Developing Human Capital Indicators: A Three-Way Approach

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(1)Developing human capital indicators: a three-way approach Tzu-Shian Han* and Carol Yeh-Yun Lin Department of Business Administration National Chengchi University 64, Zhi-nan Rd., Sec. 2, Wenshan Taipei 116, Taiwan, ROC E-mail: [email protected] E-mail: [email protected] *Corresponding author. Mavis Yi-Ching Chen Department of Business Administration Ming Chuan University 250, Sec.5, Jhongshan N. Rd, Shihlin Taipei 111, Taiwan, ROC E-mail: [email protected]. Abstract: This study aims to develop human capital indicators in the management practices of Taiwanese enterprises. The research design encompassed three stages. First, 56 human capital indicators were drawn from the literature and a questionnaire was implemented regarding the applicability of these indicators. Second, a ground approach asked EMBA executives to provide five key human capital indicators that are valuable and important to his or her company. Third, the empirical human capital indicators that are adopted in relevant top-tier journal papers were compared to the results of the previous two stages. The comparison results in the selection of ten human capital indicators, including employee competence, job accountability, professional tenure, employee commitment, employee cooperativeness, employee skills, employee creativity, employee professional knowledge, organisational tenure and employee education level. Some managerial implications and research suggestions are also proposed. Keywords: intellectual capital; human capital; human capital indicators; human capital measurement. Reference to this paper should be made as follows: Han, T-S., Lin, C.Y-Y. and Chen, M.Y-C. (2008) ‘Developing human capital indicators: a three-way approach’, Int. J. Learning and Intellectual Capital, Vol. 5, Nos. 3/4, pp.387–403. Biographical notes: Tzu-Shian Han is a Professor in the Department of Business Administration of National Chengchi University in Taiwan. He received his PhD from the University of Minnesota at Twin Cities in 1995. His research interests include employee ownership, employee participation, human resource management and firm performance, intellectual capital and knowledge management. Carol Yeh-Yun Lin is a Professor in the Department of Business Administration of National Chengchi University in Taiwan. She received her PhD in Human Resource Development from the University of Texas at Austin in 1992. Her research interests include strategic human resource management, international human resource management and intellectual capital. Mavis Yi-Ching Chen is an Assistant Professor in the Department of Business Administration of Ming Chuan University in Taiwan. She received her PhD from National Chengchi University in Taiwan. Her research interests include intellectual capital, strategic human resource management and organisational change.. 1 Introduction Human capital is the profit lever for the knowledge economy (Bontis and Fitz-enz, 2002) and is regarded as the fundamental element of intellectual capital. It is the core resource and competence for obtaining competitive advantage in organisations (Lepak and Snell, 1999; Pfeffer, 1994). Numerous empirical studies describe the characteristics of human capital, including education, experience, skill and the qualities of.

(2) management that exert a positive effect on organisational performance (Finkelstein and Hambrick, 1996; Huselid, 1995; Pennings et al., 1998; Wright et al., 1995). The employees who possess knowledge, skills and experience constitute the human capital that create value for organisations (Chen, 1999). Building up human capital and retaining intangible assets have become important management issues for modern corporations. Numerous scholars have focused on human capital research and accumulated a considerable amount of results in the last decade. In the meantime, many corporate executives are concerned with measuring the concepts of human capital. Among all the human capital indicators available today, the Intellectual Capital Report published by the Skandia Intellectual Capital Team in 1994 is, by far, the most notable and comprehensive piece of research. The Skandia group is the most advanced company in the field of intellectual capital reporting/planning among all Scandinavian corporations. Following the Skandia intellectual report, the researchers who became dedicated to empirical studies of human capital include Bontis (1999), Bontis and Fitz-enz (2002), Bukh et al. (2001), Dzinkowski (2000), Edvinsson and Malone (1997), Knight (1999), Roos et al. (1997), Stewart (1997), Sveiby (1997) and Van Buren (1999). Although many researchers have explored and measured human capital, some problems still exist in its measurement. Friedman et al. (1998) have suggested that there are three sets of challenges to human capital. First, the notion of human capital has remained a vague and ambiguous concept and the traditional financial measurements based on tangible assets are inadequate for intangible human capital. Second, it is difficult for managers to change their views and motives to obtain, manage and enhance human capital as valuable capital rather than expendable resources. Third, it will mislead managers into making improper decisions because of the ignorance of the proper disclosure and sound measurements of human capital. Therefore, it is crucial to delineate the proper human capital measurement and accurate indicators. As Bukh et al. (2001) argued, hardly any human capital literature features a comprehensive discussion of the indicators. In addition to the statements above, numerous studies have focused on European or US management practices up to now, with little research on Asia. For example, Chen et al. (2004) mentioned that there is limited intellectual capital research related to Chinese enterprises. Whether or not the currently available human capital indicators are suitable for Taiwanese enterprises needs investigation. For these reasons, this study aims to consolidate the existing empirical research results and the viewpoints of business executives to probe a set of good human capital indicators. The following sections first illustrate and substantiate the concept and measurement of human capital and then introduces a three-stage research design to refine the human capital indicators. Afterwards, the research findings are presented and finalised, with the concluding remarks as references for academics and practitioners.. 2 Literature review 2.1 The importance of human capital From the resource-based view, the strategic assets that are apparently valuable, rare, inimitable and nontransferable can contribute to the competitive advantage of firms (Barney, 1991; Wernerfelt, 1984). Mouritsen (1998) noted that human capital can be regarded as an organisation’s important strategic asset. Today’s firms continuously create products, services and processes in response to rapidly changing, competitive and dynamic environments and these firms need to achieve their goals through the knowledge, skills and creativeness of the human resources within the organisation (Burud and Tumolo, 2004). The term ‘human capital’ came from human capital theory, which refers to the knowledge, attitudes and skills that are developed and valued primarily for their economically productive potential (Baptiste, 2001). The economic value of education means the present value of past investments in the skills of people (Becker, 1964; Schultz, 1961). The continuous investment and development of employee skills and knowledge leads to expected firm productivity. Thus, an organisation should protect its investments in human capital to prevent brain drain..

