UNIT 1

Strategic Human Resource Management

Strategic HRM can be regarded as a general approach to the strategic management of human
resources in accordance with the intentions of the organization on the future direction it wants to
take. It is concerned with longer-term people issues and macro-concerns about structure, quality,
culture, values, commitment and matching resources to future need.

MODELS OF STRATEGIC HRM

Kazmi and Ahmad (2001) classify various definitions of strategic human resource
management (SHRM) based on strategy-focused, decision-focused, content-focused and
implementation- focused approach. According to the strategy-focused approach, which is supported
by authors like Mathis and Jackson (1985), and Beer, Spector, Lawrence,

Mills, and Walton (1984), HRM is strategic by its very nature and all its elements have
strategic linkages. The decision-focused approach formulated by Devanna et al. (1981) is based on
three decision-making levels, namely operational, managerial and strategic and considers HRM at
strategic level to be SHRM. According to content-focused approach that is proposed by
Torrington and Hall (1995), SHRM emerges when HRM elements match the organization’s
strategy.According to the implementation-focused approach that is brought forward by Miles and
Snow (1984), SHRM is when HRM systems help in the formulation and implementation of
business strategies. One of the models of SHRM based on the implementation –focused approach
is given in figure 1.1
 SCHULER, R.S. (1992) defines Strategic Human Resource management as all those activities
affecting the behavior of individuals in their efforts to formulate and implement the strategic needs
of business. Boxall and Purcell say that Strategic HRM is concerned with explaining how HRM
influences organizational performance.

Dyer and Holder define Strategic HRM in three levels which are as follows:

 Organizational level - because strategies involve decisions about key goals, major
policies and the allocation of resources they tend to be formulated at the top.
 Focus - strategies are business-driven and focus on organizational effectiveness; thus in
this perspective people are viewed primarily as resources to be managed toward the
achievement of strategic business goals.

 Framework - strategies by their very nature provide unifying frameworks which are at
once broad, contingency-based and integrative. They incorporate a full complement of
HR goals and activities designed specifically to fit extant environments and to be
mutually reinforcing or synergistic

 Miles and Snow (1984) define SHRM as a human resource system that is tailored to the
demands of the business strategy. Wright and McMahan (1992) define SHRM as the
pattern of planned human resource activities intended to enable an organization to achieve
its goals.

 Strategic human resource management (SHRM) is a concept that integrates traditional

human resource management activities within a firm’s overall strategic planning and
implementation. SHRM integrates human resource considerations with other physical,
financial, and technological resources in the setting of goals and solving complex
organizational problems (Legnick-Hall & Legnick-Hall, 1988). SHRM also emphasizes the
implementation of a set of policies and practices that will build employee pool of skills,
knowledge, and abilities (Jackon and Schuler 1995) that are relevant to organizational
goals. Thus a larger variety and more complete set of solutions for solving organizational
problems are provided and the likelihood that business goals of the organization will be
attained is increased (Mechelin, 1996).

 SHRM involves the development of the consistent, aligned collection of practices,

program and policies to facilitate the achievement of the organizational strategic objective.
Integrating the HR programs and policies with organizational mission and objective is the
main focus of SHRM. This can be explained by Ulrich’s model of HR function which
integrates operational and strategic nature of the HR professionals. According to Ulrich
one of the four roles of HR personnel is to become strategic business partner.
 Figure 1.1 Model of Strategic HRM

Dyer and Holder define Strategic HRM in three levels which are as follows:

 Organizational level - because strategies involve decisions about key goals, major
policies and the allocation of resources they tend to be formulated at the top.
 Focus - strategies are business-driven and focus on organizational effectiveness; thus in
this perspective people are viewed primarily as resources to be managed toward the
achievement of strategic business goals.
 STRATEGIC HR VS TRADITIONAL HR

The below table depicts the differences between the traditional and strategic Human
Resource functions.

Table Differences between Strategic and Traditional HR

 Barriers to Strategic HRM

 Short term mentality

As most of the HR interventions or practices have long-term implications,short-term
oriented actions can hamper effective HRM.As the evaluation of an organization’s CEO’s is
being evaluated by the current performance, no one wants to listen to long-term views.
 Unable to think Strategically

HR managers’ insufficient general management training or inability to nfluence colleagues

in other departments is seen as a constraint. Thus HR managers are unable to perform strategic
functions related to HRM

 Can’t understand the entire organization, issues and challenges

HR managers are unable to have the conceptual view of the organization, which is a great
challenge in the implementation of SHRM in the organizations.

 Lack of appreciation

Senior managers lack appreciation for the values of HR and its ability to contribute to the
organization.

 Lack of support from line managers

Few functional managers see themselves as the HR manager as well and are concerned more
with technical aspects of their area of respect that the human aspects. For SHRM to happen, the
cooperation of the line managers is a must. HRM is more of a line managers’ responsibility with
the increasing strategic importance of HR and this requires a closer relationship between HR and
line managers. The inclusion of line managers in the HR policymaking process is a critical element
of SHRM.

 Difficulty in quantifying many of the outcomes and benefits of HR programs

Human resource programs result in a more qualitative benefits rather than quantifying benefits.
These qualitative benefits are highly challenging to make it quantitative for evaluation of the HR
program. Example: Team building

 Human assets are not owned by the organization

 Technology, Information are ready to spend

 Forgets that Technology and Information must be utilized by people.

  Change Resistance

Implementation of SHRM may involve drastic changes in the work practices and other
HR processes and hence may affect a lot of employees. Bringing about change is a difficult
process and people who have faced negative consequences of an unsuccessful effort to change
may obstruct the change processes of the future. HR practices cannot change according to the
business needs. Most of the HR practices tend to get fixed as something permanent and then it
becomes difficult to change.

 Improper implementation

The success of the HR program lies in the way it is getting implemented in the
organization. Improper efforts to implement the HR programs are the main reason for the
failure of those programs.

The other barriers include:

1. Resisting the vision and mission of the change effort.
2. Interdepartmental conflict.
3. The lack of commitment of the entire senior management team.
4. Lack of plans to integrate internal resource with external requirements.
5. Limited time, money and the resources.
6. The status quo approach of employees.
7. Fear of incompetence by senior level managers to take up strategic steps.
8. Fear towards victimization in the wake of failures.
9. Improper strategic assignments and leadership conflict over authority.
10. Ramifications for power relations.
11. Resistance that comes through the legitimate labor institutions.
12. Rapid structural changes.
13. Economic and market pressures influenced the adoption of strategic HRM.
14. More diverse, outward looking approach.

