1–2

The Chinese president was once asked “How will you be

able to feed one million mouths?” His answer was simply:
“why don’t we put it as “how I will plan to benefit out from
two million working hands”.
 INTELLECTUAL
CAPITAL

RESOURCE

ASSET

HUMAN BEING

MACHINE

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 “To win in the marketplace you must first win in
the workplace.” 
– Doug Conant, CEO of Campbell’s Soup

 “When people are financially invested, they want

a return. When people are emotionally invested,
they want to contribute.” 
– Simon Sinek

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“Help them grow,
or
Watch them go”

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1–7
• HR planning.
• Recruitment.
• Placement.

1–8
• Pay
• motivation

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• Career path.
• Training.
• Talent Mgmt.

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 Employees are human assets
 Increase in value to organization and marketplace when
investments of appropriate policies & programs are applied.
 Effective organizations recognize that employees have
value
 Much as organization’s physical & capital assets have value

 Employees are valuable source of sustainable

competitive advantage

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Competitive Advanatge 12
13
 The advance of human
knowledge in the last few
decades of this century has
outstripped all the combined
discoveries and advances of
human knowledge through
out history.

14
1–15
  Knowledge workers become a growing important, essential
element of the workforce.
 Power shifts into the hands of those who have control over
knowledge. They also have control over resources of force
and wealth.
 Wealth loses its material form of money and takes an
informational nonmaterial form of numbers stored in the
memories and transferred by computers.
 Societies with greater and faster ability to acquire knowledge
and information advance more and outstrip other societies.
 Knowledge is becoming the key factor in global power
struggles replacing power conflicts over material and energy
resources.

16
 Traditional Sources of Success are:
 Product and process technology;
 Protected and regulated markets; and
 Economies of scale.

17 HRM
 PRODUCT and process technology
 Since product life cycles are shortening and new
product introductions are coming much more rapidly,
relying on static product technology for success is
increasingly problematic.
 The growing rate of product obsolescence makes the
ability to rapidly innovate increasingly important.

18
 Product and PROCESS technology
 The people who sell you technology will sell the same
technology to your competitors too.
 Investment in specialized technology in not a substitute
for skill in managing the work force; it actually makes
the work force even more crucial for success.

Machines don’t make things, people do !!!!

19 HRM
 Protected and regulated markets
 The wave of deregulation sweeping the world has
eliminated many protected markets.
 Once deregulated, markets are difficult to close or
regulate.

20 HRM
21 HRM
 “The traditional sources of success are smaller now than
they once were and will probably be even smaller in the
future; Human resources should be our major source of
competitive advantage

“The success of an organization depends increasingly

on the quality of its people in terms of knowledge,
information, and know-how at their disposal.”

22
1–23
1. Technical Knowledge
 Markets, processes, customers, environment

2. Ability to Learn and Grow

 Openness to new ideas
 Acquisition of knowledge & skills

3. Decision Making Capabilities

4. Motivation
5. Commitment
6. Teamwork
 Interpersonal skills, leadership ability

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1–25
 Determines how to best invest in people
 Costs
 Out-of-pocket
 Opportunity

 Human assets become competitive advantage

 Required skills become less manual, more knowledge-
based
 Appropriate, integrated, strategy-consistent approach
is needed

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 Failure to invest in employees causes
 Inefficiency
 Weakening of organization’s competitive
position
 Human assets are risky investment
 Require extra effort to ensure that they are
not lost

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1–28
 HR practices directly related to profitability & market value
 Primary reason for profitability:
 Effective management of human capital

 Integrated management of human capital can result in 47% increase in

market value
 Top 10% of organizations studied experienced 391% return on
investment in management of human capital

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 Wall Street analysts still generally fail to acknowledge
human capital in assessing the value of an organization and
the effect that human resources can have on stock price
 This is rooted in the fact that there are no “standard” metrics
or measures of human capital, much as there are for other
organizational assets
 Exhibit 1.4 lists some Common HR Metrics while Exhibit
1.5 displays the means of calculating five common metrics.
However, the appropriate metrics for any given organization
will be dependant on that organization’s strategy.

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 Absence Rate  Training Investment Factor

 Cost per Hire  Training Return on Investment

(ROI)
 Health Care Costs per Employee
 Turnover Costs
 HR Expense Factor
 Turnover Rate (Monthly/Annually)
 Human Capital Return on
Investment (ROI)  Vacancy Costs

 Human Capital Value Added  Vacancy Rate

 Labor Costs as a Percentage of  Workers’ Compensation Cost per

Sales or Revenues Employee
 Profit per Employee  Workers’ Compensation Incident
rate
 Revenue per Employee
 Workers’ Compensation Severity
 Time to fill
rate
 Yield Ratio

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 Measure Formula Value/Use

Human Capital ROI Revenue - (Operating Expenses – Allows determination of human investments relative to
Compensation + Benefits Costs) productivity and profitability, represents pre-tax profit
Compensation + Benefits Costs. for amounts invested in employee pay and benefits after
removal of capital expenses.

