Human Capital: the contribution of Organisational Psychology

By Maire Kerrin, Organisational Psychology Group, City University

Definitions of Human Capital that have emerged recently, such as those in Table 1, view human capital as a combination of employee competencies (ie knowledge, skills, abilities and experience), and the motivation or commitment of the individual to apply these competencies. Broader definitions suggest that while the competence x commitment description is useful, there is also a need to include the work environment design as a factor in human capital - that is human capital is not just the sum of individual KSA's (Refs: Fissing/HR society). In general, in the practitioner and academic management literature, it is described as something individuals bring to the organisation, but also something that might be developed through training and development. Any Organisational Psychologist reading this will immediately recognise these descriptors as summarising much of the core work areas that we have been involved in for the past 100yrs! Organisational Psychologist have been involved at a theoretical level in researching, defining and measuring workplace knowledge, skills, abilities (KSA's), motivation and commitment. Research has also addressed the impact of the work environment in making the most of individual talent and promoting well-being at work. Our theoretical understanding in these areas has been used to inform practice, for example in selection, training, career development, appraisal, rewards and counselling in the workplace. It seems strange then, that the area of Human Capital has been dominated by the management, accounting, HR and economic literature.

The purpose of this article is to review the area and, given the skills and knowledge that Organisational Psychologist, consider how organisational psychologists can contribute research and practice to this area.

Approaches to Human Capital

The Institute for Employment Studies identifies at least three different models that are driving organisational action in relation to Human Capital:

1. the accounting model, which aims to put human assets on the map in the same way as financial ones. This focuses on reporting metrics on human capital in the same way as traditional company accounts
2. the resource based view of the organisation that sees intangible assets, especially employees, as increasingly the source of competitive advantage
3. the notion that achieving higher engagement/commitment levels will lead to performance or productivity improvements

For many, human capital is seen as a new era for understanding the contribution of individuals to the workplace, while for others it is no more than another management fad that helps consultancies sell their various products and metrics. Critics also argue that viewing and measuring people in the same way as economic units is inappropriate and leads to generating metrics and statistics that are meaningless. It is too early to determine whether it will end up being a lasting concept, but it has undoubtedly raised awareness around the psychology of individuals at work at both a boardroom level and national level. This is with a particular focus on the role of motivation, commitment, engagement (however defined) and the role of the work environment/ design.

An example of this interest at a national level is the recent Government initiative that set up a taskforce entitled 'Accounting for People', sponsored by the DTI and led by Denise Kingsmill. The work of the taskforce has served to raise the profile of this as an area of importance for UK organisations. At the core of the taskforce is an evaluation of how UK organisations should go about measuring and reporting KSA's, motivation and communication within orgs and establishing any links to performance. The report, due out in the Autumn 2003, aims to create best practice guidance for organisations. One of the key areas being examined by the report is whether organisations should be required to report such measures in annual reports, in the same way as company accounts. If this happens, the implications are huge in terms of how an organisation externally reports their human capital. Even if this does not happen, it appears that the measurement and reporting of human capital, as part of 'intangible assets', is now firmly on the board room agenda.

How organisational psychologists contribute

The measurement and management of Human Capital, which are the main activities that organisations are involved in today (in terms of an 'individual's value in an economic sense, and the way that value is transformed into the organisations capability'), leads to a whole number of moral, ethical and psychological questions that organisational psychologists are well placed to answer. The area has been dominated by the strategic HR field, economists and analyst, but there are opportunities for more organisational psychologists to become involved in the theoretical and practical debate.

A whole raft of HC metrics have emerged that for many recycle old ideas without much thought about what they tell us about the individual behaviours or impact on the organisation. In particular, many are based on poor theoretical grounds. The 'added value' that psychology brings to this area is the understanding of the underlying behaviours of individuals in organisations and of the constructs being measured.

Human Capital has highlighted the motivation and commitment of individuals at work, the knowledge, skills and abilities individuals have, and the issue of the measurement of these constructs. Organisational psychology research and practice has theoretical knowledge of constructs such as motivation and commitment, and how they can be measured using proven methodologies. Organisational Psychologist also use rigorous approaches to the identification and measurement of job related KSA and importantly, the behavioural indicators that underline these.

For example, in the area of selection, validity and reliability studies carried out by organisational psychologists provides information on how accurate the selection process was in terms of selecting the right person for the job. It also provides data on the return of investment (ROI) and the added value of fitting the right person to the job. This is both in terms of organisational performance and the well being of individuals through a better match to the job. Of course, not all organisations carry out these studies to evaluate the efficiency of their selection process, but where they do, they are better placed to demonstrate the value of good selection practices on both the individual and the organisation. Within training, organisational psychologist are well skilled to carry out evaluations of training and development programmers, the information from which can better inform the human capital debate regarding the impact of training on knowledge, skill and abilities, and also on motivation and commitment to apply new skills. These are far better indicator than how many training programmes carried out.

Most of the work in this area has been metric driven - ie developing balanced scorecards to capture the amount of training, measuring commitment and motivation through opinion surveys and then linking to external performance indicators. What is poorly understood is what these constructs mean and how are the behaviours or attitudes manifest themselves in practice. For example, showing a connection between employee engagement and business performance may be a very important indicator for the organisation in terms of the influence of human capital, but it still begs the question about what employee behaviours and attitudes underpin the engagement. Or more importantly, for many organisations, it is not clear what they meant by engagement in the first place! At this level, organisational psychologists can continue to have input.

Conclusion

For many organisational psychologists, the debate around Human Capital adds nothing new to what we already do i.e. understanding the contribution of individual behaviour at work. This is carried out by using sound theory grounded in psychological research, designing ways to measuring constructs appropriately and examining the relationship to organisational outcomes e.g. performance, absenteeism, turnover etc and the impact of work environment/design on this…Or this is what we would like to do. Practicalities and resources often mean that short cuts are taken and comprise made when carrying out this work. The emergence of the measurement and management of Human Capital as a board room and government agenda item may mean that in future, we have the perfect rationale for using skills to the full.

In summary, it is apparent that organisational psychologists are contributing in the work that they do to this area. However, I would argue that we do not see the link between local projects (e.g. carrying out a training evaluation, designing and validating a selection process, designing measures to assess motivation and commitment) and strategic initiatives by the board around defining and measuring human capital. There are opportunities to link our measures and assessments (based on sound theoretical knowledge) to these wider initiatives. To do this we need to recognise where the opportunities are and to influence key stakeholders that Occupational Psychologists can contribute to this area (whether it is call Human Capital or some other phrase for the week!). We also need to lobby more strongly as a group to become involved in taskforces and government initiatives that shape some of these agendas around the contribution of individuals to work. Otherwise we will be left to operate at local level, which while useful, will not have significant impact on well being of individuals at work.