(3) The following reasons may contribute to the positive impact of human capital on firm performance: First, the talent may facilitate enterprises in improving their business processes for better strategic and operational effectiveness (Kaplan and Norton, 1997). Second, under the conditions of increasing global competition, organisation survival depends on the employee’s innovative capability. Continuous learning and employee growth facilitates the transformation of knowledge into innovative products or services and cultivates a firm’s innovative capability (Becker, 1964; Mincer, 1974). Third, the qualified and preeminent human resources in firms accompany high-quality products and services, maintaining the existing customers and developing new ones (Pennings et al., 1998). It is crucial for firms to retain and strengthen human capital with challenging and satisfying work, opportunities for growth and advancement, the recognition of achievements and fair and competitive compensation (Roberts and Hirsch, 2005).. 2.2 The definitions of human capital Human capital can be classified into national, industrial and organisational levels (Becker, 1964). This present study attempts to explore the contents of human capital from the perspective of organisational management. Most scholars agree that human capital represents the knowledge, competence, technical skill and experiences of the human resources who yield economic value for the organisation (Hitt et al., 2001). Ulrich (1998) expanded the scope of skills, experience and knowledge and argued that human capital is composed of employee competence and commitment, highlighting the employee willingness to contribute. The fruitful human capital definitions proposed by scholars are in Table 1. After synthesising these definitions, we believe that it is essential to broaden the contents of human capital to contain multiple arguments. We define human capital as the core assets of an organisation, namely knowledge, skills, experience, competence, attitude, commitment and individual personal characteristics. These elements are transformed into intangible assets that create profits and productivity.. 2.3 The measurement of human capital The relevant literature on human capital measurement is continuously growing. Marr et al. (2003) have identified five main reasons why organisations are seeking to measure intellectual capital: to help the organisation formulate strategies, to evaluate the strategy execution, to assist in decision-making for diversification and expansion, to use it as a basis for compensation and finally to communicate measures with external stakeholders. Likewise, human capital is the primary component of intellectual capital. It is essential for firms to measure human capital when evaluating organisational effectiveness and externally disclose human capital to raise the organisation’s image, as well as investor confidence. Bukh et al. (2001) proposed a generic intellectual capital model for its measurement. This model illustrates three closely linked elements: ‘what is’, ‘what is done’ and ‘what happens’. ‘What is’ information is connected to the question of ‘do we have the right resource portfolio?’ These resources typically refer to employees, customers, processes and technology. ‘What is done’ information focuses on the question of ‘are we carrying out the right qualification or upgrade activities?’ Training, customer development, processes and technology improvements make qualification activities visible. ‘What happens’ information is concerned with the question of ‘have the activities we carried out worked?’ These consequences include employee and customer satisfaction and increases in the firm’s added value. Focused on the measurement of human capital, Bukh et al. (2001) explained that “what is” states the formal qualifications of employees, such as the level of education, work experience, organisational tenure, professional certification and so on. For example, Brooking and Motta (1996) used the level of education, professional licences/qualifications and work-related knowledge to measure human capital. Hitt et al. (2001) measured human capital through the level of education and organisational tenure. ‘What is done’ refers to the investment activities for human capital that are already done by an organisation, like employee training, leadership and motivational activities. For instance, Edvinsson and Malone (1997) and Sveiby (1997) used the average days of employee training and the average cost of.

