HUMAN CAPITAL MANAGEMENT AND ORGANIZATIONAL PERFORMANCE

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Aug 16 - 22, 2004
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In this review, it has been assessed the context in which human capital is being discussed and identify the key elements of the concept, and its linkage to other complementary forms of capital, notably intellectual, social, and organizational. It has then been examined the case for human capital making an impact on performance, for which evidence is now growing, and explore mechanisms for measuring human capital. My belief is that, on the evidence of this review, the link between human capital and organizational performance is convincing.

DESCRIPTION

Human Capital is the concept that was first introduced by Adam Smith two centuries ago. It has become one of the buzzwords of the knowledge society today. This word Human Capital can be decomposed into two further words. One is Human (from the Latin hominem, for man) means relating to people. It signals our biological species: To be human is to be a person and not an animal, a good machine. The second word is Capital (From the Latin caput, for head) means the first, biggest, or best. In modern accounting, it means net worth the remaining assets of a business after all liabilities have been deducted. So overall we can define Human Capital as, "The accumulated value of investments in employee training, competence and future. Might also be described as the employees' competence, relationship ability and values". It is an element under the broader umbrella of intellectual capital comprising of human capital, structural capital, organizational capital, innovation capital, and process capital. The concept and perspective of human capital stem from the fact that there is no substitute for knowledge and learning, creativity and innovation, competencies and capabilities and that they need to be relentlessly pursued and focused on the firm's environmental context and competitive logic. There is a saying by the management guru Peter Drucker that "People are our greatest asset. Yet few practice what they preach, let alone truly believe it".

The race for human capital has long begun. Although many companies acknowledge that their employees are their important assets, few actually do much to secure this asset. It is not that companies don't value their people; actually they do not know how to manage them. People are the chief engine of prosperity for most organizations. "Workers are assets" has become the dominant symbol of late 20th-century management. Workers are not assets. Assets are passive that is bought, sold, and replaced at the whim of their owners; workers, in contrast, take increasingly active control over their working lives. What actually is Human Capital, what it is and why people invest in it. Therefore employees should not be viewed as assets, or factors of production, but investors in a business, paying in human capital and expecting a return on their investment. The logic is that when someone works in an organization for several years, they are investing time, energy and talent in that organization. When we say "capital", it is the ability, behavior, effort, and time they contribute to the organization. There is a large and growing body of evidence that demonstrates a positive linkage between the development of human capital and organizational performance. The emphasis on human capital in organizations reflects the view that market value depends less on tangible resources, but rather on intangible ones, particularly human resources.

 

 

Survey on Pakistani organizations was conducted regarding Human Capital Management and Organizational Performance. I visited different organizations and was supposed to interview the CEOs. But due to their heavy schedule, referred me to the Human Resource Managers. The first thing I asked them was about the type of evaluation done in the organizations. It is clear that most organizations believe in formal evaluation. This shows that very low percentage of the organizations are indulged in informal evaluation that includes the involvement of the employees in the performance evaluation.

The tool that was used by most of the organizations was the rating method. In this they assign certain weight age to the questions and in the end sum up all the points in order to make decisions. When I asked the organizations that why they are using this method, they answered that this is the most simplest method and the supervisor just assigns the points to each question and to evaluate the employee becomes easy and accurate up to some extent.

Most organizations rely on their supervisors to carry out the evaluation process because the immediate supervisor knows his/her employees in the department more than anyone else in the organizations. So what they do is that management does what the department head tells them regarding their employees. In some of the organizations biasness also was experienced because at times the factor of favoritism comes in. this is the point where the deserving candidates suffer. But the employee who was evaluated on the bases of likeness, he was found to report to the top management and then the management looked into the matter and solved the problem. Now this type of activity made the employees demotivated and their output in the organization suffered.

When asked about their most motivational factors, the employees were much more satisfied with the rise in their salary rather than any other kind of factor. This was because of the fact that they were meeting their day-to-day needs of life. With more cash in hand they were more satisfied.

Recruiting and retaining the best employees, however, is only part of the equation. The organization also has to leverage the skills and capabilities of its employees by encouraging individual and organizational learning and creating a supportive environment, in which knowledge can be created, shared and applied. Competitive advantage is dependent not, as traditionally assumed, on such bases as natural resources, technology, or economies of scale, since these are increasingly easy to imitate. Rather, competitive advantage is dependent on the valuable, rare, and hard-to-imitate resources that reside within an organization. Human capital in a real sense is an invisible asset. The importance to the strategic aims of the organization of the human capital pool (the collection of employee capabilities), and how it is managed through HR processes, then becomes apparent.

Now this whole depended not only on the employees to look for their future prospects but the organizations considered their responsibility in order to develop and train the employees in such a way that they are picked internally from the organization and were placed on the required position. The organizations considered their own employees if there exist a vacancy. The employee who qualified for the post was posted at that position.

