Measuring human capital involves quantifiable factors such as revenue, hiring, salaries, training costs, and HR department costs. However, an average revenue per full-time employee calculation can be misleading due to external factors beyond employee control. Companies also consider absenteeism rates, turnover, and HR department efficiency to measure human capital.
Human capital can be difficult to measure as it involves a variety of intangible elements, including education and skills development. There are several variables that could affect whether individuals can effectively use their accumulated knowledge, skills and experience. Companies attempting to measure human capital will typically look at several factors that can be quantified, including revenue, hiring, salaries, and wages as a percentage of total revenue, training costs, and HR department costs.
A firm might measure human capital in terms of overall production efficiency and revenue generation. One way to isolate the effectiveness of a company’s staff is to determine the amount of revenue a full-time employee contributes to the company. This is done by simply dividing the company’s total revenue amount by the number of its full-time employees. The danger in this is that the calculation only returns an average, as some employees undoubtedly contribute more to the bottom line than others.
An additional disadvantage of assuming an average amount of revenue produced per full-time employee is that revenue could be affected by conditions beyond the employee’s control. Things like an unfavorable macroeconomic environment will pose a challenge for any sales team, regardless of their skill level. Additionally, the way a job is designed could also make it difficult for employees to focus solely on increasing sales and revenue for the organization. This can make it difficult to get a true picture of an organization’s human capital return potential.
Another area that companies consider when measuring their human capital is people. They could look into absenteeism rates and lost productivity, which then translates into lost revenue. Turnover and hiring costs are two of the biggest areas organizations seek to control. Skilled and experienced employees leaving, particularly in the first few months on the job, can account for a huge amount of human capital loss. This is because it takes significantly more money, time and internal resources for the organization to recruit and train a new employee than an expert.
Companies also measure the efficiency of their HR departments to measure human capital. They could calculate the average amount of HR costs per full-time employee. Organizations could very well look into how many full-time employees are assigned to a particular HR department. This is especially true in large companies that include several divisions, business units, and regional headquarters.
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