Knowing how to best use your organization’s human capital can make the difference between failing, getting by, and exceeding your wildest expectations. This article will cover the foundations of human capital management strategy and how human capital management differs from human resources management. Note that we will use the terms “people,” “workforce,” and “employees” interchangeably.
What is human capital management?
Human capital management is actually a collection of strategies based on the foundation of human resource management but focused on getting the best from your workforce. That means
- Hiring the right people at the right time
- Managing your people in the most effective way
- Retaining your workforce—which translates to employee satisfaction
- Developing your workforce to increase productivity
The heart of human capital management is understanding that people are any business’s most important asset. It hinges on the idea that investing in your people has holistic benefits for your business.
Human capital: a brief history
Though the concept may seem new age, it’s based on concepts first proposed by the British Enlightenment Era economist, Sir William Petty. He proposed that developing the “value of the people” was essential to the production and the wealth of a nation. Themes of investing in people as a resource—and the value of human happiness—are scattered throughout Enlightenment Era economic theory.
In the 1960s, American economist Theodore Schultz renewed these ideas in his analysis of how countries use human capital to develop an economy and recover from economic disasters. His theory maintains that a healthy and educated populace is foundational to a country’s economic prosperity.
What are the elements of human capital?
Human capital refers to the elements a person possesses that are useful in the production process. Within each person you hire, there are four key elements that you should develop. These are
These four key elements should be developed in line with organizational goals, team goals, and the goals of the individual. But, don’t limit yourself to these four. They do not exist in a vacuum and rely upon many peripheral elements, including:
- Tacit knowledge
- Relational capital
- Strategic thinking
- Systems thinking
The make-up of any individual’s human capital will be unique to them. The relationships between the unique capital of each individual within organizations are just as unique and provide a vast wealth of resources the organization and the people in it can draw from. In many ways, your organization’s human capital is the foundation of its company culture.
What does HCM strategy do?
The core of any human capital management (HCM) strategy is to align organizational talent to meet or exceed strategic objectives. Identifying, managing, and developing the talents and interests of your workforce (also called talent management) in ways that benefit your organization is no small feat.
An HCM strategist knows that people produce at their best when they feel their personal experience, creativity, style, and distinct set of skills and knowledge are deeply important to you and your business. HCM strategy means developing deep relationships with your employees. You do this by building a strategy based on the components of the HCM process (more on this next).
In the best cases, your strategy is not linear but circular. Strategic objects guide how you build and develop your workforce. But your workforce should also guide how you build and develop your organization’s initiatives. When this happens, the system reinforces itself—your workforce is energized by pursuing objectives and your objectives become more strategic by an engaged and adept workforce.
What are the components of human capital management strategy?
Human capital management strategy is composed of a set of practices we typically divide into six parts:
- People analytics
- Talent acquisition
- People management
- Payroll, compensation, and benefits
- Attendance and leave management
These parts ideally work in ways that check, balance, and strengthen each other. They are not wholly separate, and developing each component should be looked at as an ongoing process.
We believe that people analytics is the foundation of any good HCM strategy. People analytics is the act of observing, tracking, and analyzing your workforce, plus the tools and processes you use to do so. The purpose of people analytics is to improve the performance of individuals and teams while engaging your employees and building trust. As you can see, many components come together to produce results.
When we talk about recruitment, we often think of it in terms of finding and hiring people in a streamlined process. But HCM strategy takes a holistic approach to recruitment. Workforce planning using HCM means observing your current workforce—or the workforce of similar businesses if you’re launching a new business—and hiring strategically based on those observations. That can mean sourcing from within your company or from the outside for current positions, plus planning for future roles that will open as your organization advances.
People management strategy focuses primarily on the first year an individual is on the job or in a new position within the organization. This includes onboarding, training, and providing self-service resources to new hires. Strategic onboarding provides all the important information in a well-structured manner and helps each individual set appropriate goals.
Strategic training ensures that each employee understands the processes and expectations of their position, while also providing the right opportunities to develop skills and knowledge related to their work and goals.
Finally, equipping employees with assistance and self-service resources gives employees the freedom to access their benefits, training, and progress as they see fit.
Managing the development of your workforce is one of the most complex but critical pieces of HCM strategy. It is comprised of four central components:
- Competency management
Competency management is about two things: understanding the competency level of your employees and understanding the competency needs of each position in your organization. When these are understood and defined, it is easier to put the right talent in the right positions. It also helps you identify gaps between what a position requires of the person filling it and the competencies of your employees.
More importantly, it helps you identify competencies in your workforce that you’re not yet utilizing. Think of unused competencies as possible money left on the table.
- Performance management
Performance management is more than tracking metrics and timesheets. The best performance management strategy aligns the goals of the individual with the goals of the organization. This is done during the hiring process and in an ongoing basis through performance reviews.
Most people want the chance to flex their skills, learn new things, and take on new challenges. Aligning those interests with what your organization needs—and providing support through training, feedback, and mentorship—can produce huge wins.
- Workflow management
How does an organization meet big targets? By creating an effective workflow. An effective workflow ensures that the tasks performed by individuals feed into the business process efficiently and effectively. Workflows can be managed in a variety of ways and with a variety of tools. It ultimately doesn’t matter what method your organization uses, so long as it produces outcomes in ways that make it easy for people to understand and organizations to track.
- Contingent Workforce Management
Many organizations rely on people outside their organization—independent contractors, freelancers, and seasonal workers are all examples of a contingent workforce. Managing them well means knowing when to hire, for how long, and which benefits will both attract the best candidates but doesn’t cause friction within your essential workforce.