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(5) employee training per year. Bukh et al. (2001) adopted the ratio of investment in training to the total of the salaries paid and Roos et al. (1997) applied the index of leadership to measure human capital. ‘What happens’ represents the effectiveness of these activities on human capital through such measures as job satisfaction, productivity, the level of salary and turnover rate (Bontis and Fitz-enz, 2002; Bukh et al., 2001; Sveiby, 1997; Van Buren, 1999). However, formulating the appropriate human capital measures for ‘what is’, ‘what is done’ and ‘what happens’ depends on the general organisational identity and the specific form of management activities that firms need (Bukh et al., 2001). Wright and Snell (1991) regarded organisational competitiveness management as an open system, with a Human Resources Management (HRM) system as one of the subsystems. In the HRM system, technical skills and competence were regarded as ‘input’; employee behaviours were in the process of ‘transformation’ and employee satisfaction and job effectiveness were the ‘output’ of the subsystem. The perspective of Wright and Snell (1991) is similar to Bukh et al.’s (2001) ‘what is’, ‘what is done’ and ‘what happens’ statements. ‘What is’ and ‘what is done’ information are employees competence and the competence upgrading activities implemented by firms, representing the ‘input’ and ‘process’ dimensions of human capital. Moreover, ‘what happens’ is the ‘output’ dimension of human capital resulting from human resource input and investment. Firms can develop the Input-Process-Output (IPO) framework to measure their own human capital and achieve an integrated and exclusive effectiveness. Nowadays, most human capital indicators can be categorised within the IPO framework of ‘what is’, ‘what is done’ and ‘what happens’ information..

(6) 3 Research design The research design involved three stages in refining the practicable human capital indicators that are fit for Taiwanese enterprises. In the first stage, 56 human capital indicators (see Appendix) were drawn from 1 previous empirical studies and a mailed questionnaire was implemented to enquire from the respondents about the applicability of these indicators. The survey items were measured by a four-point scale, from ‘highly inapplicable’ to ‘highly applicable’. Based on the Taiwan Economic Journal (TEJ) databank, a total of 1574 questionnaires were mailed in 2004 and 251 complete surveys were returned. The response rate was 15.94%. Approximately 80% of the respondents were at the management level and the provided information is more likely to reflect management practices in reality. The proportion of male and female participants was 64% to 36%, respectively. The industry distribution of our sample was composed of the manufacturing industry (45.5%), the information and service industries (20.5%, respectively), the financial industry (7.0%) and others (6.6%). In the second stage, we adopted a ground approach. Human capital was defined in an open questionnaire and numerous EMBA executives from National Chengchi University were invited to list five human capital indicators that are valuable and important to his or her company. We successfully contacted 122 EMBA executives from October to November 2005 and collected a total of 608 human capital indicators. The survey results were provided by male (57%) and female (43%) respondents. Approximately 75% of the participants were managers. The sample was composed of the service industry (37.7%), the manufacturing industry (21.3%), the information industry (17.2%), the financial industry (12.3%) and others (11.5%). In the third stage, enfolding the empirical human capital studies used in relevant top-tier journals strengthened the academic and practical value of these human capital indicators. Podsakoff et al. (2005) examined the management journals’ influence, using citations from 28 journals over the past 20 years. The findings showed seven top-tier journals accounting for 61% of all of the citations, namely, the Administrative Science Quarterly (ASQ), the Academy of Management Review (AMR), the Academy of Management Journal (AMJ), the Strategic Management Journal (SMJ), the Journal of Applied Psychology (JAP), Personnel Psychology (PerPsych) and Organisational Behaviour and Human Decision Processes (OBHDP). Among these journals, ASQ, AMR, AMJ and SMJ had papers related to the topic of human capital at the organisational level. We searched for empirical studies from these four journals that were related to human capital and that were done in the past decade. We compared the indicators that were adopted in these articles with those of the previous two surveys. The contents of these journal papers will be provided in the next section to avoid redundancy.. 4 Results 4.1 An analysis of the applicability survey on human capital indicators Table 2 reports the selection of ten applicable human capital indicators in the first-stage survey. The ‘ratio-type’ indicators included organisational tenure and professional tenure. The others were ‘degree-type’ indicators, such as the level of education, cohesive force of employees, management leadership skills, organisation identification, employee cooperativeness, employee job satisfaction, job accountability and employee competence. Although the education level seems to be the common indicator to value human capital, the results indicate that most Taiwanese enterprises place more emphasis on ‘degree-type’ indicators. We further investigated the distribution and differences of the human capital indicators among the industries. The results showed that among the ten applicable indicators, the manufacturing industry adopts ‘professional tenure’ (47.34%) most often, while the information industry emphasises the ‘level of education’ (21.43%), the financial and service industries value ‘employee cooperativeness’ (7.73% and 22.22%, respectively) and ‘organisational tenure’ (7.43%) is often adopted as human capital measurement.