Benefits of SHRM
1. Identifying and analyzing external opportunities and threats that may be crucial to the
company’s success.
2. Provides a clear business strategy and vision for the future.
3. To supply competitive intelligence that may be useful in the strategic planning process.
4. To recruit, retain and motivate people.
5. To develop and retain of highly competent people.
6. To ensure that people development issues are addressed systematically.
7. To supply information regarding the company’s internal strengths and weaknesses.
8. To meet the expectations of the customers effectively.
9. To ensure high productivity.
10. To ensure business surplus thorough competency
 The importance of adopting an investment perspective of Human Resource
Management
The notion of viewing human resource as human asset, and adopting an investment perspective
enable the organization to invest in people in order to earn the best return from them (Mello,
2005).

When an organization views human resource as an investment, rather than a variable cost, it has
to consider costs, risks and return when making human resource decisions. The organization has
to consider the suitability of the candidates to the jobs, and to train them much like servicing
machineries. The opportunity cost of releasing the employees for training has to be considered
along with the cost of conducting such trainings when comparing the return from those trainings
such as potential increase in loyalty and motivation.

Adopting an investment perspective allows the management to consider the risk of investment in
human resource and to device strategies to avoid those risks as well. Even though, human
resource cannot be duplicated or imitated by the competitors as easily as other assets such as
technology and facilities, the employees themselves have their freewill to move to competing
companies (Mello, 2005).

 ADOPTING AN INVESTMENT PERSPECTIVE

1. Characterizing employees as human assets implies the strategic management of human
resources should include considering HR from an investment perspective.

2. Cost/Benefit basis analysis may be used to evaluate HR programs, such as training and
development.

3. Investment perspective toward human assets facilitates their becoming a competitive

advantage as most other resources/assets can be cloned, copied or imitated by competitors.

4. A strategic approach to HR, however, does not always involve a human relations approach to
employee relations, as noted in the Managing Employees at United Parcel Service example

5. Investments in employees must be undertaken in tandem with strategies to retain employees

long enough to realize an acceptable return on investments in employees. This requires valuation
of the employee as an asset, which can be difficult to do.

 HUMAN RESOURCES INVESTMENT CONSIDERATIONS

• Management values.

• Risk and return on HR investment.

• Economic rationale for investment in training.

• Utility theory.

• Outsourcing.

 AN INVESTMENT PROSPECTIVE OF HUMAN RESOURCE MANAGEMENT

• HRM practitioners & Scholars have long advocated that HR should be viewed from investment
prospective.

• Current practices indicate employees as valuable investment but still some organizations view
employees as variable cost and their is little recognition about employees training &
development, recruitment & replacement cost.

• Investment only in physical resources does not give organizations a competitive edge as
systems, processes can be duplicated, cloned or reversed engineered.

• Maintainable edge / advantage drives from the level of skills of employees, their knowledge
and capabilities.

• Management scholar Edward Lawler described investment in Human Resources as:

• “to be competitive , organizations in many industries must have highly skilled and
knowledgeable workforce. They must also have a relatively stable labour force since employee
turnover works directly against obtaining the kind of coordination and organizational learning
that leads to fast response and high quality products and services.”

• Due to forecast of shifts in skills need from manual to cerebral (intellectual) , investment for
enhancing employees knowledge & skills become more important.

 INVESTMENT IN TRAINING & DEVELOPMENT

• Investment in employability. – (Training, internship, higher level exposure, learning
environment, multi- skilling & growth opportunities etc. which makes employees more
employable

. • Investment in training. – For future strategies and competitive advantage investment in

employees training and development to enhance skills to face rapid technological changes. • On
job training.. • Investment in management development.

• Prevention of skills obsolescence.

• Reduction in career plateauing. (stagnation) Investment practices for improved retention:

• Organizational culture emphasizing interpersonal relationship values.

• Effective selection procedures.

• Compensation and benefits.

• Job enrichment and job satisfaction.

• Practices providing work life balance.

• Organizational direction creating confidence in the future. • Retention of technical employees.

• Other practices in facilitating retention.

 Investment in job secure workforce:

• Employment security/ job guarantee.

• Recognition of the cost of downsizing and lay-offs.

• Avoiding business cycle-based lay-offs.

• Alternatives to lay offs. – Redeployment. – Curtailment of sub contracts. – Reassignment of

work to company employees. – Pay cuts. – Paid / unpaid leaves.

• Ethical implications of employment practices

• Non traditional investment approaches. – Investment in disabled employees. – Investment in

employee health. – Countercyclical hiring .-keeping highly technical / skilled for future use when
company will have normal operations– bhatta business.

REASONS WHY YOU NEED TO INVEST IN EMPLOYEE TRAINING:

1. Support succession planning. Providing ongoing employee training and development supports
succession planning by increasing the availability of experienced and capable employees to
assume senior roles as they become available. Increasing your talent pool reduces the inherent
risk of employees perceived as “irreplaceable” leaving the organization. Areas of training that
support succession planning include leadership, strategic decision making, effective people
management, and role-specific skills.

2. Increase employee value. Effective training can be used to “up-skill” or “multi-skill” your
employees. Up-skilling involves extending an employee’s knowledge of an existing skill,
providing more experts within a subject area. Multi-skilling is the process of training employees
in new or related work areas to increase their usability within the organization. Employees with
diverse skill sets can perform a variety of tasks and transition more easily into other roles within
the organization.
3. Reduce attrition rates. Investing in the development of your employees can reduce attrition
rates. Well-planned training can provide career pathways for employees making retention within
the organization rather than seeing them seeking next-level opportunities elsewhere. Another
positive is a reduction in recruitment costs.

4. Enhance operational efficiency. Training your employees can increase their efficiency and
productivity in completing their daily work tasks. Training can also help your organization
achieve greater consistency in process adherence, making it easier to project outcomes and meet
organizational goals and targets. 5. Exceed industry standards. Training your employees in
industry-standard best practices could also assist you in building your reputation, giving your
competitors a run for their money! Many businesses operate in saturated markets, so often it’s
the small things that will set your business apart from the rest.

