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e-book The ROI of Human Capital: Measuring the Economic Value of Employee Performance

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How to Measure Human Capital

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Comprar nuevo EUR 50, Comprar nuevo EUR 42, Comprar nuevo EUR , Human capital is the knowledge, skill sets and intangible assets that add economic value to an individual. Human capital is not a static measure and can be improved. It is an intangible asset and is just as valuable as a tangible asset. A manager can use various measures to evaluate the economic value added by his staff. One approach a manager can use is measuring human capital as a return on investment ROI. Since human capital can be built upon through investing in employees' skill sets and knowledge through higher education and workshops, a manager can calculate the investments made on human capital.

Managers can calculate the total profits a company generates before and after investing on its employees' capital.

The ROI of Human Capital : Jac Fitz-Enz :

The ROI of human capital is calculated by dividing the company's total profits by its total investment on human capital. For example, suppose company TECH, a technology company, launches a new program to invest in its employees' knowledge and skill sets in order to increase productivity and creativity. The managers of TECH can compare its human capital's ROI year over year so they can track improvements of profitability and whether it is linked to the current program.

Managers can also compare the ROI of human capital to other companies to gauge how well the company's investments in human capital are, relative to the industry. Suppose the industry average of human capital's ROI is 8; this signals to managers that the company's program is sufficient and outperforms other companies. The ROI measures the financial return on an investment made, or it can be applied to a business measuring the performance of the firm by assessing the net profit compared with the overall net worth of the company.

In more recent years, the ROI concept has been adopted by other industries to evaluate projects and programs on a smaller scale.

The ROI of Human Capital : Measuring the Economic Value of Employee Performance

Using quantifiable metrics improves the credibility of HR as a profession, and allows upper management to identify specific, measurable ways that HR services benefit the organization. It's no longer enough to state that a certain program is believed to be beneficial -- you need to be able to prove the worth of your actions.

In difficult economic times, the value of support services -- often seen as tangential to the organization's core mission or product -- comes under increasing scrutiny. Consequently it becomes even more important for HR professionals to show how HR services directly impact the bottom line, while identifying and eliminating programs that are not financially efficient.

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HR can use ROI metrics to analyze the value of almost any of its services, as long as a dollar cost can be determined. For example, if HR introduces a new health and safety program, its effectiveness can be measured by the associated reduction in costs of work-related injuries.


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The value of a new employee orientation program can be measured in terms of an ROI by assessing the costs saved by correlated reductions in turnover. Diversity programs, HR information systems, training, development and mentoring initiatives are additional examples of HR programs that can be measured by the ROI calculation.