Soc Indic Res (2018) 137:605–623

https://doi.org/10.1007/s11205-017-1601-9

Measuring Human Capital in Small and

Medium Manufacturing Enterprises: What
Matters?

Muhammad Shujaat Mubarik1 • V. G. R. Chandran2 •

Evelyn S. Devadason1

Accepted: 9 March 2017 / Published online: 24 March 2017

© Springer Science+Business Media Dordrecht 2017

Abstract This study proposes a framework that quantifies and integrates both the tangible
and intangible aspects of HC to comprehensively measure the overall level of human
capital index (HCI) in small and medium manufacturing enterprises (SMEs). Data were
collected from 100 SME experts through the use of questionnaires in two stages. The data
collected were first, used for selection purpose, and second, for the prioritization of rele-
vant dimensions and sub-dimensions of HC. The analytic hierarchy process was adopted
to prioritize and assign dimension and sub-dimension weights to HC to derive the HCI.
The results indicate that not all dimensions and sub-dimensions of HC are important for
the HCI. Namely, the HCI can be best represented by 9 dimensions and 35 sub-dimensions
of HC. The core dimensions are experience, skills, education, abilities and training.
Indeed, within experience, the main sub-dimensions are work-related experience and
organiza- tional tenure. The results suggest the importance of experience relative to skills
and education. The proposed framework can also be applied to derive industry specific
HCI.

Keywords Human capital index (HCI) Small

· and medium enterprises (SMEs) Analytic
hierarchy process (AHP)

& Muhammad Shujaat Mubarik

shujaatmubarik@gmail.com
V. G. R. Chandran
vgrchan@gmail.com
Evelyn S. Devadason
evelyns@um.edu.my
1
Department of Economics, Faculty of Economics and Administration, University of Malaya,
Kuala Lumpur, Malaysia
2
Department of Development Studies, Faculty of Economics and Administration, University of

1
3
Malaya, Kuala Lumpur, Malaysia

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1 Introduction

Human capital (HC) has resurfaced as an important topic of debate among policy makers
and managers. Indeed, firms, regardless of size, consider HC to be important to attain
competitive advantage (Cricelli and Grimaldi 2008; Lepak and Snell 1999; Nakamura
1981), and to sustain their performance (Ambrosini, Bowman, and Collier 2009; Becker
1962; Mincer 1958; Schultz 1961; Wernerfelt 1984). Similarly, following from the
resource based view, firms consider HC as one of the capabilities that is distinct to firms;
it is valuable, rare, non-substitutable and non-inimitable (Delery and Shaw 2001; Newbert
2007). Since HC is linked to employees, its measurement is essential to enable firms to put
into place exigent management control issues (Widener 2004).
Despite the importance of HC, measuring it has been difficult and the literature has at
best produced inconsistent measurements of HC. Many studies have used proxies for HC.
Further, there are limited attempts to comprehensively define and construct a HCI that
includes both tangible and intangible aspects of HC. Most studies on HC-firm
performance often reach contradictory results because of the unavailability of a
comprehensive measure of HC. A significant number of studies suggested positive
relationships between HC with productivity, export and innovation of firms (Becker 1962;
Coff and Kryscynski 2011; Ployhart et al. 2006; Prahalad 1983), while others show
otherwise. By reviewing past studies, Newbert (2007) concluded that only 33 percent of
those studies supported a positive association between HC and firm performance.
Similarly, Slaughter et al. (2007) highlighted that the failure in taking into account firm
specific and general HC has led to mixed evidence in the performance-based studies.
Given the central role of HC in any organization, the question arises as to how to measure
HC, and what dimensions of HC matter to for measuring explicit knowledge (Guthrie
2001; Tayles et al. 2007). It is noted from previous literature that initial measures of HC
seemed to focus solely on efficiency and cost. Traditional measures were highly criticized
as they were considered short term, lagging behind and backward-looking. This gave rise
to the development of the HC metrics (Garavan et al. 2001; Gates and Langevin 2010).
This new concept urged organizations to apply non-financial performance measures for
performance management such as the Balance Score Card (Kaplan and Norton 1996) and
the Skandia’s HC indicator (Edvinsson and Sullivan 1996). These scholars then illustrated
how performance is produced within an organization, and how its various filaments are
interconnected. The conclusion was that HC s contribute in a radical way towards
attaining key objectives of performance. Thus, HC measures have evolved beyond just as
efficiency indicators, with adapted measures for more complicated jobs (Gates 2004).
HC is generally defined as the accumulation of competencies, knowledge and skills to
carry out work, which can produce economic value (Wright et al. 1995). Scholars that
focused on the multi-facets of HC, developed various measures towards this end (Becker
et al. 2001; Bontis and Fitz-Enz 2002; Calabrese et al. 2013; Edvinsson and Sullivan 1996;
Kaplan and Norton 1996). Yet, some fundamental problems prevail. First, the prominent
issue is that the concept of HC is still ambivalent, and most researchers have attempted to
analyze HC using conventional measures based on tangible resources. Second, the existing
measures of HC do not fully encapsulate major qualitative and quantitative dimensions of
HC (Chen et al. 2004; Krueger and Lindahl 2000). Third, it is important to know which
dimensions of HC are critical, to identify its optimum level. In this context, the aim of this
study is to develop a comprehensive framework that accounts for both the qualitative and
quantitative aspects of HC, by weighting the important dimensions of HC. Taking into