INVESTMENT PRACTICES IN IMPROVED RETENTION

10 Ways to Improve Employee Retention Is your employee retention at an all-time high? Can't
seem to scare employees off if you try? Congratulations. But, if you're one of the many
businesses that sees high employee turnover as a problem, you may wonder what you can do to
retain your most valued workers. In an increasingly competitive business world, top talent is in
high demand. If you aren't making your top workers happy, another company may come along to
steal them away. Here are ten tips that will help you make sure your employees are around for
many years

 Create the Right Culture

Finding employees who will feel a strong bond with your company starts with creating an
environment that attracts those employees. Your company culture should match the type of
employee you want to employ, whether you opt for a by-the-book, strict workplace or a more
casual, laid-back atmosphere.

 Hire the Right Employees

As you're screening candidates, pay close attention to signs that you may have a job-hopper.
While there's nothing wrong with someone switching jobs if it provides career advancement,
look for someone who is interested in growing with your company rather than getting experience
to take somewhere else.

 Offer Training
Businesses expect their professionals to arrive fully trained and certified. Yet too many aren't
willing to invest in helping them maintain those credentials. Whether you send employees to a
learning center or you provide membership to one of the many e-learning sites available, when
you take your employees' education seriously, they see it as an investment in their career.
  Provide Guidance
Your employees should be fully aware of their job duties and how they're doing in performing
them. You can accomplish this by first having a job plan in place and providing regular feedback
on an employee's performance. If an employee feels confused about his role in your organization,
he's more likely to feel disgruntled and begin searching for something else.

 Pay Well
As difficult as it is to pay competitive salaries when funds are low and budgets are tight,
calculate the cost to replace employees. It can cost as much as 30 percent to 50 percent of an
entry-level employee's annual salary just to replace him. Employees often find they can enjoy a
10 to 20 percent salary increase by simply moving from one company to the next, which makes
jumping ship attractive.

 Don't Punish
Competence Managers often spend much of their time on employees who are struggling, leaving
the talented ones completely neglected. Over time, this can lead to resentment as star employees
start to feel unnoticed and unsupported. Managers must make an effort to let top performers
know their hard work isn't going unnoticed.

 Be More Flexible
Workers have expressed a preference for flexible working conditions. If you expect your best
employee to answer his phone when a client calls at seven o'clock on a Friday night, you should
also understand when that employee comes in late one morning or needs to take off early.

 Offer Benefits
Small businesses often struggle to compete with larger corporations in providing benefits. While
you don't have to beat big business in the healthcare options you offer, you can offer things they
won't get elsewhere, such as the ability to work from home, more flexible vacation offerings, and
performance bonuses.

 Provide Unique Perks

Another way businesses can compete without breaking the budget is through offering perks they
can't get elsewhere. Silicon Valley has become notorious for its free meals and nap pods, but you
can increase retention by coming up with creative perks. Use your connections to get free VIP
tickets to special events or special discounts at local retailers.

 Don't Take Yourself Too Seriously

As much work as you try make your company attractive to talented people, the truth is
employees might be leaving because of their bosses. In fact, research has shown people tend to
quit their bosses, not companies. If you can cultivate an environment where employees feel
rewarded and gratified, you'll already be ahead of a great deal of other bosses out there.
HUMAN RESOURCE INVESTMENT CONSIDERATIONS

Several factors will be considered in the discussion of strategic human resource investment
decisions. As noted earlier, these will include management’s values, views of risk, the economic
rationale for investment in training, utility theory, and alternatives to human resou1rce
investments. Investments in training are covered in this section because they are fundamental to
the formation of human capital. Firms also invest in many other human resource practices with
the expec-tation that there will be impacts on performance and financial returns.

 Management Values
Fundamental values must be addressed in many human resource issues, particularly those
involved in major strategic initiatives. When senior managers formulate and implement
strategies, their values and philosophies are communicated to members of the organization
through human resource policies and practices. For example, senior managers who are
committed to the preservation of the organization’s human resources can manage the stress
associated with major strategic events, through such measures as dealing with rumors and
providing accurate information, so that misinformation does not have such a debilitating impact
on employees.

 Risk and Return on Investment

Although there are a number of important benefits to investments in human resources, such
investments contain an element of risk. Investing in human resources is inherently more risky
than investing in physical capital because the employer does not own the resource. Employees
are free to leave, although contractual arrangements may limit their mobility. In order for
investments in human resources to be attractive, the returns must be great enough to overcome
the risks. Further, for some investments, such as cash outlays to maintain no-layoff policies, the
benefits are not easily quantified and there are meaningful costs. Decision makers have to be
prepared to trade off current costs for long-term strategic benefits, such as a more flexible,
committed workforce and related positive aspects of the organizational culture to which such
policies contribute

 Current Practices in Training Investments

As indicated earlier, heavy investments in training will be necessary for future strategies and
competitive advantage. Nonetheless, U.S. companies seem to lag behind the practices of
companies in several other industrialized countries. For example, a study by the Congressional
Office of Technology Assessment reported that “auto workers in Japan receive more than three
times as much training each year as workers in American-owned assembly plants in the U.S.”
U.S. workers not going on to college do not receive the training of their counterparts in other
industrialized countries. In contrast, technical workers in other industrialized countries are often
trained in welldeveloped apprenticeship programs. Approximately 59 percent of the German
workforce has been trained through apprenticeships. In Japan, new employees often receive
months of training by their employers. Japanese companies are investing in human resources by
training these workers. There are some notable exceptions to the U.S. tendency to lag behind the
Japanese and Germans in employee training. One of the most progressive examples of
investment in training technical and production workers is provided by Corning, Inc. Corning’s
experience demonstrates that a company can earn high returns by investing in human resources.

