attitude or disposition), and work ethics (effort).

Either one or a combination of some or all of these variables would

determine how fast or how slow a worker does his or her task. A less
experienced line man in a telephone company will naturally fix less non-working
lines than a seasoned one. Conversely, a well experienced lineman, who is a
slacker, my fix less line than a experienced one. In short, the combination of
ability, behavior, effort, and the time investment produces performance the sum
total one¶s investment.
Author Thomas Devenport sums up this multiplicative relationship in the
following equation:

TOTAL HUMAN CAPITAL INVESTMENT = (ability + behavior) x effort x time

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Now that we know what human capital is all about, how about do we
attract and retain the best of these investors? Putting it in another way, how do
we spot the right capital and convince him that he will have a better return on his
investment in your company? The answer of course is, look at your hiring

Given the fact that it is human capital that makes or unmakes a

company, one has to be scrupulous and rigid in the selection process. Consider
the acquisition cost of a wrong selection: advertising expense, the headhunter¶s
fee (if one gets the services of the third-party agency), time lost in the test and
interview, salary for the someone who did not contribute to the company¶s
operation, the cost of his failure or mistakes while on the job and opportunity
loss. The cost of selecting the wrong employee could be staggering. No wonder
one American boss once told us: ³You should be ruthless in your selection!´

Being able to attract human capital and retain him requires a different
strategy from that pursued by an investor who just puts in the money and waits
for the cash or stock dividends to come in. Looking for the right man capital is not
that easy. The human being is a complex organism and such is not very easy to
evaluate. The more we learn about people, the more we realize how complicated
the process of selection and placement really is. One has to accept that there is
no such thing as a ³good applicant´ for a job. An applicant is good only when
place in a job that makes maximum use of his abilities, satisfies his level of
aspiration (including the return on his investment, the important element of which
is money), stimulates his interest, and provides his social needs. People differ
markedly from one another, with respect to these factors.

When the selecting the best human capital, one has to understand how
person came to be what he is today. We should be looking for causes. We all
know in our study of psychology that all behavior is caused. For example, much
of an applicant¶s poise, possession of the knowledge, and skills that the job
requires, and facility of the speech may have been caused by his being brought
up in high socioeconomic circumstances by intelligent parents trained in a school
and/or worked in a fairly good company. The traits of that applicant are products
of both hereditary and environment.

Steeve Kneeland gives us tips on what to look out for when hiring people
who will be able to perform well in the needed job. He pointed out four things that
really matters.

Ë Starting with the job description (competency-based job evaluation now

calls this role description), identify what the requires in terms of
knowledge, skills, and job related qualities.

Ë Focus on behavior. Observe the candidate¶s past performance and, on the

basis of that performance, project the candidate¶s future performance in
the job you¶re offering. Regard the knowledge and skills factors as
minimum standards for the recruitment. What you should be searching for
is that quintessential something that produces outstanding performance.
As T. J. Rogers, CEO of Cypress Semiconductor, aptly said, his
organization ³must do at least four thing are better than competition. One
who hire outstanding people and hold on to them.´

Ë Look at what people actually do. You should ask two important questions:

What specific behavior do you see in your people that account for them is
producing good results? What specific behavior do you see that you wish
everyone to display?

What specific behavior do you see in your people that seem to impede
successful performance?
Ë Avoiding pitfalls. Problem may arise if you apply too literally the analysis of
what makes your successful people succeed and then look for those
characteristics in your winning candidate. The pitfalls are:

Behavioral patterns are rarely clear-cut, that is, there is no single definitive
behavior that defines successful performance.

People can make compensate for their performance

A good quality can be carried too far. For example, a desirable character
like assertiveness can have undesirable consequences if taken to
extremes. It may irritate some people and thus, stifle cooperation and
team work

What you think is needed can change. The ingredients needed to produce
outstanding performance may not be the same now as it was then.

Technical specification can be over emphasized. People usually succeed

or fail ion the job for reasons which have more to do with operating style
and inter-personal skills than with technical skills or knowledge.

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The ideal policy in hiring is to get the best and brightest. Author Pfau and
Kay in-tones: ³Hire people who can hit the ground running.´ Citing noted
organizational psychologist David McClelland who said, ³They say you can teach
a squirrel to fly. But it¶s to hire the eagle, ³Mssrs. Pfau and Kay suggest that the
best place to look for that ³eagle´ is in the halls of competition. The best
candidate for any job is someone already doing it someplace else ± and is not
out looking for work.
Justifying this policy, the famous authors rationalize ± and everyone will
certainly agree ± that best predictor of the future behavior is past behavior.
³Ideally, an organization will hire someone doing this exact job, in this exact
industry, in this particular business climate, from a company with a very similar
culture. The further a company moves away from that in concentric circles, the
further it gets from the likelihood of a good time.

