What Is Human Capital?

Human capital includes the experience, qualities, and hard and soft skills workers and members bring to a business or institution — and it is crucial to a business’s operations.

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Over the long run, a business is only as good as its workers and managers. Even if a company offers quality products or services, its odds of long-term success are poor if it doesn’t effectively maintain, manage, and elevate its human capital.

What exactly is human capital?

Human capital includes the experience, qualities, and hard and soft skills workers and members bring to a business or institution. At the fundamental level, it’s one of the most important factors in shaping organisational success.

Why is human capital important?

It’s important because it shapes how organisations function daily and their ability to adapt to new developments and achieve goals. A company or organisation with high employee turnover is almost certainly losing valuable human capital. Highly skilled employees with lots of experience in a particular field improve the organisation through their expertise.

Human capital is essential for running an organisation effectively and meeting operational goals. It’s even more important for gaining a competitive advantage through innovating or succeeding in highly competitive fields or industries.

How can companies improve human capital?

Businesses and institutions have a number of avenues to improve their human capital. To start, organisations can have standards and human resources practices that promote hiring great employees.

From there, providing beneficial training and education at sufficient intervals helps ensure that workers are kept up to speed and learning new things. Monitoring performance and communicating effectively with employees is also important.

In many cases, keeping employees for long periods allows them to grow with the organisation and develop their expertise. Fostering a strong workplace culture, providing employment benefits, and delivering pay raises and incentives when appropriate can all help retain and develop human capital.

Balancing the skills of people in your organisation can also be a way to improve human capital, as employers and members who work well together can complement each other and create a synergistic environment.

An example of human capital in action

The Silicon Valley area is famous for hosting many of the world’s biggest and most influential tech companies. The area also hosts perhaps the world’s greatest ongoing competition for human capital. Attracting the right executives, managers, developers, designers, engineers, and workers of a wide range of stripes can make or break companies in the highly competitive tech industry.

In addition to competing to offer salaries and benefits that can help attract the best talent, tech companies aim to provide office experiences and workplace cultures that stand out and are valued by employees. Workplace perks — such as high-end cafeterias and food options, well-stocked snack bars, lounges for relaxation, transportation services, gyms, and recreation areas where employees can go to blow off steam — are intended to attract and retain human capital.

This article contains general educational content only and does not take into account your personal financial situation. Before investing, your individual circumstances should be considered, and you may need to seek independent financial advice.  

To the best of our knowledge, all information in this article is accurate as of time of posting. In our educational articles, a "top share" is always defined by the largest market cap at the time of last update. On this page, neither the author nor The Motley Fool have chosen a "top share" by personal opinion.

As always, remember that when investing, the value of your investment may rise or fall, and your capital is at risk.