Does Human Capital Matter?

Bret Simmons; Leader Lab

1st March 2011

For your company to achieve high performance, you need to acquire and nurture the best and brightest human capital available and keep these investments in your company. This is the bottom-line conclusion of a study recently published in the Journal of Applied Psychology entitled "Does Human Capital Matter? A Meta-Analysis of the Relationship Between Human Capital and Firm Performance."

Human capital is the knowledge, skills, and abilities of your employees. Past research has shown that some of the most important aspects of human capital that drive company strategy and performance are the experiences, education, and training of managers.

This study's analysis of data from 66 previously published studies found that human capital had a significant and positive impact on global measures of company performance (e.g. ROA and Returns on Sales). The relationship between human capital and performance was strongest when the human capital was firm-specific (e.g. years of experience with a firm) vs. general (e.g. a stockbroker). When human capital is general in nature, wages and the threat of turnover are higher because the labor market is more competitive. But specific human capital is more valuable to the performance of your company because it is hard to for you to replace and for your competition to copy.

The study also found that human capital has an even stronger effect on measures of operational performance (e.g. customer service satisfaction, team performance, retention, and innovation). Operational performance, in-turn, had a strong effect on global measures of company performance. This demonstrates that human capital drives the performance of your company through its effect on operational excellence. Your company cannot thrive with crappy operations, and your operations cannot thrive without good people.

When I teach the service-profit chain in my MBA classes, my bottom line is that the single most important thing you need to do on a daily basis if you want to grow revenue and profit in your company is to take care of your employees. Inevitably, there are always a few know-it-all managers that smirk when I say this. Like it or not, it's an empirical fact that your people are the key to success for you and your company.

Take care of your people. Teach them to take care of each other and your customers. Once you develop this very specific human capital in them, don't treat them like a commodity. Treat them like the performance of your firm depends on them, because it does.