(7) in other industries, like construction and academic research.. 4.2 An analysis of the ground approach to the human capital indicators For the ground approach in the second stage, we classified the results of the open questionnaire survey. A total of 16 human capital indicators were derived, as shown in Table 3. According to the top ten rankings of human capital indicators, there were five items that were consistent with the results of the first stage: job accountability, employee competence, professional tenure, employee commitment (the cohesive force of employees and organisation identification were combined in the indicator) and employee cooperativeness. The new additions to the list were employee skills, the personal characteristics of the employees, employee professional knowledge, communication skills and employee creativity. Most of the EMBA executives considered the job accountability of employees as an important indicator; however, the level of education, which ranked first in the previous survey, dropped out of the top ten list. We explored the variations of these human capital indicators among industries. The human capital indicators that the manufacturing, information, financial, service and other industries deemed as crucial profit levers were as follows: ‘employee cooperativeness’ (29.41%) for manufacturing, ‘employee creativity’ for information and service (26.32% and 47.37%), ‘professional knowledge of employees’ (18.84%) for financial and ‘communication skills’ (16.67%) for other industries, such as medicine and academic research. The indicators above, based on industry levels, were different from the first survey. The differences between the results could be the following reasons. First, other new indicators appeared in the ground approach, except for the selection of the ten applicable human capital indicators in the first survey. Second, the industry proportion was also unbalanced between the two stages. For example, the proportions of the manufacturing industry in the two stages were 45.5% and 21.3%, respectively. In general, employee cooperativeness was regarded in the survey results as an important human capital factor in the manufacturing, service and financial industries..

(8) 4.3 A comparison of the human capital indicators in top-tier journal papers to the previous results The present research used human capital indicators that were adopted from some top-tier journals to identify the differences or consistencies of the previous practical surveys on Taiwanese enterprises. The empirical indicators were derived from ASQ, AMJ and SMJ (after 1997) and the findings are shown in Table 4. These measures, adopted by scholars, contrasted those from the previous two stages, representing eight consistent human capital indicators that include professional tenure, the level of education, employee skills, employee cooperativeness, employee competence, employee commitment, the professional knowledge of the employees and employee creativity. Moreover, the human capital indicators that are most frequently applied by these articles are employee skills, the level of education and professional tenure. We made a comparison of the three sets of human capital indicators in Table 5. Four indicators were consistent through all of the three stages (employee competence, professional tenure, employee commitment and employee cooperativeness). We figured that 80% of the human capital indicators that were valued by Taiwanese enterprises (in the first and second stages) were the same as those in academic research. Eventually, we obtained ten practicable human capital indicators, including employee competence, job accountability, professional tenure, employee commitment, employee cooperativeness, employee skills, employee creativity, the professional knowledge of the employees, organisational tenure and the education level of the employees. According to the IPO framework with the issues of ‘what is’, ‘what is done’ and ‘what happens’, the final ten practicable human capital indicators were examined based on the three issues above. Table 6 reveals that five human capital indicators belong to ‘what is’, two indicators belong to ‘what is done’ and five indicators fall into ‘what happens’. Employee skills and employee professional knowledge simultaneously fall into ‘what is’ and ‘what is done’, because skills and professional knowledge can be.

(9) gained before the employees enter the firm or are enhanced via comprehensive development within the firm..

(10) 5 Conclusion 5.1 Establishing down-to-earth human capital indicators for Taiwanese enterprises The current study delineates down-to-earth human capital, which are valuable and applicable for Taiwanese firms, through a comprehensive three-stage investigation. In addition, the research findings may guide future reviews of the empirical studies on human capital. This present study found that the human capital indicators that are applicable to enterprises in Taiwan are employee competence, job accountability, professional tenure, employee commitment, employee cooperativeness, employee skills, employee.