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account the gaps in previous studies, this study contributes to the existing literature on HC
measurement.
The rest of the paper is structured as follows. Section 2 reviews the literature related to
HC dimensions, the measurements and limitations of existing approaches. Section 3
details the proposed framework for HC and the model developed by using the AHP
procedure. Section 4 reports and discusses the findings. The final section concludes.

2 Review of Literature: HC Measurement Approaches

In the past, various approaches were used to measure HC, directly and indirectly. The
accounting-oriented approach generally integrates the HC measurement into the con-
ventional accounting framework. The inception of the accounting-based approach to
measure HC can be traced back to Likert (1961), (1967) and Pyle (1966). Thereafter,
Flamholtz (1973) developed a comprehensive approach to measure HC. He asserted that
HC costs had two major strands: acquisition cost and learning cost. Acquisition cost
embodies the cost related to recruitment and selection, deployment, promotion, and
internal hiring, whereas the cost of formal training and on the job training (OJT) is
included in the learning cost. On the same note, Flamholtz (1999) also developed the
human valuation model called the Stochastic Rewards Valuation model. He explicated a
five-step method for human valuation to apply this model. In the context of this
framework, Flamholtz et al. (2003) devised an approach for computing return on
investment (ROI) on management development. They claimed that using the Human
Resource Accounting as a method to gauge the contribution of management development,
augments the value of HC. Others have also used such types of alternate models (Cascio
1998; Dobija 1998). For example, Cascio (1998) suggested indicators like the inventory of
knowledgeable employees, employee attitudes and HC innovation to measure HC. This
approach gives innovation key importance. In addition, turnover, organizational tenure,
experience and learning imperative were also considered for HC accounting.
Another approach, which is common, is to assess the market value and the market
return of intangible assets including HC, or the differences between the two. The market
value approach uses techniques based on market value, which measures HC on the basis
of the number of employees, their market and book value. One prominent research in this
cat- egory is that of Bontis and Fitz-Enz (2002). They created various metrics like human
capital revenue factor, human economic value added, human capital cost factor and human
capital value added. These metrics quantify the market value of HC. However, this
approach is still underdeveloped and recognized mainly in the management literature.
Likewise, market return approach focuses solely on ‘‘returns’’ generated by intangible
assets. Examples for this include the Human Capital Pricing Model and the Role of
Human Capital. The most prominent measure is that developed by the Saratoga Institute
(Bontis et al. 1999), comprising the human capital financial index combined with the
human capital revenue index (revenue per employee), human capital cost index (total labor
cost per employee) and human capital profit index (revenue minus purchased services per
employee). This index quantifies the market returns of HC. This approach has been crit-
icized by some researchers who claimed that it overestimates the contribution of intangible
assets. Alternatively, the value added approach is based on the difference between input
and output. In this regard, the difference between the return on HC and the cost of HC is
measured.