Payroll, compensation, and benefits
This covers the nuts and bolts of payroll administration and compliance. Plus, how employees want to be paid, from the monetary and non-monetary compensation to the user design of payroll software. And that’s in addition to providing a suite of employee benefits that make people want to stay. Your payroll, compensation, and benefits strategy should be based on a deep understanding of current trends and feedback from your employees.
We should also note that no payroll strategy is complete without tracking and analyzing work done on and off the clock. Off-the-clock work can include catching up on projects, entertaining clients, or attending a company event.
Attendance and leave management
Tracking and analyzing employee data includes how people use their time while working, plus how they use vacation, sick time, and days for personal use. You can also track how office use changes, especially if your organization uses flexible scheduling and in-person attendance policies. Does working from home work for your teams? Good attendance and leave management will help you answer this question.
What are the benefits of human capital management?
HCM strategy is all about productivity—but what does that really mean? There are four elements to the productivity a strong HCM strategy produces.
- You start with the best talent and you keep them.
Effective HCM strategy combines a firm understanding of the candidate you need and what job listings will best attract them. That makes turning highly qualified candidates into highly valuable employees. But it doesn’t stop there; HCM strategy also means understanding how to get employees to love their jobs. When people love what they do, they stay.
High employee retention offers many benefits. Rehiring for a position costs between 12 and 40 percent of the position’s salary!
- You manage your workforce and workforce budget effectively.
Compensation is more than a salary. It’s healthcare, retirement services, time off, flexibility, work-life balance, employee perks, and more. Effective HCM strategy uses a variety of compensation to attract and retain talent. It also tracks how people use their time and other valuable resources so that a company can evaluate how well it is deploying its talent.
- You manage an ever-changing market effectively.
What employees want and need from their careers is ever-changing. Over the last two years, the workplace has changed dramatically. And, as new generations are comprising more and more of the workforce, preferences are shifting. Effective HCM strategy identifies these trends and positions a company in ways to take advantage of them.
Your strategy should also allow you to anticipate changes in your organization, utilize succession planning, and manage periods of higher turnover.
- You streamline HR operations.
An effective HCM strategy uses the most effective tools available. For many businesses, this means embracing new technologies to automate HR processes and provide self-service options for employees. The result is a well-functioning HR department that needs minimal effort.
What are HCM solutions?
HCM solutions—more commonly called HCM software—refer to the management of employees through a variety of HCM technologies, HR softwares, services, and integrative platforms. We are in a bit of an HR revolution these days. HR professionals are using AI and Saas technology to manage HCM strategy along with other HR processes.
When processes can be automated and accelerated, you can provide more for the people who work for you while also getting more from each person on your team. Gusto (ahem, just for example) can serve an HCM strategy. With our powerful tools, you can manage HR processes and deploy an effective HCM strategy.
You can also sync Gusto data with various insights and analytics platforms including:
- The Calculate Hub
How does HCM strategy address business needs?
A great human capital strategy produces a fulfilled group of people working together to create an effective business strategy and meet business goals. That can mean better customer acquisition, reducing workplace errors, or more efficient rollouts of new products and designs—when you’re hiring, training, and developing for specific outcomes while supporting your team, you’re much more likely to do great things.
Using HCM as a framework to approach your workforce pays off systemically. It’s not just about the direct benefits of implementation, but the family of benefits—both direct and indirect benefits and the relationship between them. Often the relationship between these benefits becomes a self-feeding system.
Consider this: engaged employees who have a developed trust relationship with their companies are more likely to give honest feedback that can supercharge organizational development and innovation. When an organization is open to and acts upon employee feedback, employees become even more engaged with, committed to, and fulfilled by their work.
Is HCM strategy useful for small organizations?
What if you run a business with only five employees, is HCM still important? HCM allows companies of all sizes to create more productive and satisfied teams. Getting the most out of your workforce is especially important when you have a smaller group of employees. Putting sound practices in place allows you to position your small business in a way that can attract top talent despite competition from larger corporations.
HCM strategy can offer the same benefits to small businesses. Consider the savings even a small business can achieve through attracting top talent for the long term: If you pay $16 an hour to part time employees, you can easily spend between $2,000 and $3,000 to rehire that employee. That’s like paying out a month’s worth of wages for an employee to do nothing.
What is the difference between human resources management and human capital management?
Human Resources Management (HRM) and Human Capital Management (HCM) are two interrelated ideas with different goals. Managing both well is the best way to create a strong company. HRM is the administrative arm of human resources, and its concepts are more concrete. Overseeing benefits, record keeping, and reporting is what we think of when we think of HRM.
HCM is the developmental side of human resources, and it focuses on boosting productivity through the development of each person working for a company. Though a little more abstract, HCM relies upon HRM fundamentals to work to its fullest potential. Without HRM, a company pays an opportunity cost having lost out on the profits of a more productive workforce.
Frequently Asked Questions
Why is HCM important?
Human capital management helps your business hire the best people, retain them for many years, and develop their talents along the way. Employees get to do work that fulfills them, while being compensated—monetarily or non-monetarily—in ways that make them feel valued. This is done by building and deploying an HCM strategy tailored to your organization’s needs and values.
What are the aims of human capital management?
Human capital management is about getting the most valuable outputs from its workforce in the most effective manner. That means strategizing for growth, empowering employees and equipping them with the tools they need to flourish, and managing people in a way that meets the needs of the company and the workforce.
This is by no means a simple or static process. Connecting HR processes with employee performance and organizational performance is done over time through planning, data collection, analysis, and realignment.
What are examples of human capital?
Examples of human capital include an individual’s hard and soft skills, training, well-being, resilience, work ethic, knowledge, situational knowledge, and self-knowledge. A person’s productive capability is borne from a variety of attributes, and each person hosts a unique set of abilities and experiences they can draw from to perform their job functions to the highest degree.