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Understanding human capital

The concept of human capital is not new. The World Economic Forum, for example, produces a global human capital report providing a comprehensive overview of nations' human capital using a Human Capital Index of more than 50 measures based around four pillars: education; health and wellness; workforce and employment; and the enabling environment. The report provides a broad range of contextual factors for understanding human capital and provides links between human capital and national economic performance.6

The use of the concept of human capital in business is recent and reflects an evolution in thinking about how employees contribute to business outcomes—from the human resources' approach where employees are considered a ‘cost’, to an approach where employees are considered an ‘asset’.7 This change in view is summarised by Andrew Mayo in Table 10.1.8

Table 10.1 Comparison of the human resources and human capital views of employees
Human resource view Human capital view
Source: Adapted from Mayo 2008
Employees are costs Employees are assets with value
Assess headcount Count diverse individuals
Employees are a labour resource Employees are value creating
Employees need regulation Employees need guidance
Employees need management Employees need objectives
Employees need satisfaction Employees need engagement

The inherent challenges in managing the workforce as human capital are twofold: identifying and securing human capital that has value for the organisation; and optimising the use of human capital so it is realised as high organisational performance.

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5 Australian Public Service Commission 2012, State of the Service Report 2011–12, Chapter 7, Commonwealth of Australia, Canberra.

6 World Economic Forum, 2013, The Human Capital Report, Geneva, Switzerland.

7 Armstrong, M 2006, A Handbook of Human Resource Management Practice (10th edn), Kogan Page Publishers, London, United Kingdom.

8 Mayo, A 2008, So what's the Difference between Human Capital and Human Resources?, Presentation to CIPD West London Branch, 15 January, Chartered Institute of Personnel and Development, London, viewed 9 October 2014, http://www.cipd.co.uk/NR/rdonlyres/F19BF029-4D5A-4F42-8A3C-ADDF061DD570/0/HumanCapitalslides.ppt.