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The human resource indicators approach, which focuses on indicators like employees’
competence, motivation, skills, professional knowledge and creativity, is the most popular
approach for measuring HC. This approach collects indicators related to corporate per-
formance and quantifies them with the help of various techniques. For example, Gimeno
et al. (1997) considered similar industry experience, relevant work experience and level of
education as the most important indicators of HC. Bontis and Fitz-Enz (2002) crafted a
comprehensive approach, taking into account qualitative and quantitative factors of HC, in
order to check the association between HC effectiveness with valuation, investment and
depletion of HC. Their results showed a significant relationship between revenue (human
capital effectiveness) with the tenure of supervisors and administrative staff. A few sig-
nificant techniques, based on the indicators approach include the following: Skandia
Navigator, Human Resource Score Card and Intellectual Capital Navigator. Some
researchers have also used the Analytic Hierarchy Process (AHP) for human capital cal-
ibration (Abdullah, Jaafar, and Taib 2013; Bozbura et al. 2007; Calabrese et al. 2013).
Though the concept of HC has been introduced by many researchers, it was Becker
(1962), Mincer (1958) and Schultz (1961) who pioneered this concept. These researchers
emphasized three cords of HC, namely training, education and experience. For example,
Mincer (1958) focused on training and education as important constituents of HC, and
suggested that the differences in income of individuals as a cause of disparity in HC.
Similarly, along with education and training, Schultz (1961) defined health and internal
migration as filaments of HC. He argued that HC should include useful skills and abilities,
which may be improved by deliberate investment. Explaining the disparity in productivity,
he further attributed it to differences in education, health and training. Combined with
training, education and experi- ence, personal skills, characteristics and attitude are also
considered to be of equal importance in several studies (Hatch and Dyer 2004; Youndt et
al. 1996).
In the management literature of the late 1990s, various innovative definitions flourished
and scholars devised useful tools to measure the level of HC, accordingly. The Skandia
model defined HC as an aggregate of knowledge, skills, creativity and the ability of each
employee to meet the tasks at hand (Bontis 2001). Similarly, Brooking and Motta (1996)
listed employees’ experience, knowledge, competence and creativity as vectors of HC.
Defining HC also requires a greater focus on the intrinsic value of employees. For Ulrich
(1998), employees’ commitment, motivation and attitude formed essential parts of HC.
Similarly, Luthans et al. (2004) considered creativity as an important string of HC, and
listed personal experience, education, professional skills, knowledge and creativity as the
main constituents of HC. Likewise, various indicators of HC were also established.
Among them is the Balance Score Card method mentioned above, comprising three
attributes of employees to reflect HC, employee sustainability, employee satisfaction and
employee capability (Edvinsson and Sullivan 1996). Aligned with this method, Bontis
(2001) per- ceived the level of ideal competence, employee satisfaction, employee co-
operation, and succession training plans as major indicators of HC. Alternatively, Gimeno
et al. (1997) predicated their views on the fact that similar industry experience, relevant
work experi- ence and level of education as the main cords of HC. Hatch and Dyer ( 2004)
proposed the key factors of HC to include the level of education, technical test in
selection, training, employees’ work participation, problem-solving skills and employees’
commitment. Skaggs and Youndt (2004) instead stressed employee skills, level of
education and pro- fessional tenure as important strands of HC. Subramaniam and Youndt
(2005) added creativity as an additional dimension of HC to skills, education and
experience. In order to find commonly used HC indicators, Han et al. (2008) conducted a
study in the context of Taiwan’s manufacturing firms. The study highlighted five

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common indicators of HC: job

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accountability, employee’s competence, professional tenure, employees’ commitment, and