INVESTMENT IN MANAGEMENT DEVELOPMENT

The continued development of managerial personnel is a critical strategic issue in most

organizations and a particularly difficult challenge given the massive shifts in strategy. Before
considering management development, it is useful to quickly review some evolving and
forecasted trends in the managerial environment. It is clear that organizations are becoming less
hierarchical and that many middle-management positions have been eliminated. Further, larger
numbers of workers are better educated and many are professionals. As a result, they expect to
participate more in decision making. In the future, more work is expected to be performed in task
force or project teams, power will be shared, managerial status will be deemphasized, and
leadership responsibilities may be rotated. Because of the participative aspect of these
empowerment trends, many professionals and highly educated employees may have more
exposure to managerial responsibilities and may develop related skills as a natural part of their
work. An important management development approach has been to rotate managers through
successively more challenging assignments. Frequently, these job rotation programs seek to
provide a broad view of the organization and as a result, may involve interdepartmental or
crossfunctional assignments . Use of job rotational programs is positively correlated with
company size and is used most in transportation and communications and least in service
industries.

INVESTMENT PRACTICES FOR IMPROVED RETENTION

Companies invest in their workforces when they pursue practices and develop programs that
increase retention. By failing to make such investments, they incur the high costs of turnover.
Coarse-grained estimates place the costs of turnover at 150 percent of exempt employees’
compensation and at 175 percent for nonexempt employees. The determinants of turnover are
reasonably well under-stood as there has been a great deal of research on the topic. Accordingly,
there are sound practices that employers can follow in order to retain their employees.

 Organizational Cultures Emphasizing Interpersonal Relationship Values

One of the most important determinants of employee retention is the organization’s culture. By
investing in human resource practices that ultimately affect the organization’s culture, firms can
influence retention. A longitudinal analysis examined the retention of 904 college graduates
hired by public accounting firms over a six-year period. The study found a difference in retention
related to the culture of the firms. For employees of firms with cultures characterized by
interpersonal relationship values (respect for people and a team orientation), the median for
retention was 14 months longer than in firms with cultures reflecting task values (detail and
stability). Interestingly, the effects of the culture emphasizing interpersonal values appeared to be
universal and were not contingent on employee characteristics. Other research has found higher
retention in “fearless cultures” in which employees can speak up in order to challenge the status
quo without being concerned about retribution. Retention improves with other related aspects of
culture such as positive relationships with superiors, absence of conflict-laden relationships,
having input into decisions, less emphasis on formal authority, information sharing, and support
for employees.

 Effective Selection Procedures

When firms hire employees that match well with the organization, the job, and their coworkers,
there is an increased likelihood of retention. Recent survey research indicates that careful
selection is the most widely used method for retaining front-line employees. In addition to the
use of selection procedures, such as valid tests and improved interviewing processes to obtain
better job matches between employee job qualifications, the use of realistic job previews (RJPs)
also can increase retention. RJPs attempt to show applicants what the actual job is going to be
like. As a result, there is less likelihood that applicants will accept jobs that fail to conform to
their expectations. The exact means by which RJPs influence retention is the subject of some
debate because there are several variables that can have an impact on their ability to affect
retention. Nonetheless, RJPs provide a useful means for increasing retention in many
circumstances. In addition, the use of biodata, which are data on objective characteristics such as
years of experience, bilingualism, and college education, improves retention.

 Compensation and Benefits

Equitable compensation is important for employee retention. In turn, greater compensation
equity occurs with fair appraisal reviews, equitable ratios of inputs (e.g., effort, skill, education)
to outputs (various rewards), exclusion of politics in compensation decisions, fair compensation
structures, and communication of compensation procedures. Increased retention also occurs with
performance-based compensation, pay incentives, and benefits that are valued by employees. Not
surprisingly, the most frequently used approach for retaining senior executives is to improve
their compensation and benefits. Companies in Fortune’s top 100 list typically offer both high
compensation and generous benefits. For example, Merck has extraordinary benefits, and its pay
ranks at the top of the scale. Merck employees have received $60,000 in stock options over the
past decade while the average stock option gain for nonexecutives at Cisco Systems has been
$150,000. At WRQ soft-ware, employees pay nothing for their health care. At J. M. Smucker,
the jelly maker, voluntary turnover in a recent year was only 5 percent. One of the company’s
benefits is a savings plan for which the company provides 50 percent matching contributions.

 Job Enrichment and Job Satisfaction

Job-enrichment practices, such as those building in increased responsibility or autonomy,
knowledge of results, meaningful work, knowledge of how assigned tasks contribute to the
greater activity of the larger organization, and skill variety, have been found to produce moderate
reductions in turnover. Practices that enhance job latitude and job satisfaction also have a
positive impact on employee retention. However, when high-performing employees feel
undervalued, they tend to have higher turnover rates. Another company from Fortune top 100
companies provides a good example of the retention effects of job enrichment and job
satisfaction: “Being at a good company is like having a good wife,” says Floyd Williams, a
senior production manager at sports gear maker K2 (No. 52), who gushes about the opportunity
to work on as many as 25 projects at a time. “When you get used to a certain level of freedom
and excitement, you don’t want to leave.” In fact, none of Williams’ three marriages has lasted
as long as his 28- year career with the company. “One wife told me it was either K2 or me. And I
said, ‘Well, I’m not leaving K2!’

 Practices Providing Work Life Balance

In addition to job-related factors and the work environment, the opportunity to obtain a balance
between work and home life also has a positive impact on retention. Alternative work schedules,
child care services, and provisions for family leave also facilitate retention. (The Family and
Medical Leave Act sets minimum standards for family leave.) Conversely, unreasonable
workloads are associated with turnover. It is no surprise that many companies in Fortune’s list of
the best 100 companies to work for provide such benefits. Flextime is offered at 59 of these
companies, while 18 provide opportunities for telecommuting. These top employers include a
wide range of practices for balancing work and family life. For example, Deloitte and Touche
has adopted flextime and telecommuting practices. Janus Investments has generous timeoff
practices. Unum provides subsidized child care for employees earning less than $40,000. The
accounting firm Plante and Moran provides child care on Saturdays during tax season. The SAS
Institute, the statistical software developer, has a 35-hour week and provides employees child
care at a rate of $250 per month. It also provides 12 holidays per year and free medical care on
site. At First Tennessee Bank, 91 per-cent of employees are on flextime. Behavior. Nonetheless,
another empirical study that employed an experimental design, with experimental and control
groups drawn from two companies, found increased quitting behavior to be associated with
training, financial incentives, and competition.
What Is Human Capital?
The term human capital refers to the economic value of a worker's experience and skills. Human capital
includes assets like education, training, intelligence, skills, health, and other things employers value such
as loyalty and punctuality.