While some may take issue on the ethics of ³pirating´ or ³poaching´ from
the other companies their best talents. This is where head- hunters thrive in their
business of spotting the best and brightest who are happy enough in their
present jobs, but are being enticed to ³jump to the other side´ with an attractive
economic package and better career opportunities.

This reminds us of an incident about 20 years ago when a plant manager,

in a pharmaceutical company joined a competitor for the same job at higher pay
and benefits. The company that lost him pirated also from other competitor. Like
the game of musical chairs, poaching resulted in five plant managers switching
companies, with everyone getting a higher return on their human capital
investments in process.

It is obvious that the best human capital today is attracted to the company
that offers to give them a better return on their investments. While money and
attendant perks are important elements, there are other equally important
considerations. Thomas Davenport enumerates these returns on investments.

Ë    such an access to the latest technology, exposure to

senior management, involvement in big deals, opportunity to run project;

Ë S  like technical training, leadership training, support for

further education, assignment to key teams;

Ë Ñ  such as recognition for achievement or excellent performance

during annual company events;

Ë  consisting of base salary at market average, and incentives
based on individual or group performance;

Ë £

Central to this idea of attracting the best human capital is the interviewing
process. The traditional interview technique is anchored on the objective of
eliciting information and behavior from the applicant. Prodded by probing and
open-ended questions, the applicant does most of the talking to sell himself. 

In this age of human capital, however, where workers are acting like free
agents, the interviewer must also try to sell the company. He must treat
candidates as human capital owners who need two kinds of information: a full
disclosure of the organizations expectations for human capital investment and a
comprehensive description of the return on investment it proposes to provide.

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Getting human capital in is one thing. Making it work is another. Human

capital, like any other asset, lies dormant and useless if not applied. For this
capital to be utilized wisely, it must satisfy three conditions:

Ë d  S S    The individual investment of the

worker must be directed toward the accomplishment of business strategy.
Congruence of the two leads to a better chance of producing benefits for
both worker and the organization.
Ë d            is
needed to get the worker to invest his ability  (behavior), effort, and

Ë -     Both parties, the employer and worker must trust that
they will get a fair deal in their contract. Trust begets enthusiasm that
motivates the worker to behave like an investor in performing his assigned

Trust requires participation in the decision making process and
information on the important goings-on in the company. It must be remembered
that workers under the human capital concept are not playing with other people¶s
money. They have invested their own talents, abilities and efforts in the
company, therefore, like any venture capitalist, they want to have a say in the
planning of their investments and they also want to be informed of their expected
return on investment.

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How do you motivate a worker to work more efficiency and productively?
Translating that into the human capital metaphor, how do you get him to invest
more of his or her ability (knowledge and behavior or interactive skills), effort, and
time for the goals of the business enterprise? The answer is: by assuring him or
her high return on investments.

High returns consist of a higher than average compensation, benefits and

incentives. Companies must also focus on intrinsic factors that contribute to
better performance.

Ë Compensation, benefits, and incentives

j It is not enough that a worker receives salary higher than the

average in the industry or community. Salary must be linked to
performance. As authors Pfau and Kay said, ³Salaries, bonuses,
stock, they are loosely termed µrewards.¶ But too often they fail to
function as such because in dispersing them companies do not
significantly distinguish between their true stars and their chronic
non-performers. Those firms are wasting valuable resources on a
reward system that does not actually reward a thing. And they are
disabling one of the most powerful tools in their arsenal when it
comes to attracting, retaining, and motivating the best players. The
answer is as simple as it is difficult to do: Organizations should
promise employees terrific rewards for terrific performance. They
must warm them that poor performance will not be tolerated. They
must follow through.´

j Come to think about it, why should an investor who puts in more
investments receive the same returns as someone who invest less?
In order to attract, one must motivate and retain the most talented,
creative, and productive human capital. Meritocracy in the reward
system must be put in place. Using the Watson Wyatt Human
Capital Index, the authors Pfau and Kay suggest that companies
that use the right reward system will enjoy 9 percent higher
shareholder value. They also confirmed that the most successful
companies create reward systems that reward good performance
and return and refuse tolerate poor performance.