employees’ cooperativeness. In another significant study, Pablos (2002), (2004) suggested
employee turnover, education, motivation, satisfaction profile and training as important
indicators of HC. Among these indicators, employee satisfaction and work-related com-
petencies have been used by many researchers alike (Chen et al. 2004; Engstro¨m
et al. 2003; Moon and Kym 2006; Petty and Guthrie 2000; Rompho and Siengthai
2012).
Despite the numerous definitions, approaches and indicators, limitations still exist in
measuring HC. The problem with the traditional approaches of measuring HC is that they
focus on market value-based techniques that quantify the various aspects of HC, but overlook
some major qualitative facets of HC. HC is not a financial residual, but a combination of
various characteristics of people and human resource activities. Likewise, Bullen and
Eyler (2010) argued that the accounting base techniques do not aptly quantify HC. Scholars
tend to be selective in the choice of indicators. The most worthy approaches are therefore
those that assist to explicate human capital management strategies (Baron 2011). From the
literature survey, it is obvious that indicators such as education, training, experience
(industry expe- rience and relevant job experience), satisfaction, commitment, turnover
and work-related competencies have been extensively used, whereas indicators like
innovation, health, social status, behavior and emotional intelligence seem to be largely
ignored. The dependence on selected indicators consequently renders these measures as
inadequate to capture the HC without bias. Indeed, various indicators should be considered
before each organization strives to identify the most germane measure (Purcell 2003).
Besides, there is also a need to ascertain the degree of importance of each indicator or
dimension of HC. The non-existence of a holistic and common measure makes it
impractical to compare the contribution of HC across firms, industries or sectors (CIPD
2006). Hence, in order to evaluate the impact of HC on business goals, there is a greater
demand for HC measures that are more practical (King 2010). Therefore, this study
intends to assess, holistically, various indicators and provide the most common indicators
that firms should consider as for measuring HC. The study uses the HC indicators and
dimensions approach as the basis.

3 Methodology: Measurement Procedure for HC

The method for measuring HC constitutes three stages, identification, selection and pri-
oritization. Figure 1 presents the stages.

3.1 Stage 1: Identification

In Stage 1, identification, 95 potential dimensions and sub-dimensions of HC were iden-

tified from the literature that uses HC indicators and dimensions approaches (Becker 1962;
Mincer 1958; Schultz 1961; Bozbura et al. 2007; Abdullah et al. 2013). Table 1 reports
these dimensions and sub-dimensions, respectively.

3.2 Stage 2: Selection of Dimensions and Sub-dimensions

Using the dimensions and sub-dimensions exhibited in Table 1, we developed a ques-

tionnaire to select the most relevant among them. The questionnaire consisted of two parts,
with questions based on the Likert scale ratio, ranging from 1 to 3 (where 1 denotes not
important, 2 somewhat important and 3 very important). Part 1 of the questionnaire con-

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tained 40 potential dimensions of HC and Part 2 contained 55 sub-dimensions of HC.
Since

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Summary of dimensions and sub- dimensions of HC extracted

Identification

Expert Sampling

Questionnaires for prelimnary survey

Selection

Data collection from experts

Criteria to select relevant dimensions and sub-dimensions

Framing the problem

Data collection from experts(comparison)

Prioritization

Pairwise comparison

Consolidation--Finding Solution to the Problem

Fig. 1 Stages in measuring HC

the focus of the study was on SMEs in the manufacturing sector in Pakistan, SME experts
were used to select the relevant dimensions and sub-dimensions. Experts were selected
using the expert sampling technique; a non-probability sampling technique. This technique
is a sub-case of purposive sampling in which the researcher relies on his own expertise to
select the sampling unit. It involves the consolidation of a sample of individuals with some
definitive experience and expertise in a particular field. The first step in expert sampling is
identifying the meaning of the term ‘experts’. We divided experts into three categories,
namely, industry professionals, government officials and institutional executives who
deals with SMEs. All these experts have 10 years or more experience in dealing with
SMEs. The study selected 100 experts.1 Table 2 details the experts sampled for the
study.

1
We checked for outliers in the answers since the number of experts in each category is unbalance and do
not find any outliers. We also recalculated the mean values with a more balanced number of experts in each
category in order to assess the robustnessof the constructed HCI and we find the same dimensions to be
important with very small and insignificant differences in the priority values.

