Human capital

Human capital is the value represented by the skills and experience of employees. When properly deployed, human capital should result in a high level of productivity, which in turn increases a company's market position, profits, and/or cash flows.

A logical outcome of the human capital concept is that a business can increase it by investing in the training of its employees. This training may be accomplished not only through the use of formal training, but also by implementing a policy of hiring from within, so that the experience level of employees increases as they move upward through increasingly more challenging positions. Job rotations can also be used to force employees to gain experience in a number of functional areas.

When a business has developed or hired a high level of human capital, a concern will be its ability to retain employees. A low level of employee turnover can be achieved by attending to the work environment, offering competitive compensation and benefits, and training managers in proper supervisory skills. Otherwise, a business will find that its human capital trickles away, and may then be employed by more attentive competitors.

The value of human capital is not recorded anywhere in the financial statements of an organization, nor can it be created as an intangible asset as a result of a business combination. In fact, human capital is not owned by an organization at all, but rather by its employees. This is why investments in human capital are charged to expense in the period incurred - no quantifiable owned asset is created.

A higher level of human capital in society should result in an increase in wages over time.