Ë   S  SSS 

Competence- that set of skills, knowledge, talent, and behaviors

that would contribute to excellent performance. Companies that put
a premium on worker competence increase human capital
Autonomy ± the quality or state, as defined by Webster¶s dictionary,
of being self-governing or self contained. It comes from the Greek
words for self-governance. Through similar empowerment, it is
different in the sense of autonomy does not give up power transfer
control from manager to workers. Empowerment does. Power in
autonomy still rest on the manager. But it gives workers as sense of
choice, some for flexibility and allows them to take charge of their
jobs. Workers who are given this lee way to make their own
decision are more likely to improve human capital investment and
job performance.

More than a decade ago, we saw an autonomous action at New

United Motors Inc. (NUMI) in Freemont, California. It used to be a wholly owned
subsidiary of General Motors. Strike ± torn because of confrontational labor ±
management relations, NUMI folded up. It later opened under GM ± Toyota in
joint venture but managed by the Japanese. Separate officers for managers were
torn down, common cafeteria for all regardless of rank introduced, reserve
parking for managers was abolished and anybody can park anywhere on first-
come-first serve basis.

Above all, autonomy was given to the employee. When a worker

sees quality defect in the assembly line, he stops the production and calls the
attention of his superior on the defect. During GM days, worker who stops
production without the consent of the supervisor or manager could be fired.
NUMI scored one of the highest production and quality indices in the automotive
industry during the period when it¶s the worker enjoyed autonomy.

Companies cannot give a fair return on investments to their

shareholders unless they also guarantee the same to their human capital and
satisfy them. In the 2001 study of ¦ on the ³100 Best Companies
to Work For,´ the magazine found direct link between higher levels of employee
satisfaction and higher shareholder returns.

This study only confirms a 1998 Gallup Organization study that found a
link between employee satisfaction and financial performance. The research
showed that the most satisfied employees also worked in business units with
higher levels of productivity, profit, retention, and customer satisfaction. In short,
based on empirical data, there is reason to believe that satisfied employees bring
about high productivity, profit, and customer satisfaction. Satisfied employees
also tend to stay longer in the company and invest more of their human capital.

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ccccccccccccWe have learned how human capital can boost customer satisfaction,
productivity, and bottom line results. Hoe do you know enhance worker¶s human
potential to achieve maximum productivity. The answer is through training and
development. In this information age, where the knowledge worker takes center
stage amidst rapidly changing technology, training and retraining becomes
critical components. His skills and knowledge are to be sharpened, attitudes and
behavior molded to suit the corporate culture and business strategies.
Training and development are still viewed with askance by some
companies. To be sure, it is hard to measure the effectiveness of training.
Training is also considered as an expense. In short, it return indeterminate and
unquantifiable. Given this mindset, it becomes unsurprising that in times of
distress, the first thing subjected to the pruning knife is training. Be that as it may,
no one can deny that the benefits of training become apparent through the
improved knowledge and/or skills of a worker and the change in his behavior.
Assessing its efficacy can best be measured in terms of how workers improved
their performance and productivity before and after training.

Some words of caution must, however, be heeded. Training must be

categorized into ³must have´ and ³nice to have.´ Companies must give priority
attention to ³must-have´ training. It is through these types of training where both
the trainee and the company get a return on investment. The other aspect of
training that employer must be aware of is that it might not teach workers how to
perform better in their current jobs; rather, the training could be preparing them
for the next job that might yet be nonexistent in the company. In this type of
training, the program grooms a worker to be easy prey for piracy by another
company where the trained-for job already exists. The return on that investment
goes to this poaching company.

Apart from the benefits of improve skills and knowledge gained by

training, also promotes camaraderie and thus, better teamwork. Author
Davenport calls it ³Community of Practice.´ Consider a workshop-based training
where sales representatives and technicians are tasked to solve a customer
relation personnel work out with accounts receivable people inaccurate billings
that irritate customers. Learning from theories in class, and applying these to
actual situation, gives human resources from cross-functional areas a taste of
group dynamics and collaboration. Learning therefore has a social content where
trainees acquire knowledge and skills not only from instructors or facilitators but
also peer interaction. As Wenger puts it, ³There is no distinction between learning
and social participation, enduring and meaningful.´

How much should a company spend for training and development?

