Measuring and Managing the Financial Performance of Human Capital Investments

Financial capital (cash) is the lifeblood of a business. However, it is human capital (people and HR programs), the body through which the lifeblood flows, that deploys the cash and ultimately determines whether the cash deployed increases or decreases the value of a business enterprise. But how does an organization measure the effectiveness and efficiency of its human capital investments? How can managers of human resources make the hard, compelling case for human capital investments and measure the impact of those investments on enterprise value? This chapter describes a comprehensive, cohesive, and cascading method for a Chief Human Resource Officer (CHRO) to measure and analyse the financial performance of an organization’s investments in human capital. This is not an academic approach but a very practical, hands-on model that has been field-tested. Using the methods presented in this chapter will enable CHROs to effectively respond to every CEO’s challenge to HR to demonstrate the value of human capital investments; that is, they will be able to make the necessary business case for the investments in human capital necessary to continuously improve business performance. Companies invest in human capital (people and HR programs) to drive revenue, profits, and shareholder value. Moreover, as the chart in Figure 8.1 shows, companies invest far more in human capital than financial capital. These keywords were added by machine and not by the authors. This process is experimental and the keywords may be updated as the learning algorithm improves.