As such, it is an intangible asset or quality that isn't (and can't be) listed on a company's balance sheet.
Human capital is perceived to increase productivity and thus profitability. The more investment a
company makes in its employees, the chances of its productivity and success become higher.

History of Human Capital

The idea of human capital can be traced back to the 18th century. Adam Smith referred to the concept in
his book An Inquiry into the Nature and Causes of the Wealth of Nations, in which he explored
the wealth, knowledge, training, talents, and experiences of a nation. Adams suggested that improving
human capital through training and education leads to a more profitable enterprise, which adds to the
collective wealth of society. According to Smith, that makes it a win for everyone.1

In more recent times, the term was used to describe the labor required to produce manufactured goods.
But the most modern theory was used by several different economists including Gary Becker
and Theodore Schultz, who invented the term in the 1960s to reflect the value of human capacities.2

Schultz believed human capital was like any other form of capital to improve the quality and level
of production. This would require an investment in the education, training, and enhanced benefits of an
organization's employees.3

Criticism of Human Capital Theories

The theory of human capital has received a lot of criticism from many people who work in education and
training. In the 1960s, the theory was attacked primarily because it legitimized bourgeois individualism,
which was seen as selfish and exploitative. The bourgeois class of people included those of the middle
class who were believed to exploit those of the working class. The theory was also believed to blame
people for any defects that happened in the system and of making capitalists out of workers.

Understanding Human Capital

An organization is often said to only be as good as its people from the top down, which is why human
capital is so important to a company. It is typically managed by an organization's human
resources (HR) department, which oversees workforce acquisition, management, and optimization. Its
other directives include workforce planning and strategy, recruitment, employee training and
development, and reporting and analytics.

The concept of human capital recognizes that not all labor is equal. But employers can improve the
quality of that capital by investing in employees. This can be done through the education, experience,
and abilities of employees. All of this has great economic value for employers and for the economy as a
whole.

Since human capital is based on the investment of employee skills and knowledge through education,
these investments in human capital can be easily calculated. HR managers can calculate the total profits
before and after any investments are made. Any return on investment (ROI) of human capital can be
calculated by dividing the company’s total profits by its overall investments in human capital.

For example, if Company X invests $2 million into its human capital and has a total profit of $15
million, managers can compare the ROI of its human capital year-over-year (YOY) in order to track how
profit is improving and whether it has a relationship to the human capital investments.

Special Considerations
Human capital tends to migrate, especially in global economies. That's why there is often a shift from
developing places or rural areas to more developed and urban areas. Some economists have dubbed this
a brain drain or human capital flight. This describes the process that keeps certain areas underdeveloped
while others become even more developed.

Human Capital and Economic Growth

There is a strong relationship between human capital and economic growth , which is why it can help
boost the economy. That's because people come with a diverse set of skills and knowledge. This
relationship can be measured by how much investment goes into people’s education.

Some governments recognize that this relationship between human capital and the economy exists, and
so they provide higher education at little or no cost. People who participate in the workforce with higher
education will often have larger salaries, which means they can spend more.

Does Human Capital Depreciate?

Like anything else, human capital is not immune to depreciation. This is often measured in wages or the
ability to stay in the workforce. The most common ways human capital can depreciate are through
unemployment, injury, mental decline, or the inability to keep up with innovation.
Consider an employee who has a specialized skill. If they go through a long period of unemployment,
they may be unable to keep these levels of specialization. That's because their skills may no longer be in
demand when they finally reenter the workforce.

What Is Human Capital Risk?

Human capital risk refers to the gap between the human capital requirements of a company or
organization and the existing human capital of its workforce. This gap can lead a company towards
inefficiencies, inability to achieve its goals, a poor reputation, fraud, financial loss, and eventual closure.
To reduce and eliminate human capital risk, an organization should train, foster, and support its
workforce.

The Bottom Line

Human capital refers to the economic value of a worker's abilities and skills. Companies can enhance
their human capital through recruitment or training, as well as by implementing management techniques
that optimize the productivity of their existing workers. Maintaining and improving the value of human
capital is usually the role of a company's HR department.

Developing your human capital ensures that your workforce is being effective and efficient, and
ultimately, improving your company’s overall performance.
Human capital is what your employees possess in terms of their knowledge, skills, experiences, and
commitment invested in the organization. In fact, human capital includes the knowledge, education,
vocational qualifications, professional certifications, work-related experiences, and even the
competencies of your workforce.

Armed with this definition, we can now tackle our topic. Measuring human capital: why and how to
measure it!

Reason for Measuring human capital

Simply attempting to measure and develop your human capital just because it is “good practice” will
never help you achieve your goals. You need to know why you are doing it in order to get the most out of
it.
On that note, here’s a few reasons why you should measure your human capital.

1. To determine your human capital’s ROI

As with any other resource, your human capital is an asset that you invest in, and expect to get a return on.
Once you calculate what your return is on your human capital investment, you will be able to judge the
efficiency and effectiveness of your human capital.
2. To identify gaps in human capital

It’s quite simple really: when you measure what you have, you will be able to see what you don’t have!
The gap becomes even clearer when you consider your organization’s overall objectives.

For example, if your company’s objective is to be the best service provider in the IT industry, then having
exceptional IT skills is an essential attribute that your human capital needs to possess. But if your
organization’s objective is to be the highest grossing retailer, then exceptional IT skills probably isn’t
going to be at the top of your list!

3. To bridge the gap in your human capital

Just like with any other analyses, their overall objective is identifying what you have, what you are
lacking, and then determining how to bridge the gap between the two in order to achieve your
organization’s goals.

It is critical to keep in mind your organization’s objectives during all of your analysis, and especially
when bridging any gaps in human capital. You should ensure that how you bridge the gap supports your
company’s goals. For example, you might think that any gap could easily be resolved with the
right training program. However, if your company’s corporate strategy is to be the lowest cost provider,
then spending a large sum of money on a training program might not be the best answer.
Now that we have a clear understanding of why it’s important to measure human capital, it’s time to find
out how to measure it!