Unfortunately, there is no statistics available in the Philippines to indicate
average training cost. In the United States, corporations spend approximately
$60 billion a year for training. Citing American Society for Training and
Development figures, authors Pfau and Kay reveals that leading this firm
currently spend 4.4 percent of payroll on training and over 85% of employees
receive some type training. In the last company we worked for, our annual
budget for training was usually about 5% of payroll cost.

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How do you measure human capital? Or putting more specifically, how

do you measure human capital investment and return? The return can be
measured in terms of compensation, benefits, incentives, and psychic reward
such as recognition, career advancement and other intangibles. But how can you
put in numbers the investment in human capital?

This is almost akin to the problem of measuring human resource

management performance. Jac Fitz-enz, the author on Ú- Ú 
Ñ  -(his latest book is the Ñ Ú  deplores
that, ³A mythology has developed around personnel work. It has to do with the
nature and purpose of the work, one more importantly, it ideals with the
outcomes or results of the labor. It sets personnel apart from the rest of the
organization. While their peers in other departments are focusing on income,
assets and liabilities, sales, cost and profits, personnel workers talking about

To debunk this myth, Fit-enz then asserted that human resource can be
measured. In a succession of chapters in his book, he showed how to measure
planning and staffing. Compensation and benefits, employee relation activities,
training and development.

This demolishes the common bias of non HR people that efforts to measure
HR performance are either too general and of limited value, such as headcount
or payrolls coat, or so complex that managers are unable or unwilling to use

We contend that human capital investment can be measured either in

qualitative or quantitative terms. Executives in other disciplines such as Sales
and Production should not be smug in thinking that their performance can be
measured in terms of gross or unit sales and number of units produced. They
should be reminded that Albert Einstein, a genius in numbers, has been quoted
as saying that not everything that counts can be counted, and not everything that
can be count counted.

Thomas Davenport writes that companies that dedicate themselves to

counting tough to-count intangibles as well financially denominated assets
apparently distinguish themselves by superior performance. Measurement-
managed companies review performance data in at least three of six categories,
namely: financial performance, operating efficiency, customer satisfaction,
employee performance, innovation and change, and community/environmental

Measurements, Davenport continues, must be considered from two

perspectives: as a tool for defining optimum combinations of utility and return on
investment expenditure and as a means to monitor progress in managing human
capital strategically.

In the final analysis, in this age human capital, measurement should focus
more on the value of the organization the worker and less on the worker to the

1. Who first coined term, ³human capital´?
2. What are the elements of human capita?
3. How would you differentiate the concept of human capital from human
4. What are the elements that best attract human capital?
5. How do you increase human capital investment?
6. If workers are considered as investors, what do you consider as their


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A reputable computer has the policy of attracting the best and the brightest
among the graduates of leading universities. It trains them rigorously as Systems
Engineers or Sales Engineers. After two to three years, these creams of well-
trained, productive, and high potential engineers normally resign and join other
competing companies. What could be the reasons for this high turn-over? If you
were the CEO, what would you do to stem this loss of valuable human capital?

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ccccccccccccWayne F. Casio, d  S  -(London:
Prentice Hall Inc., 1987)

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Ñ Ñ   S , Book 1 rule XIV

Wendell French, Organization Development: Objectives, Assumption,

And Strategies (New York: McGraw-Hill Book Company, 1972), pp. 31-49.

David J. Cherrington, Personnel Management: !S - 

Ú Ñ   (Iowa: WM. C Brown Co., 1983).

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Sec. 3, Art XIII.

Raymund A. Noe, John R. Hollenback, Barry Gerhart, Patrick M. Wright,

Ú Ñ  - d (Third Edition,
McGraw-Hill Book Company, 2000), pp. 498.

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E.G. Flamholts J.M. Lacey,   -
  Ú  d  
    Ñ  -S ", No. 27
(Los Angeles: Institute of Industrial Relations, University of California, Los
Angeles), p. 35.
Bruce Pfau and Ira Kay, !S Ú    #,(McGraw-Hill Book
Company 2002), p.27.

Adam Smith, $ S  % (New York: P. F. Collier & Son, 1937),

Thomas O. Davenport, Ú   , (San Francisco: Jossey-Bass,

1999), pp. 18-19.

Steve Kneeland, Ú 

(How To Book LTd., 1999), p.8.

T.J. Rogers, ³No Excuses Management,´ Ú  £  Ñ 

(1990): p. 84.

E. Wenger, ³Communities of Practice: The Social Fabric of a Learning

Organization,´ Ú S ¦ &  (July-August 1996): p. 22.