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

Preface to the

First Edition

The Missin g Pi ec e

The classic books of management have ignored, avoided, or

thrown platitudes at the question of human value in the

business environment. When and if the authors did give

passing attention to valuing the human contribution, their

comments were either gratuitous or simplistic. Nineteenth-

century capital theory claimed that wealth was leveraged

from investments in tangible assets such as plants and

equipment. It held that workers were entitled to compensa-

tion only for their labor, since the incremental values of the

business came from investment in capital equipment. This

type of thinking lit the fire under people like Karl Marx and

Samuel Gompers. From the early work of Fayol

1

and Bar-

nard,

2

which supported this thinking, to the more enlight-

ened insights of Drucker, Peters, Handy, and others, no one

has successfully taken on the challenge of detailing how to

demonstrate the relative value of the human element in the

profit equation. Invariably, writers attempting to do so have

opted out at the last minute with weak-kneed excuses for

not closing the loop with specific examples. The only excep-

tion has been some of the human resources accounting

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xviii PREFACE TO THE FIRST EDITION

work, and that has not been accepted as a practical manage-

ment tool.

The term human capital originated with Theodore

Schultz, an economist interested in the plight of the world’s

underdeveloped countries. He argued correctly that tradi-

tional economic concepts did not deal with this problem.

His claim was that improving the welfare of poor people did

not depend on land, equipment, or energy, but rather on

knowledge. He called this qualitative aspect of economics

‘‘human capital.’’ Schultz, who won the Nobel Prize in 1979,

offered this description:

Consider all human abilities to be either innate or acquired.

Every person is born with a particular set of genes, which de-

termines his innate ability. Attributes of acquired population

quality, which are valuable and can be augmented by appro-

priate investment, will be treated as human capital.

3

In business terms, we might describe human capital as a

combination of factors such as the following:

• The traits one brings to the job—intelligence, energy, a

generally positive attitude, reliability, commitment

• One’s ability to learn—aptitude, imagination, creativity,

and what is often called ‘‘street smarts,’’ savvy (or how

to get things done)

• One’s motivation to share information and knowledge—

team spirit and goal orientation

The great irony is that the only economic component that

can add value in and by itself is the one that is the most

difficult to evaluate. This is the human component, which is

clearly the most vexatious of assets to manage. The almost

infinite variability and unpredictability of human beings

PREFACE TO THE FIRST EDITION xix

make them enormously more complex to evaluate than one

of the electromechanical components that comes with pre-

determined operating specifications. Nevertheless, people

are the only element with the inherent power to generate

value. All other variables—cash and its cousin credit, mate-

rials, plant and equipment, and energy—offer nothing but

inert potentials. By their nature, they add nothing, and they

cannot add anything until some human being, be it the

lowest-level laborer, the most ingenious professional, or the

loftiest executive, leverages that potential by putting it into

play. The good news is that measuring the value added of

human capital is possible. In fact, it has been going on in a

dozen countries since the early 1990s. Why this is known by

only a relatively few managers will be addressed later.

Viewed from either an economic or a philosophic per-

spective, the thing that matters most is not how productive

people are in organizations. That is a by-product of some-

thing more fundamental. The most important issue is how

fulfilled people are in their work. No amount of compensa-

tion can restore the soul of a person who has spent his or her

life in mindless toil. In fact, even a modicum of economic

comfort cannot overcome the bitterness of that experience.

Curiously, fulfilling work is truly its own reward for the indi-

vidual and the enterprise. In the final analysis, there is clear

and abundant evidence that an organization that makes

work as fulfilling as possible will develop and retain the

most productive workers and enjoy the most loyal cus-

tomers.

One of the key drivers of fulfillment is knowledge. Know-

ing how well we have done leads directly to job satisfaction.

The only thing that is more satisfying than seeing data that

show our accomplishments is having our supervisor see the

results of our labor and compliment us on a job well done.