4. To Identify Talent Gaps

HCM identifies labor needs and talent gaps in relation to the organization’s corporate strategy. If a
company needs individuals with a particular skill set, it helps you create a plan to source talent and
calculate costs ahead of time. You can also launch programs to enrich the skill set of your current
employees to fill in gaps for that missing expertise.

Increase Employee Retention

HCM lets employers identify what employees want. It can pinpoint the opportunities and benefits
employees want through performance reviews, survey forms and other sources of feedback. Knowing
what your workforce needs can help you deliver better results and identify key areas of improvement—
which is necessary for the company’s growth.

Boost Return on Investment (ROI)

As with any business decision, it’s important to consider the ROI when hiring and compensating
employees. While employees can perform their basic duties, you can improve their outputs by motivating
them to perform better.
A good tip is to invest in growth opportunities, bonuses and complementary financial incentives.
Alternatively, you can create a culture of collaboration where employees feel valued and appreciated.
Research on 200,000 managers and employees revealed that 79% of people who quit their jobs cite lack
of appreciation as a major reason for leaving.

The building blocks of human capital management

1. Recruitment and hiring

Recruitment and hiring are crucial components of HCM, as they involve pinpointing and selecting top
talent to meet organizational needs. Successful recruitment strategies require identifying the skills,
knowledge, and experience needed for each role and crafting targeted recruitment campaigns to draw in
the right candidates.

Hiring decisions should be grounded in a thorough evaluation of each candidate’s qualifications and
compatibility with the organization’s culture and values. You’re committing as a company in the long
term to whoever you’ve decided to hire – so you want to make the right decision if you want to see that
role really succeed.

2. Compensation and benefits

Compensation and benefits play a vital role in HCM, as they help attract and retain top talent.
Organizations should aim to provide competitive and fair compensation packages that align with industry
benchmarks and reflect the value of each employee’s contributions. This includes researching local
compensation markets and understanding what employees (and candidates) really value in return for the
work they’re doing.

Benefits packages should also cater to the needs of employees and their immediate families,
encompassing healthcare, retirement, and other perks. The options for benefits are practically limitless,
and you can absolutely be creative here. The key is what attracts and retains your stars.

3. Performance management
What you’re looking to do here: Set clear expectations and goals, giving regular feedback and coaching,
and assessing performance to drive constant improvement.
Performance management is another pivotal aspect of HCM, involving the setting of clear expectations
and goals, regular feedback and coaching, and performance evaluation to drive ongoing improvement.
When employees know how they’re doing and what they’re expected to do, and can see the results of
their work, they’ll perform better.

Effective performance management strategies entail setting SMART (specific, measurable, achievable,
relevant, and time-bound) goals, providing consistent feedback and coaching, and carrying out periodic
performance evaluations.

4. Learning and development

What you’re looking to do here: Invest in employee training and development to enhance skills and
knowledge and promote career growth.

Learning and development are also indispensable components of HCM, as they involve investing in
employee training and development to enhance skills and knowledge and promote career growth. It’s
actually growing in importance for many jobseekers – and should be a cornerstone of your HCM strategy
especially as businesses become more agile in fast-evolving environments.

Successful learning and development strategies involve identifying employee development needs, crafting
targeted training programs, and offering opportunities for continuous learning and skill-building.

5. Succession planning
What you’re looking to do here: Spot and groom future leaders while ensuring continuity of key roles
and responsibilities.

Succession planning is the final key ingredient of HCM, involving the identification and development of
future leaders and ensuring continuity of critical roles and responsibilities.

Effective succession planning strategies entail pinpointing vital roles and competencies, designing
targeted development programs for high-potential employees, and ensuring that key roles are filled by
qualified and capable leaders. When you get stuck in a situation where your best workers turn out to be
poor managers (the Peter Principle, in short), that means you haven’t got your succession planning
strategy really nailed down.
 By integrating these key components into a comprehensive approach to HCM, organizations can create a
culture of excellence and continuous improvement that drives organizational success and growth.

MEASURING THE IMPACT OF HUMAN CAPITAL MANAGEMENT

1. KPIs
Measuring the effectiveness of HCM practices is essential to ensure optimal results. Key performance
indicators (KPIs) can help organizations track progress and identify areas for improvement.

Some common KPIs for HCM include:

 Employee turnover rate

 Employee satisfaction and engagement levels
 Training and development participation rates
 Time-to-hire and time-to-fill metrics
 Revenue per employee

2. Employee satisfaction and retention

Surveys and assessments can provide valuable insight into employee satisfaction and retention rates. By
collecting feedback from employees, organizations can identify areas that need improvement and take
action to address issues and promote engagement and retention.

Assessments can also measure the effectiveness of specific training programs and provide feedback to
trainers and HR leaders on how to improve.

3. ROI
Finally, it’s essential to evaluate the return on investment (ROI) of HCM practices themselves. By
measuring the impact of investments in employee development, compensation, and benefits, organizations
can make informed decisions about where to allocate resources and prioritize initiatives.

ROI calculations can be complex, but they provide a valuable tool for measuring the effectiveness of
HCM practices and identifying areas for improvement.
 4 Skills Inventory

A skills inventory is a recording of the skills, capabilities, qualifications, trainings, and certifications of
your employees. The skills inventory may also include your employees’ preferences, career goals, and
other developmental information. The purpose of the skills inventory is for an organization to have a
database of its resources for more effective HR management.

While the main purpose of a skills inventory might not be measuring human capital, having a database of
the information can certainly help you! Sort, arrange, and compare your employees’ skills with what is
required for their positions, and then identify the gap and determine how to bridge it.

5. Personality

It is not only essential to ensure that your employees have the knowledge, skills, and experience to
successfully perform their job, you also need to focus on their “other attributes”. Of the “other attributes”,
the predominant factor that is also the most often considered is personality.

An individual’s natural reflexes, tendencies, attitudes, and innate traits are what differentiate a good
employee from a great one. Use psychometric testing to measure your human capital’s “other attributes”,
identify the gap, and provide you with insight on how to best bridge it.
Many recent studies have shown that over half the organizations today believe that HR is more influential
than it was five years ago. Executives are now recognizing HR’s ability to making strategic contributions
to the organization’s overall objective.