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 Measuring Human Capital in Small and Medium 6
Table 1 Potential dimensions and sub-dimensions of human capital
Part A Potential dimensions
Abilities Intrinsic value of employee
Attitude Knowledge
Behavior Leadership abilities
Capabilities Learning
Commitment Loyalty
Competence Motivation
Compliance Organizational tenure
Creativity Personal attributes
Cultural aspects Personal ethics
Disease Personal traits
Education Professional technique
Employee interpersonal network Quickness
Employee turnover Reputation
Employees values and beliefs Safety issues
Ethics Stability
Experience Skills
Health Spirit
Implicit knowledge Tacit knowledge
Innovation Training
Intellect (employee’s) Vision
Part B: Potential sub-dimensions
Similar industry experience Level of education
Work related experience Quality of education
Organizational tenure Technical education
Industry experience Years of schooling
Professional competence Cooperation
On the job training Motivation
Spending on training Commitment
Time on training Satisfaction
Technical Training Engagement
Soft skills training Passion
Previous training Emotional attachment
Interpersonal trainings Behavior
Professional trainings Vision
Creativity Absenteeism
Gender Longevity
Intelligence Turnover
Diversity Annual non- voluntary layoffs
Energy Physically strong
Leadership Age of employee
Risk taking Disease free
Personal ethics Energetic
Loyalty Charges &litigations
Work related skills Safety issues

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Table 1 continued

Problem solving skills Complaints

Communication skills Obedience
Technical skills ICT Skills
Entrepreneurial skills Interprenurial skills
Profession related skills

Table 2 Experts sampled

Expert group Stakeholders Number Total
sampled

Government Planning Commission of Pakistan 3 20

officialsa State Bank of Pakistan 3
Small and Medium Enterprises Development Authority 10
(SMEDA)
Trade Development Authority of Pakistan (TDAP) 4
Institutional Academia 6 20
expertsa Non-Governmental Organizations 6
Microfinance institutions 8
Industrial Textile 15 60
professionals Leather 10
Food 10
Metal 10
Furniture 10
Electronics 5
Total 100
a
10 years of experience in managerial capacities dealing with issues related to human capital
developments in SMEs including through capacity building

Once the selection is done, we need to define hierarchy of the goal, dimensions and the
sub-dimensions of HC. The primary goal is to develop an index that can comprehensively
explain the level of HC. Figure 2 indicates, hypothetically, how the AHP hierarchy can be
developed to measure a single HCI. The second and third levels of the hierarchy portray
the dimensions and sub-dimensions of HC.

3.3 Stage 3: Prioritization

The previous stage only identifies the relevant dimensions and sub dimensions of HC
based on the 100 selected experts and the development of the AHP hierarchy. The
prioritization stage assigns weightage to the selected dimensions and sub-dimensions of
HC, according to their importance, using the AHP hierarchy. After establishing the
hierarchy, a ques- tionnaire consisting of bi-polar questions using Saaty’s (1980) scale
(Table 3) that com- prises the dimensions and sub-dimensions of HC was designed to
collect the pair wise comparison judgments from the same 100 experts. The experts were
required to compare the importance across and within dimensions.

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 Measuring Human Capital in Small and Medium 6

Fig. 2 AHP model. Note: HC represents overall human capital; A, B, C, and N represent the dimensions of
HC; a, b, c, and n represents the sub-dimensions of HC and w represents the weightage of each dimensions
and sub-dimension

The AHP, a theory of measurement through pairwise comparisons, relies on the

judgements of experts to derive priority scales, which are then used to measure intangibles
in relative terms. The key concern of the AHP is to obtain consistency in the judgements.
The data collected from the questionnaires are processed to structure the corresponding
pairwise comparison judgment matrices (PCJM), to establish the normalized weights.
Each of these matrices is then converted into the largest eigenvalue problem and is solved
to find the normalized and unique priority weights for each criterion. Here, the consistency
ratio (CR) of each PCJM is also computed to check the consistency of the behavior of the
evaluators/experts. Saaty (1980) suggests that if the CR ratio exceeds 0.1, the set of
judgments may be too inconsistent to be reliable and must be repeated. If the CR equals 0,
the judgments are perfectly consistent. Therefore, a threshold of 0.05 illustrates that CR is
within the band and judgments are trustworthy for further calculating PCJM. We used a
software developed by Goepel (2013) to determine the normalized priority weights. To
further check any variability in the results, we also processed the data using two software
packages, namely DEXi and ChemDecide. The results obtained from both software and
manual calculations were found to be consistent. Once the normalized priority weights for
each PCJM have been calculated, the next step is to synthesize the solutions for the
derivation of the HCI. The normalized weights of dimensions and sub-dimensions of HC
are added together with respect to all succeeding hierarchical levels to attain the global
composite priority weights of all sub-dimensions of HC used in the third level of the AHP
model.

