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As
the relationship between workers and their work has evolved, so
have the metaphors we use to describe how people view their jobs,
and how companies view their employees. This evolution is not just
a change in terminology. Rather, it reflects fundamental shifts
in the way we think—and speak—about working life.
Why should we care
about metaphors? After all, a metaphor is merely a figure of speech,
a way of illuminating one idea by invoking another apparently unrelated
idea. Why should anyone not sitting in an English class—or standing
up in front of one—pay attention to their use? The reason, simply
put, is that language matters. Because metaphors are attention grabbing
and packed with meaning, they are especially powerful. In the words
of philosopher and humanist Jose
Ortega y Gasset, “The metaphor is probably the most fertile
power possessed by man.”
Business leaders,
never ones to overlook a power source, are enthusiastic, if not
always precise, users of metaphors. Indeed, business language is
full of them. Employees aren’t just important contributors—they‘ve
become their companies’ “most valuable assets.” Capable executives
aren’t just hard to come by—companies are waging a “war for talent.”
People don’t just bring their background and experience to their
work, the contribute their “human capital.”
While all these metaphors
help us understand why people are valuable to companies, the notion
of people as owners and investors of human capital is particularly
rich. More to the point, I think it better captures the underlying
truths of working life than the idea that people are mere assets,
deployed at the whim of their owners like so many forklifts. Why
quibble over which is the more accurate metaphor? Mark Twain reminded
us why it’s important to choose our words carefully: “The difference
between the almost-right word and the right word is really a large
matter—‘tis the difference between the lightening bug and the lightening.”
A Definition of
Human Capital
As a term, human
capital suffers the same fate as many compelling and widely adopted
metaphors—broad acceptance but imprecise usage. So, I’ll make a
modest contribution by proposing a definition. Human capital comprises
all the intangible assets that people bring to their jobs. It’s
the currency of work, the specie that workers trade for financial
and other rewards. The term first appeared in a 1961 American
Economic Review article, “Investment
in Human Capital,” by Nobel-Prize winning economist Theodore
W. Schultz. Economists, academics, and consultants have since loaded
many notions into the human capital portmanteau. I propose that
the best way of looking at human capital is to break it into four
elements:
 Knowledge:
command of a body of facts
Skill:
facility, developed through practice, with the means of carrying
out a task
Talent:
inborn facility for performing a task
Behavior:
observable ways of acting that contribute to accomplishing a task.
Like
all good metaphors, the idea of human capital gains potency as you
explore tangential metaphors—spin-offs, if you will. Let’s have
a quick look at some of the more enlightening spin-offs from human
capital.
Return on Human
Capital Investment
People come by their
human capital through a variety of means—formal education, job training,
on-the-job learning, evening classes at the school of hard knocks,
and through the luck of the DNA draw. And they do with it just what
you would expect someone to do with something that has value—they
cash in on it. That is, an owner and investor of human capital will
place this asset where it will generate the highest return.
Return on human capital
investment, therefore, is the set of rewards that an employee receives
in return for investing his or her knowledge, skill, talent, and
behavior. Those rewards come in financial forms through pay, benefits,
and stock options. Equally important are the non-financial forms:
intrinsic job satisfaction, recognition for good performance, opportunities
to learn through the job and advance in the organization. A little
later, we’ll consider how companies should manage and deliver this
portfolio of rewards.
In the human capital
arena, investment and ROI work much as they do in financial circles:
higher return engenders a greater inclination to invest. A lower
return reduces the inclination to invest and increases the probability
that human capital will be withdrawn and moved to another investment
(that is, the employee will quit and take another job).
Risk
Risk is defined as
exposure to the possibility of injury or loss. Financial investors
consider risk when they structure their investment portfolios. Every
time they make a move (or decide not to move), financial investors
face the possibility that they will lose some part of their capital
or forego a gain they might have enjoyed with a different investment.
Human capital investors
face their own special forms of risk. In the early 1990s, when the
spectre of downsizing haunted the workplace, an employee’s greatest
risk was loss of a job. When this happened, the chance to earn a
return on human capital investment fell to zero for some time. The
investable asset wasn’t directly threatened—layoffs eliminated jobs,
but didn’t make people incompetent.
In
our post-millennium world, however, risk means something different.
These days the greatest risk faced by employees, especially those
for whom the latest technical knowledge is their most critical human
capital, is not loss of a job, but rather devaluation of the asset.
As long as my Java programming skills are up to snuff, I can get
another job. But what if I fail to hone those technical skills or
if my knowledge falls behind by as much as three months? Then I’m
in trouble because my human capital drops below its maximum value
and so does my ability to earn a return on its investment. Little
wonder why continuous learning is so important to people who work
in fast-moving industries.
Investment Contract:
The Deal
An implicit contract—a
deal—provides the context for exchange between worker and organization.
The deal conveys what each side will provide to the other and what
each will receive in return. A formal document may capture some
aspects of the relationship between individual and company, but
can never cover all the subtle interpersonal elements. Therefore,
social scientists like to use the term psychological contract
to encompass the web of written, unwritten, spoken, unspoken, and
ultimately ineffable aspects of the interaction between people and
their employers. The notion of a psychological contract is old wine,
but its prominence is of recent vintage.
It seems that no
one paid much attention to the unwritten contract until companies
began to break it. Downsizing, one read a few years ago, destroyed
the time-honored contract that provided a job of indefinite (but
presumably extended) tenure in exchange for loyalty and reasonable
performance. Today, a different contract binds workers and companies.