Human side of corporate strategies in strategic Human resource management

Strategic Human Resource Management (SHRM) involves aligning an organization's human resource
practices and policies with its overall corporate strategies and objectives. The human side of corporate
strategies in SHRM is crucial because it focuses on managing and developing the workforce to ensure
they contribute effectively to achieving the organization's goals. Here are some key aspects of the human
side of corporate strategies in SHRM:

1. Talent Acquisition: Finding and recruiting the right talent that aligns with the company's strategic goals
is essential. HR needs to identify the skills, competencies, and cultural fit required for various positions
and work closely with management to attract and hire the right individuals.
2. Training and Development: Investing in employee development is essential for aligning the workforce
with corporate strategies. HR must provide opportunities for training and skill development to ensure that
employees have the necessary knowledge and skills to contribute to the company's strategic objectives.
3. Performance Management: Developing performance management systems that align with corporate
strategies is vital. This includes setting clear performance goals, providing regular feedback, and
implementing performance appraisal systems that reward behaviors and outcomes in line with strategic
priorities.
4. Employee Engagement: Engaged employees are more likely to be committed to the company's goals.
HR should focus on strategies to improve employee engagement, such as creating a positive work
environment, providing recognition, and fostering a sense of purpose in their work.
5. Succession Planning: Identifying and grooming future leaders within the organization is essential for
long-term strategic success. HR should work with management to develop succession plans that ensure a
steady pipeline of talent for key roles.
6. Change Management: When corporate strategies shift or evolve, HR plays a critical role in managing
the human side of change. This involves communicating changes effectively, addressing employee
concerns, and providing support and training to help employees adapt to new strategies and initiatives.
7. Diversity and Inclusion: Incorporating diversity and inclusion into HR practices can support corporate
strategies by harnessing a broader range of perspectives and talents. This can lead to innovation and better
decision-making.
8. Employee Benefits and Compensation: HR needs to design compensation and benefits packages that are
competitive and motivate employees to contribute to the company's strategic goals. This can include
variable pay, bonuses, and other incentives tied to performance metrics.
9. Employee Relations: Maintaining positive relationships with employees is essential. HR must address
conflicts, provide opportunities for feedback, and ensure that employee concerns are heard and addressed,
which can contribute to a harmonious work environment conducive to achieving strategic goals.
10. Data and Analytics: Leveraging HR data and analytics can help in making informed decisions related to
human resources and corporate strategy alignment. HR should collect, analyze, and use data to track
progress, identify areas for improvement, and make data-driven decisions.

In conclusion, the human side of corporate strategies in SHRM is about managing and developing the
workforce to ensure that employees are aligned with the organization's strategic objectives. It involves
various HR practices and policies aimed at acquiring, developing, engaging, and retaining talent in a way
that supports the overall mission and goals of the company.

STRATEGIC CAPABILITY

With the emergence of the knowledge era, it has become widely recognized that the intangible assets
of an enterprise will be key to both its ability to create competitive advantage, and to grow at an accelerated
pace. As a result, more and more organizations are showing increased attention to the creation of value
through leveraging knowledge. Increased competition, changing workforce demographics and a shift
toward knowledge-based work are requiring companies to place an increasingly higher priority on
improving workforce productivity. Organizations are now looking to the Human Resources function to go
beyond the delivery of cost-effective administrative services and provide expertise on how to leverage human
capital to create true marketplace differentiation. Facing these challenges, many HR organizations have
been actively revamping to more effectively deliver the strategic insights the business requires. Improving
the strategic capability of the HR organization is not, by itself, a new idea. Spurred on by leading
academics such as David Ulrich and Edward Lawler, organizations have worked for the better part of the
last decade to build more strategic capability into their HR departments Competing in today’s
environment requires companies to focus on building a more responsive, flexible and resilient workforce. To
do so, organizations must do a more effective job of sourcing talent, allocating resources across competing
initiatives, measuring performance and building key capabilities and skills. HR organizations that provide
strategic guidance on these issues can become proactive drivers of organizational effectiveness, rather than
simply a supporter of these efforts. The key to the performance and growth of today’s enterprises resides in
the capabilities of the organization, which in turn depend on the capabilities of its people. The industrial era
was a time when people were easily recruited and retained to fill an established, unvarying set of roles. The
knowledge era brings with it a much more competitive marketplace for talent.
As they experience unprecedented employment volatility around them, people are placing a great deal of
value on working in an environment where they can actively develop their capabilities. In a way, customers
are also putting a high value on learning and acquiring capability, with regards to solutions that are
important to the realization of their aspirations.

In current and emerging business contexts, our understanding of what creates value for organizations
has changed radically. Intangible assets now represent the most important source of value creation. This is a
radical change from the industrial era when tangible assets played a much more prominent role.
However, the overall blueprint of today’s organization has, in large part, been inherited from the
industrial era. As a result, our enterprises are ill equipped to manage their intangible assets. This is why
rethinking on how to best approach Human Resources management in the knowledge era must be based on
an understanding of intangible assets.

1.12.1 Building Strategic Capability: The roles of the HR manager or HR Business Partner
and Centers of Expertise (CoE)

At the heart of the strategic reinvention of the HR organization are the roles of the HR Business partner
and the Centers of Expertise (CoE). Organizations continue to struggle with a number of factors (see Figure
1.7), including:
 Defining the new job responsibilities and performance measures for HR Business
Partners and CoE members
  Identifying the capabilities necessary to meet the new role expectations
 Defining the number of individuals needed to fill each of these roles
 Identifying and addressing sources of resistance when HR personnel are asked to focus on more
strategic activities.

Figure 1.7: Areas of focus when transforming strategic HR positions

 New HR Responsibilities

In recent years, companies have often retitled their HR generalists as “Business Partners” in an
attempt to connote a closer and more strategic working relationship between the HR department and the
operating units. For many companies the very nature of the work of a Business Partner has been
redefined. At the same time, a significant amount of the front-line employee relations work was also
transferred to a combination of line managers and dedicated shared services personnel. For some
organizations, these changes eliminated up to 70 percent or more of the workload of the traditional HR
generalist role. In its place, HR Business Partners were generally asked to take greater accountability for
more strategic tasks that need to be accomplished over a longer time horizon. These could include activities
such as: consulting with business unit leadership on a new productivity initiative; rolling out a new
competency framework; developing a talent capacity plan for a new product or service launch; and
developing a three-year labor outlook for an emerging set of skills and capabilities. These activities are
designed to look beyond employee transactions at how the business unit can make the best use of its
current and future human capital resources. For individuals working in CoE, the focus shifts toward
playing two roles: thought leader and integration manager. As thought leaders, CoE personnel need to be
responsible for designing HR programs and processes, identifying and applying good practices from outside
the organization, monitoring program effectiveness, and providing subject matter assistance to Business
Partners and shared services personnel. In addition, CoE personnel need to manage the relationships with
outsourcing vendors for their particular discipline; including the monitoring of service level agreements and
conducting root cause analysis to address ongoing issues.