Table 3 AHP measurement Degree of importance Definition

Scale. Source: Saaty (1980)
1 Both dimensions are equally important
3 Weakly/moderately important
5 Strongly important
7 Very strongly important
9 Extremely important
2, 4, 6, 8 Intermediate values

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4 Results

Figures 3 and 4, respectively, shows the results of the selection of dimensions and sub-
dimensions (Stage 2). The results are arranged in descending order of their mean values.
We computed the mean values of each dimension and sub-dimensions of HC by

Experience
education
Training
Attitude
Skills
Personal Attributes
Stability
Health
Compliance
Employees' Interpersonal network
Employees' turnover
Employees' values and
beliefs
Capabilities
Abilities
Competence
Implicit Knowledge
Innovation
Employees' Intellect
Knowledge
Leadership abilities
Learning
Loyalty
Motivation
Organizational tenure
Creativity
Personal ethics
Personality traits
Professionalism technique
Quickness
Reputation
Commitment
Spirit
Tacit Knowledge
Behavior
Intrinsic value of
employee
Ethics
Vision
Cultural aspects
Disease
Safety issues

0 0.5 1 1.5 2 2.5 3

Fig. 3 Dimensions of HC (Mean Value)

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Work related experience

On the job training
Technical education
Similar industry experience
Satisfaction
Work related skills
Organizational tenure
Level of education
Previous training
Intrapreneural skills
Engagement
Communication skills
Quality of education
Technical trainings
Employees turnover
Intelligence
Diversity
Leadership
Interpersonal trainings
Times on training
Problem solving trainings
Communication skills
Technical skills
Spending’s on training
Absenteeism
Motivation
Commitment
Creativity
Risk Taking
Longevity
Cooperation
Physical strength
Age of employee
Safety issues
Charges & litigations
Complaints
Disease free
Behavior
Industry experience
Energetic
Obedience
Years of schooling
Professional competence
Entrepreneurial trainings
ICTs Trainings
Personal Ethics
Loyalty
Internet skills
Entrepreneurial skills
Energy
Passion
Emotional attachment
Vision
Annual non-voluntary layoffs
Gender
0 0.5 1 1.5 2 2.5 3

Fig. 4 Sub-dimensions of HC (Mean Value)

multiplying the percentage of respondents with the values of 1, 2 and 3, which represent
‘‘important’’, ‘‘somewhat important’’ and ‘‘not important’’ respectively. In order to
choose the important dimensions and sub-dimensions, we followed Tam and Tummala’s
(2001) approach of using the average of the maximum and minimum mean values. The
cut-off

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Human Capital

Education Experience Training Skills Attitude Personal Stability Health Compliance

Attributes Longevity
Technical
skills
Communication Turnover
skills Absenteeism
Problem solving Longevity
Organizational skills
Intrapreneurial skills Turnover
tenure
Work related skills Absenteeism
Similar Industry On the job trainings
experience Satisfaction Creativity
Previous trainings
Motivation Diversity Charges &
Work related Interpersonal litigations
experience trainings Engagement Intelligence
Spending on trainings Safety issues
Quality of Education
Time on trainings Cooperation Leadership
Level of Education Complaints
Technical trainings Commitment
Technical Education Risk Taking