(11) creativity, professional knowledge of employees, organisational tenure and the education level of employees.. 5.2 Developing the input-process-output framework of human capital measurement Firms can develop the IPO framework of ‘what is’, ‘what is done’ and ‘what happens’ to measure their own human capital, achieving an integrated and exclusive effectiveness. From these research findings, Taiwan puts more emphasis on the input and output dimensions of human capital, but invests less in the process dimension. This indicates that firms tend to recruit market talent to boost organisational effectiveness. However, the continuous investment and development of human capital is even more beneficial to raise the value of corporations. Therefore, we suggest that the managers and executives of Taiwanese enterprises further reinforce human resource development practices and continuously cultivate their employees while continuing to recruit high-quality talent and emphasise the economic benefits embedded in human resources.. 5.3 Integrate industrial and general indicators into bundles of human capital measures Besides the examination of the practicable human capital indicators, we explored the variations among the industries. It is reasonable for firms to adopt different bundles of human capital indicators to fit industry characteristics. For example, our results indicate that companies in the service industry take more account of employee creativity. Thereby, the bundles of human capital indicators should contain general and industrial indicators. General human capital indicators are applicable to organisations in all industries and might include employee personal characteristics of faith and integrity and the job accountability of employees. Industrial human capital indicators should be measured on the industry level. For instance, the financial industry may focus on the professional knowledge of employees, but the cultural and creative industries may consider the execution of creativity as highly important. In conclusion, we suggest that future research should attempt to measure human capital based on the concept of bundles that contain general and industry-specific indicators. Moreover, the impact on firm performance between general and industry-specific human capital measurement should be investigated.. References Baptiste, I. (2001) ‘Educating long wolves: pedagogical implications of human capital theory’, Adult Education Quarterly, Vol. 51, No. 3, pp.184–201. Barney, J. (1991) ‘Firm resources and sustained competitive advantages’, Journal of Management, Vol. 17, No. 1, pp.99–120. Becker, G.S. (1964) Human Capital, New York: Columbia University Press. Bontis, N. (1999) ‘Managing organizational knowledge by diagnosing intellectual capital: framing and advancing the state of the field’, Int. J. Technology Management, Vol. 18, Nos. 5–8, pp.433–462. Bontis, N. and Fitz-enz, J. (2002) ‘Intellectual capital ROI: a causal map of human capital antecedents and consequents’, Journal of Intellectual Capital, Vol. 3, No. 3, pp.223–247. Booth, R. (1998) ‘The measurement of intellectual capital’, Management Accounting, Vol. 76, No. 10, pp.26–28. Brooking, A. (1997) ‘The management of intellectual capital’, Long Range Planning, Vol. 30, No. 3, pp.364–365. Brooking, A. and Motta, E. (1996) ‘A taxonomy of intellectual capital and a methodology for auditing it’, 17th Annual National Business Conference, McMaster University, Hamilton, Canada, pp.24–26. Bukh, P.N., Larsen, H.T. and Mouritsen, J. (2001) ‘Constructing intellectual capital statements’, Scandinavian Journal of Management, Vol. 17, No. 1, pp.87–108. Burud, S. and Tumolo, M. (2004) Leveraging the New Human Capital: Adaptive Strategies, Results Achieved and Stories of Transformation, Palo Alto, CA: Davies-Black Publishers..

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(14) Education level of employees Total number of employees Average employee tunover rate in the three most recent years Average rate of employee retention in the three most recent years Average amount of new ideas for new products proposed in the three most recent years Average amount of new ideas for new products that were accepted in the three most recent years Total annual training and education expenses Total annual personnel expenses Total company sales in the last year Average salary of employees Average salary of managers Average sick leave per year Average employee attendance each year Average overtime per week Compare the staff salaries of your company to similar businesses Have a complete recruitment plan in your company Invest in employee training expenditures Have complete training programmes for employees in your company Added value of each employee (surplus/number of employees) Ratio of new employees with less than two years of experience The industry’s opinion of the company’s employees Employee departure will cause great impact on the organisation Your company is attractive to employees with high potential. The survey items on the applicability of human capital indicators (continued) Level of employees’ proposals being realised Employee creativity Your company has an innovative culture Informal interaction among employees Social ability of employees Frequency of messaging among employees Level of learning orientation of employees Your company has a learning culture Employee voices are heard well Rate of employee participation in company activities Level of voluntary extension of work time.

(15) Loyalty of employees Level of employee identification Level of employees believing and accepting company goals and values Level of employees willing to invest efforts for the company Level of employees willing to maintain their identity as a member of the company Morale of employees Level of delegation in your company Number of teams delegated in your company Level of employee job accountability Level of employee competence Level of employee job satisfaction Level of cooperativeness among organisation members Level of employees’ positive and proactive attitudes Leadership skills of the management team Number of members in the management team Number of female members in the management team The executives share their management experiences.

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