It is seen that the management is 55% involved in the skill development of the employees and 36% was of management training. This shows that the management is also keen to develop their employees not only for their benefit but also for the growth of the organization.

If the types and levels of skills are not equally distributed, such that some firms can acquire the talent they need and others cannot, then that form of human capital can be a source of sustained competitive advantage.

 

 

The link between human capital and performance is based on two theoretical strands. The first is the resource-based view of the firm. The second is the expectancy theory of motivation which is composed of three elements: value attached to rewards; the instrumentality, or the belief that the employee will receive the reward upon reaching a certain level of performance; and the expectancy, the belief that the employee can actually achieve the performance level required. The growth of the organization was also having the impact of low age CEO. Because the fresh blood that is coming in the market is making a lot of difference. They know the latest techniques to handle things and have overcome the traditional ways of doing things. Some CEOs changed according to the demands but some were dropped from the business.

The average age and average growth has been taken from the sample data. It is seen that average is 30 and the organizations growth is 85%. This is clear indicator that the fresh blood in the market is making a lot of difference and new ideas are coming into the market. If we look at the average age that is 52 years, it is seen that the average growth is only 24%. So the turnover rate was very low.

Human Resource Management practices that encourage high skills and abilities e.g. careful selection and high investment in training can be specified to make the link between human capital management and performance. Employees who invest in education and training will raise their skill level and be more productive than those less skilled, and so can justify higher earnings as a result of their investment in their human capital. With general training, the potential for asset creation exists, so do the conditions for employee turnover because trained employees can market their heightened human capital. With firm specific training, there is no incentive for the employee to leave the firm. The chief benefit of the training will be to the firm.

In public sector the promotion is due after certain criteria like the number of years spent at one position and the lower employees had to wait for the person to be promoted to the next level when his/her turn comes. But in private organizations this concept is totally different. What they do is that they keep the employee in the departments for 6 months or even less than this. His/her promotion depends on the level of work he/she knows. If the management finds that the person should be promoted than they don't delay the promotion. Due this factor also the level of employees motivation and loyalty towards their organization is found to be very high.

NEED ANALYSIS

The reason for which I have written this article is that I want to see that in Pakistan what organizations are doing for the human capital management that directly relates to the organizational performance. In this article, I have studied about the organizations that are doing their best for the human capital management. By analyzing their views I will see that why are we facing problems and what is the reason that organizations fail to retain the top talent in organizations and most of the talent is going outside Pakistan. I will also find the loopholes and will try to create my own views.

HYPOTHESIS

If Human Capital is managed in an efficient and effective manner then this will lead to organizational performance.

CONCLUSION

 

 

What has been gathered from the data is that in public sector no such activity is being done. Due to these factors the employees are not producing what they are required to. Basically there is no concept of employee development in public sector organizations and the employees know that after certain years he/she will be promoted to the next level when the promotion is due. Even though if he/she lacks the required skills to meet the criteria. So they are leased pushed about the work. Another serious thing that I noted in these organizations was that they were not bothered about the organization where it goes. But yes they were bothered about themselves. Now what does this show, it shows that they are not loyal towards the organization and are just waiting for the higher post to achieve.

Whereas in private sector organizations, the scenario is completely different. They are doing very much for the training and development of the employees that ultimately result in the organizational growth. The employees in these organizations knows that if he/she produces the results only then they are considered for the promotion or any other reward system. In private organizations, the employees are also given rewards based on their performance and their output. That is why the employees are very much loyal to the organizations. These organizations are heavily investing in research and development that caters for the right need of the organizations as well as for the employees. In one of the survey, I visited the Multinational organization where I found that employees were evaluated on the basis of the output and were considered for the promotion. There was no time restriction. Their human resource department was completely working as they are operating abroad. Though all the employees are the local personnel. This shows that if Human resource practices are observed in the organizations, no matter at what cost, then the organizations will be successful in retaining their employees and thus will have the top talent working in their organizations.

As it is seen that our top talent is leaving their homeland and have gone abroad and are providing the services there. The reason is because they don't find the opportunities here and they are not being paid according to their qualification. So who is on the loser side? Of course Pakistan. If all the organizations adopt what private and multinational organizations are doing, then no way the talent will leave their homeland. Organizations must provide them the opportunities to serve in their own homeland rather than go abroad. By doing this we are going to touch the skies.

Mr. Usman Nazir who is research assistant at Mohammad Ali Jinnah University, Islamabad Campus, has written this article. A survey was conducted in the month of July 2004 to get the views of Human Resource Managers.

NOTE: THERE ARE GRAPHS IN THIS STORY. KINDLY REFER PAGE HARD COPY TO VIEW THE GRAPHS.