Fig. 5 AHP Hierarchy: selected dimensions and sub-dimensions of HC

mean for dimensions and sub-dimensions are 2.45 and 2.20 respectively. Among the 40
identified HC dimensions, 9 dimensions have mean values greater than 2.45, which are
regarded as important dimensions of HC. They are experience, education, training, skills,
attitude personal attributes, compliance, health and stability. These dimensions are viewed
as the most important dimensions in the SMEs. As for the sub-dimensions, among 55 sub
dimensions of HC, 36, reported mean values higher than the cut-off value of 2.20 (Fig. 4).
These 36 sub-dimensions are important in representing the 9 main dimensions of HC,
namely education, experience, training, skills, attitude, personal attributes, stability, health
and compliance. We then placed these 36 HC sub-dimensions under the relevant 9
dimensions. Hence, Fig. 5 forms the AHP hierarchy.
Tables 4 and 5 show the results of the pairwise comparison that assigns priority—the
analysis of data based on the AHP hierarchy. It reports the PCJM of the HC dimensions
and sub-dimensions respectively. As indicated in Table 4, within the 9 dimensions, based
on the priority values—experience (0.21), skills (0.16), education (0.12), abilities (0.12)
and training (0.11) have been the most important dimensions. Likewise, as reported in
Table 5, the most important sub-dimensions within experience is work-related experience
(0.40) and organizational tenure (0.33). As for skills, the sub-dimensions valued the most
important are work related skills (0.35) and problem solving skills (0.25). For education,
relatively what matters most is the quality of education (0.40) and technical education
(0.33). Further, the most important abilities are diversity (0.33) and creativity (0.21).
Based on the results, the study was able to overcome some of the limitations of the past
studies by identifying the important dimensions and sub-dimensions of HC. These
dimensions can be tested and verified against different industries and prioritization can be
further developed so that specific HC policies can be formulated based on the specific
industrial or sectorial needs.
Table 6 reports the derivation of the composite index known as the HCI. Since the
measure assigns weights based on importance, it is a better measure to capture HC at firm
level. This index can be developed for individual firms to measure their HC. Thus it
avoids the biasness of using any single measure or few selective measures with
weights as reported in previous studies. In assessing the HCI at firm level, one can use
close-ended questionnaire carrying at least three questions on each HC dimensions and
ask the human

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Table 4 Pairwise Comparison Judgment Matrices (PCJM)—Main Dimensions

Human capital Education Experience Training Personal abilities Skills Attitude Employee stability Health Compliance Priority

Education 1.00 0.25 1.91 1.91 0.52 1.12 3.27 1.91 1.71 0.12
Experience 3.98 1.00 1.91 1.12 1.12 2.92 2.03 4.22 4.72 0.21
Training 0.52 0.52 1.00 1.91 0.65 3.27 1.44 2.76 0.78 0.11
Personal Abilities 0.52 0.89 0.52 1.00 0.52 7.00 2.76 1.12 1.12 0.12
Skills 1.91 0.89 1.53 1.91 1.00 6.08 2.47 1.71 1.00 0.16
Attitude 0.89 0.34 0.31 0.14 0.16 1.00 0.58 1.12 2.54 0.06
Stability 0.31 0.49 0.69 0.36 0.41 1.71 1.00 1.91 0.78 0.07
Health 0.52 0.24 0.36 0.89 0.58 0.89 0.52 1.00 2.47 0.07
Compliance 0.58 0.21 1.29 0.89 1.00 0.39 1.29 0.41 1.00 0.08
CR 0.03
1

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Table 5 Pairwise comparison judgment matrices (pcjm)—sub-dimensions

Education Level of education Quality of education Technical education Priority

Level of education 1.00 0.75 0.75 0.27

Quality of education 0.33 1.00 0.33 0.40
Technical education 0.33 0.75 1.00 0.33
CR 0.01
Experience Similar industry Work related Organizational Priority
experience experience tenure

Similar industry experience 1.00 0.75 0.75 0.27

Work related experience 0.33 1.00 0.33 0.40
Organizational tenure 0.33 0.75 1.00 0.33
CR 0.01

Training Time on training Technical training Priority

On the job training 0.75 0.89 0.18

Spending on training 1.00 0.43 0.10
Time on training 1.00 0.67 0.11
Technical training 0.57 1.00 0.20
Soft skills training 0.20 0.50 0.12
Previous training 3.00 0.83 0.29
CR 0.06

Personal abilities Creativity Intelligence Diversity Leadership Risk taking Priority

Creativity 1.00 0.37 0.50 1.00 0.33 0.21

Intelligence 0.33 1.00 0.28 0.37 0.50 0.08
Diversity 2.00 1.50 1.00 0.62 2.00 0.33
Leadership 1.00 1.42 0.60 1.00 0.16 0.21
Risk taking 0.75 0.25 0.50 0.85 1.00 0.17
CR 0.05
Skills Work Problem Communication Technical Intrepreneurial Priority
related solving skills skills skills
skills skills

Work related skills 1.000 0.333 0.800 1.111 4.000 0.352

Problem solving skills 0.750 1.000 0.333 0.250 1.500 0.255
Communication skills 0.429 0.500 1.000 0.714 0.500 0.137
ICT skills 0.400 0.800 0.429 1.000 0.333 0.187
Intrepreneurial skills 0.250 0.286 0.444 0.333 1.000 0.070
CR 0.010