 New capabilities
 Based on the new tasks of the HR Business Partner, study participants identified five key capabilities
that are needed to make a strategic contribution to the organization: analytical skills; business acumen;
consulting skills; change leadership skills; and the ability to share knowledge across the HR organization.

HR Business Partners need analytical skills to develop evidence-based recommendations and

effective business cases. They must understand how data flows through various HR and financial
systems, and how to obtain and analyze human capital data that supports their recommendations. HR
Business Partners also need to be proficient in developing models and scenarios that determine the cost and
impact of changes in HR policies and procedures. Participants in our study found that they were unlikely
to have sufficient depth in these skills within their own HR organizations and considered them among the
most difficult to develop.

HR Business Partners also need business acumen in the form of understanding their business unit’s
strategies and operations. To serve as true advisors to the business, they
must understand the dynamics of their industry, as well as the day-to-day activities performed by different
functional units and how individuals within the units are evaluated. They also have to understand the needs
of customers and partners to better see how their human capital decisions impact stakeholders beyond the
organizational boundaries

HR Business Partners will have to serve as lead advisors to their business units on human capital
issues. To do so, a number of consulting skills are essential, including the abilities to build trusting
relationships with senior executives, diagnose organizational problems and determine root causes, develop
recommendations and business cases, and create action plans. Further, they must have the strength and
conviction to deliver difficult messages to senior leaders, even if those messages may prove to be
unpopular.

HR Business Partners also need to be effective at driving change through the organization. This
includes soliciting and initiating participation from individuals within the business unit to support change
efforts, aligning recognition and performance measurement systems to support desired activities, and
effectively communicating with multiple stakeholders.

HR Business Partners not only need to provide expertise to the business units they support, they also
should share knowledge across the HR organization. One way to do this is to regularly connect with
peers in other business units to share relevant practices, while another is to work with individuals in the
CoE to pass along new learning. For individuals residing in the CoE, different set of required capabilities:
deep functional expertise; the ability to partner with internal stakeholders; process design and stewardship;
and large scale project management are necessary.

CoE personnel must possess deep functional knowledge and an understanding of leading practices
within their particular disciplines. Because the CoE serves as both the developer and arbiter of HR policy,
 individuals working in this area must apply technical knowledge of their discipline and understand its
application to the overall business.

In the more collaborative environment that characterizes transformed HR organizations, individuals

working in CoEs need to partner with others across the organization to design and implement effective
policies. CoE personnel might be called to work with Business Partners to design programs addressing
business unit needs, to work with shared services to implement cost-effective HR programs that reduce
employee confusion, or to connect with line managers and employees to periodically assess the value of
CoE programs and services. As leading corporations become larger and increasingly global in scope – often
through merger and acquisition activity that brings together disparate processes for similar activities
overnight – the ability to create common, institutionalized process activities and metrics is vital. At the
same time, CoE personnel must have the flexibility to identify appropriate regional or business unit
variations and determine how those modifications need to occur. As the HR organization becomes
increasingly strategic and vital to overall

Sources of Resistance from HR Personnel

The three specific sources of resistance are: codependency; a lack of analytic skills; and lack of a “burning
platform” to insight action.

Many so-called HR Business Partners remain comfortable providing short- term answers to line managers,
who in turn, appreciate this individualized service. Indeed, the need to “provide service to the business unit”
has historically been defined as providing rapid answers to routine queries. This often leads to an unhealthy
codependency as business unit executives become reluctant to go to the shared services centers for
assistance, and the HR professionals continue to spend significant amounts of time addressing administrative
questions. Simply reorienting existing work arrangements and relationships takes a significant amount of
effort.A Study has highlighted the importance of not only explaining to people the rationale and benefits of
change, but also the consequences of not changing.As companies moved much of their administrative work
to shared services centers and outsourcers, the need for larger, dedicated teams within Centers of
Expertise often diminished. In many cases, the remaining individuals within the CoE found themselves
hesitant to fully accept the new strategic HR model for a number of reasons. These included having less
direct access to internal customers and having fewer staff to accomplish their work. In the past, the CoE
often worked directly with business unit executives to design and deliver HR policies and procedures.
Also, they tended to work directly with line managers and employees to gauge reactions and respond to
inquiries about HR programs. In the new HR model, CoEs are now being asked to work through HR
Business Partners to determine business unit needs and collaborate with shared services to determine the
effectiveness of HR policies and procedures. These changes, which represent somewhat significant
departures from past practice, often caused resentment among CoE personnel
Benchmarking of Human Resource Performance

Benchmarking compares specific measures of performance against data on those

measures in other “best practices” organizations. When information on HR performance has
been gathered, it must be compared to a standard, which is a model or measure against which
something is compared to determine its performance level. For example, it is meaningless to
know that organizational turnover rate is 75% if the turnover rates at comparable
organizations are not known. Hr professionals interested in benchmarking try to locate
organizations that do certain activities particularly well and thus become the benchmarks.
The common benchmarked performance measures in HR management are:
1. Total compensation as a percentage of net income before taxes.
2. Percent of management positions filled internally.
3. Sale (in terms of monetary unit) per employee.
4. Benefits as a percentage of payroll cost.

1.13.1 How to do Benchmarking Analysis

A useful way to analyze HR involves calculating ratios that can be compared from year
to year, thus providing information about changes in Hr operations. Effectiveness is best
determined by comparing ratio measuring with benchmarked national statistics. The
comparison should be tracked internally over time. For example, Society for Human
Resource Management (SHRM) has developed benchmarks based on data from more than
500 companies, presented by industry and organization size.