Profit per employee Revenue - (Operating Expenses / Illustrates the value created by employees; provides a
number of full-time equivalent means of productivity and expense analysis.
employees (FTE)

HR expense factor Total HR expense/total operating Illustrates the degree of leverage of human capital;
expenses provides a benchmark for overall expense analysis
relative to targets or budgets

Human Capital Revenue - (Operating Expenses –- Shows the value of employee knowledge, skills and
Value Added Compensation + Benefits Costs) / performance and how human capital adds value to an
Total number of FTE employees. organization.

Turnover Rate number of employee separations (during Provides a measure of workplace retention efforts
a given time period) /number of which can impact direct costs, stability, profitability
employees morale, and productivity; can be used as a measure of
success for retention and reward programs.

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 90% of Fortune 500 organizations evaluate HR
operations on basis of three metrics:
 Employee retention and turnover
 Corporate morale
 Employee satisfaction

 These metrics do not necessarily illustrate how

HR impacts
 Profits
 Shareholder value
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1. Identify problem HR can impact
2. Calculate actual cost of problem
3. Choose HR solution that addresses problem
4. Calculate cost of solution
5. Calculate value of improvement 6 to 24 months after
implementation
6. Calculate specific return on investment
7. ROI in human assets often not realized until some time in
future

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1–36
 Sees people as central to mission & strategy
 Mission statement & strategic objectives espouse
value of human assets in achieving goals.
 Management philosophy encouraging development
& retention of human assets.
 Does not treat human assets in same ways as
physical assets.

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 Senior Management Values & Actions
 Managers need “investment orientation” toward
people
 Attitude Toward Risk
 Investment in human resources inherently riskier
 Human assets never absolutely “owned”
 Nature of Skills Needed by Employees
 The more marketable employee skills, the riskier the
firm’s investment in skill development

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 Utilitarian (“Bottom Line”) Mentality
 Attempt made to quantify employee worth
through cost-benefit analysis
 “Soft” benefits of HR programs difficult to
objectively quantify
 Availability of Outsourcing
 Given availability of cost-effective outsourcing,
investments in HR should produce highest
returns & sustainable competitive advantages.

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 Reading 1.1: The Hidden Leverage of Human Capital
 Reading 1.2 Seven Common Misconceptions

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Strengthen key Leverage
relationships downtime
 Customers  Use variable-pay
 Employees  Address neglected
areas:
 Shareholders
 Infrastructure
 Marketing
 Operations

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 Refocusing staff on
what’s important
 Performance management as
disciplined, strategic, value-
added process
 Clearly define, differentiate &
balance between core
competencies & results
 Building return on
compensation
 Link base-pay progression to
competency achievement
 Link incentive pay to annual,
semiannual, or quarterly results
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1. Conscientiousness is a better predictor of performance than
intelligence.
2. Companies that screen job applicants for values have higher
performance than those that screen for intelligence.
3. Integrity tests don’t work well in practice because so many people
lie on them.
4. Integrity tests have adverse impact on racial minorities.

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5. Encouraging employee participation is more effective for improving
organizational performance than setting performance goals.
6. Most errors in performance appraisal can be eliminated by providing
training to managers on how to avoid them.
7. If employees are asked how important pay is to them, they are likely
to overestimate its true importance.

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1. Select new employees on both intelligence and conscientiousness.
2. Assess intelligence and conscientiousness before values.
3. Define the values that are important and assess them through
carefully developed, valid procedures.
4. Use integrity tests with ability tests for high predictability.

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5. Develop compelling goals; enlist participation and support it through
rewards.
6. Training and feedback are important, but errors are difficult to
eliminate. Top managers should serve as role models in quality of
performance reviews.
7. Attitude surveys are subject to biases; study behaviors as well as
attitudes.

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 Human capital is defined as the collective knowledge, skills
and abilities of people that contribute to organizational
success
 Human capital is influenced by corporate culture,
organizational values and strategic business goals and
objectives and indicates the health of an organization
 Human capital can be assessed via key performance
indicators (KPIs) which are quantifiable, specific measures
of an organization’s performance in critical areas of its
business

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The HR scorecard is a key management tool which can strengthen HR’s strategic
influence in an organization. The scorecard has four perspectives: strategic,
operational, financial and customer. These four perspectives organize and track
areas in which HR adds value.
• The strategic perspective focuses on measurements of effectiveness or major
strategy-lined people goals.
• The operational perspective e reflects the effectiveness of HR processes.

• The financial perspective e relates to financial measures of HR value to the

organization.
• The customer perspective focuses on the effectiveness of HR from the internal
customer viewpoint. Specific measures for each of these perspectives are
provided in Figure 3. KPIs can also be effectively utilized in the global HR
function as indicated in Figure 4.

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Four recommendations are provided for developing specific
KPIs tailored to a given organization’s strategy
1)Qualitative measurement is one path to assess qualitative
characteristics of the workforce, such as engagement
2)Employee feedback provides useful perspectives on HR
efficiency
3)Whenever possible, the impact of recruiting is best
described in terms of financial gains
4)Retaining older workers for future leadership roles depends
on what tan employer most values

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