Attitude Cooperation Motivation Commitment Satisfaction Engagement Priority

Cooperation 1.000 0.500 1.000 0.333 0.333 0.103

Motivation 0.889 1.000 0.400 0.571 0.400 0.175
Commitment 1.000 0.500 1.000 0.333 0.333 0.097

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 Measuring Human Capital in Small and Medium 6
Table 5 continued

Attitude Cooperation Motivation Commitment Satisfaction Engagement Priority

Satisfaction 3.000 0.714 1.750 1.000 0.500 0.265

Engagement 1.556 0.857 1.714 0.833 1.000 0.361
CR 0.015

Stability Absenteeism Longevity Turnover Priority

Absenteeism 1.00 0.86 0.40 0.22

Longevity 0.17 1.00 0.50 0.26
Turnover 1.00 2.00 1.00 0.53
CR 0

Compliance Charges and Litigations Safety issues Complaints Priority

Charges and Litigations 1.00 0.86 1.00 0.38

Safety issues 0.50 1.00 0.50 0.20
Complaints 1.00 2.00 1.00 0.42
CR 0

Health Physically strong Age of employee Disease free Priority

Physically strong 1.00 0.62 0.60 0.24

Age of employee 0.57 1.00 0.28 0.40
Disease free 0.66 0.77 1/00 0.35
CR 0.01

resource (HR) managers to rate the dimensions. The rating is then multiplied to the global
weights (GW) providing the HC values for each dimension. Once all the values are added,
we can measure the overall HCI for the firm.

5 Conclusion

An accurate measurement of HC is important for devising correct HC policies. This study

uses a three-fold approach to develop the HCI at firm level. After identifying 95 dimen-
sions and sub-dimensions of HC, we conducted a survey to select the most relevant among
them for the SMEs in Pakistan. We identified 9 dimensions and 36 sub-dimensions of the
HC. We further showed how to measure and apply the HCI at firm level so that a more
realistic measure of HC can be derived. An industry-specific HCI can be developed for
most countries by adopting the same methodology proposed in this study. Future research
can also consider techniques like the Technique for Order Preference by Similarity to Ideal
Solution (TOPSIS), fuzzy AHP and Outranking for the prioritization of HC dimensions
and sub-dimensions. These alternative techniques can be adopted to compare with the
AHP and also to check for the consistency of the results.

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Table 6 Derivation of human capital index (HCI)

Goal Dimensions Local Sub-dimensions Local Global

weight weights weights

Human Education 0.12 Level of education 0.270 0.033

capital
Quality of education 0.400 0.050
Technical education 0.330 0.041
Experience 0.21 Similar industry 0.270 0.057
experience
Work related experience 0.400 0.085
Organizational tenure 0.330 0.069
Training 0.11 On the job training 0.180 0.020
Spending on training 0.100 0.011
Time on training 0.110 0.012
Technical training 0.200 0.022
Soft skills training 0.120 0.014
Previous training 0.290 0.033
Personal 0.12 Creativity 0.206 0.025
Abilities Intelligence 0.078 0.009
Diversity 0.330 0.040
Leadership 0.209 0.025
Risk taking 0.167 0.020
Skills 0.16 Work related skills 0.352 0.057
Problem solving skills 0.255 0.042
Communication skills 0.137 0.022
Technical skills 0.187 0.030
Intrapreneurial skills 0.070 0.011
Attitude 0.06 Cooperation 0.103 0.006
Motivation 0.175 0.010
Commitment 0.097 0.006
Satisfaction 0.265 0.016
Engagement 0.361 0.022
Stability 0.07 Absenteeism 0.220 0.015
Longevity 0.260 0.017
Turnover 0.530 0.036
Health 0.07 Physically strong 0.240 0.016
Age of employee 0.410 0.028
Disease free 0.350 0.024
Compliance 0.08 Charges & litigations 0.380 0.029
Safety issues 0.200 0.015
Complaints 0.420 0.032
Total 1 9.000 1.00

Acknowledgements We acknowledge financial support from the University Malaya—Grant Number PG-
124-2014A.

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 Measuring Human Capital in Small and Medium 6
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