Today’s contract requires the individual to look to the value of
his or her human capital as the source of job security. The company
is required to generate ROI, or the employee has the right, with
no moral penalty and little frictional cost, to invest in another
job with a different company.
Implications for
Managers
Metaphors are only
useful if they enlighten, and enlightenment is helpful only if it
leads to some effective action. So, now that we’ve considered the
main metaphor and some of its spin-offs, what actions should companies
contemplate if they are to act in ways consistent with what the
metaphor suggests?
Consider again the
definition of human capital as critical knowledge, skills, talent,
and behavior. By critical, we mean instrumental in executing business
strategy. In a study conducted jointly by the Economist Intelligence Unit (EIU)
and Towers Perrin, entitled “Business,
People and Rewards: Surviving and Thriving in the New Economy,”
senior managers from global corporations said that some forms of
human capital most critical for delivering on business strategy
are clearly lacking in today’s workforce. Figure 1 illustrates these.
Human
Capital cited as critical or important to delivering on business
strategy.
Notice that abilities
associated with e-literacy, innovation, and entrepreneurship are
expected to be crucial for strategic success in 2003, but are considered
insufficient in today’s workforce. Managers should view the building
of these forms of human capital as a necessity. Employees should
see building them as an opportunity.
When it comes to
managing risk, the time-honored financial technique of hedging has
application for human capital investors. Financial investors hedge
by buying securities with values that move in opposite directions
when prices change. Human capital investors can do something roughly
similar by investing time and effort today to develop knowledge
and skills likely to rise in value in the future. Consider the skills
and behaviors associated with being a team player. Respondents to
the EIU/Towers Perrin study considered these forms of human capital
to be both strategically critical for business success in 2003 and
relatively widely available in the workforce today. But what if
tomorrow’s team member must behave differently and possess skills
different from those of today’s definitive team player? Participants
in senior-management focus groups said that team players in the
new economy must have:
Technological
expertise to engage in electronic communication
Project
management skills that extend to handling joint ventures and strategic
partnerships
Behavioral
attributes that permit successful cross-functional, inter-company,
and multi-regional cooperation, even when traditional authority
is absent.
High-performing individuals
manage their risk and increase their potential reward when they
raise their sights beyond today and develop human capital that will
be strategically important (and generate high return on investment)
tomorrow. High-performing companies help them achieve this goal.
Companies that intend
to work with their employees to develop tomorrow’s human capital
must also rethink their delivery of the return on human capital
investment. Even the best performing organizations, the EIU/Towers
Perrin study showed, have gaps to fill in their reward programs.
Figure 2 illustrates some of those gaps.
Gap between current
effectiveness
It is noteworthy
that respondents from high-performing companies say that challenging
work and career advancement opportunities will be two of the more
important forms of human capital ROI in the next few years. Both
rate higher than stock options (the recent reward of choice, judging
by the sturm und drang surrounding the rise and fall of employees’
equity stakes over the past year) when it comes to focusing employees
on business results.
Emphasizing the most
important elements of return on human capital investment will surely
entail a shift in management attitude away from reliance on financial
rewards. But an even more fundamental shift lies ahead, one that
will require management to set aside conventional notions of “equitable”
treatment of employees in favor of individualized, customized rewards
that reflect individual performance and value creation. Paying for
performance is not a new idea, though it is reflected more often
in word than in deed. In any case, the mass-market approach to delivering
return on human capital investment is dead, or soon will be.
Total customization
of the individual deal is both new and daunting. But it’s on the
way, to be sure, as the figures below suggest.
To what degree
are your employees able to customize
While customization
of reward packages is relatively rare at present (with only 10%
of respondents to the EIU/Towers Perrin study saying their companies
offer at least some degree of flexibility) that will change over
the next several years. More than a third of the managers believe
that, by 2003, their organizations will offer employees at least
some customization options. More than one-fifth thinks that their
organizations will be offering high (or even total) reward program
flexibility. The totally customized deal works to the advantage
of both companies and employees. Employers can allocate reward investment
in ways that best meet individual employee needs and respond to
socioeconomic change. And, not surprisingly, employees tend to value
their returns on human capital investment when they have a say in
structuring them.
What’s Next?
What will happen
to the legitimacy of the worker-as-investor metaphor if the economy
softens? Will the next shift in our economic fortunes mean a return
to the days of viewing workers as costs? Although the workplace
will continue to evolve, I believe that substantial time will pass
before economic factors undercut the value of human capital, or
undermine the insights to be gained from studying the metaphor.
In good times, companies need to attract the owners of valuable
human capital, make a deal with them, provide a high return on their
investment, and be mindful of the risks they incur. In cost-conscious
periods, companies still need to hold on to key people and keep
them engaged in jobs despite the ill fortunes of their downsized
peers. The two situations call for fundamentally the same human
capital management skills, applied in different ways. For their
part, individual human capital investors must deal with a constantly
shifting market for the intangible assets they bring to the job.
Indeed, in a softening market, one reality becomes stark: you win
or lose by virtue of the value of your human capital. To this extent,
the financial and human capital markets are equally unforgiving.
Thomas
O. Davenport is a principal in the San Francisco office of Towers
Perrin. He is the author of Human
Capital: What It Is And Why People Invest It (Jossey-Bass, 1999).
Write him at davenpt@towers.com.
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