Last Updated On July 29, 2021 / Written By Hanh Truong

Beginner's Guide to Human Capital Management

What is Human Capital Management?

Human capital management, also known as HCM, is the practice of recruiting, hiring, training, and overseeing a workforce. Effectively carrying out the human capital management process will ensure employees are working productively and optimally. In turn, employers can increase their business value and enhance operations.

Generally, human capital management involves a series of steps that are both strategic and administrative. While most organizations will have their own unique techniques for this process, there are various key elements that are critical to HCM. Most of which include the following.

  • Recruitment - The process of enlisting or finding new hires for an organization.
  • Onboarding - The act of introducing a new hire into a company and helping them integrate into the professional culture.
  • Payroll - The process of tracking hours and compensating employees.
  • Benefits and retirement services - Top companies have benefit programs for their staff members, such as health insurance enrollment and retirement savings.
  • Training - The practice of teaching employees new skills and knowledge for a particular responsibility or job.
  • Compliance - Employers must adhere to local and federal state labor laws to ensure employees are treated fairly.

The Importance of Proper Human Capital Management

As many organization leaders will say, employees are our greatest asset. With employees, companies are able to successfully produce products, serve customers, and ensure a smooth-running operation. Employees are the foundation of a thriving business, therefore, it is important that employers have proper human capital management.

Additionally, the cost of having a workforce is one of the highest expenses of a company. With an HCM system, managers can rest assured knowing they are producing the most economic value from an employees' skillset, experience, and capabilities. It also helps them retain their employees as most human capital management programs focus on development, education, health, and well-being.

These initiatives can help businesses improve employee engagement and company culture. Additionally, according to case studies, effective usage of human capital is proven to directly affect organizational key performance indicators, such as productivity, output quality, and customer satisfaction. Subsequently, this will boost the organization's competitive advantage.

5 Benefits of Effective Human Capital Management

Businesses that hone in on their human capital management processes can extract the maximum value from their employees and their skills. It also helps streamline human resources practices, allowing for efficiency. Other advantages to effective human capital management include the following.

1. Improve Training

A human capital management system helps managers establish a process for overseeing a workforce. This system can be used to ensure human resources find top talents and train them effectively. With the right training practices, companies can quickly and successfully achieve organizational goals.

2. Attract Qualified Candidates

Companies can easily attract qualified candidates with a robust human capital management process. Not only will employers build a reputation as an ideal business to work for through HCM, but it will also help hiring managers to find the right candidate for skill-specific positions. The process can also help enhance onboarding techniques and ensure new hires fit well into the organization.

3. Achieve More Goals

Human capital management enables employers to identify needs and goals within their existing workforce. With these insights, the human resource department can enhance its recruitment practices to meet more objectives. This ensures a more well-rounded labor force that can help drive company growth.

4. Match Employees with the Right Positions

An HCM system helps organizations align employees with the right position where they can leverage their talent and strengths. This is all due to the system's emphasis on pinpointing employee competencies and skills. By having employees in productive positions, they will be more satisfied with their job and efficient in their work.

5. Identify Career Opportunities

Through HCM systems, employees are empowered to steer their careers the way they want. Common human capital management practices entail training, performance reviews, and regular feedback. With this, staff members can gauge their personal and professional skills and identify their capabilities.

4 Challenges of Human Capital Management

While there are many advantages to human capital management processes, there are some challenges as well. Managers should be aware of these obstacles so they can be proactive and mitigate them. The following are common challenges to human capital management.

1. Ensuring Continuous Learning

Generally, employees enjoy working in an organization where they can continuously learn new skills and gain new experiences. Case studies show that many employees will leave their position if there is a lack of development opportunities. To ensure staff members are engaged and satisfied with their job, human capital management leaders need to keep staffers mentally stimulated.

Companies can provide learning content that is relevant to an employees' position in various formats. Having training sessions and workshops where employees can partake will also promote continuous learning. Oftentimes, organizations will also fund tuition for staff members that want to return to school part-time.

2. Managing Diversity

More and more companies are expanding businesses across regional and international borders. This means organizations are working directly with diverse employees, customers, and partnerships. Companies need to make sure to create a comfortable and welcoming environment where people of all cultures, experiences, and perspectives can come together.

3. Tending Health and Workplace Safety

While it is important to follow labor laws to ensure compliance, employers need to look after their workforce's well-being for safety. Having high demands, unfair pressure, and consistently tight deadlines can easily contribute to employee stress and burnout. Companies need to monitor workloads and stress levels to ensure staffers are in a healthy state of mind. Employers can enforce mental health days where employees can take the day off and recharge. Some businesses will also provide stress-coping workshops and policies that promote transparency regarding mental health discussions.

4. Creating an Enjoyable Company Culture

Retaining employees is a top challenge for human resources and in order to remedy it, employers need to start with their company culture. Organizations that lack a welcoming and quality company culture often experience high employee turnover. Some ways to make work more enjoyable for employees is to provide incentives, such as salary increases and bonuses. Companies can also offer flexible working schedules, such as remote work, discounted gym memberships, and other perks.

4 Key Functions of a Human Capital Management System

Organizations across all sizes and functions should have a human capital management system. This ensures employers are constantly in the know of what their employees need and how they can effectively grow their business. When establishing a human capital management system, businesses should make sure to include the 4 key functions.

1. Hiring and Termination

A common practice for human capital management is hiring new people to an organization and terminating unfit staff members. This also entails onboarding new hires to ensure they integrate well into the company. Depending on the organization, human resources may also have to source freelancers and third-party contractors.

2. Training Employees

After a successful recruitment process, the human resources department will need to train new employees for their new position. If a staff member is promoted to another role, they may also need to be trained so they can seamlessly adjust. A thorough human capital management training process will ensure all employees are prepared for their jobs.

3. Retaining Employees

Human capital management goes beyond just recruitment and training. Employers need to make sure they keep their staff members happy in order to retain them. Retention practices involve nurturing employees' needs, recognizing top performers, and continually investing in the company culture.

4. Maintaining Morale

Maintaining high morale in an organization is also important for retention and company culture. Human capital management teams should have an open-door policy to allow employees to communicate their feelings and concerns to the business. The teams should also ensure transparency and inform employees about important company news.

4 Tips for Improving Human Capital Management

Modern workforces require thorough management beyond recruitment, payroll, and benefits administration. Managers should consistently innovate and improve their HCM programs to keep up with employee demands. They can use the following best practices to ensure an effective human capital management system.

1. Focus on Current Employees

While a huge component of human capital management is recruitment and onboarding, it is also important that employers focus on their existing workforce. They need to make sure staff members are happy and engaged with the organization. This will help boost employee retention and overall productivity. Some ways to show appreciation to current employees are demonstrating recognition, helping staff identify goals, and providing benefits.

2. Connect with All Staff Members

Human resource representatives need to connect with employees in order to effectively manage them. Leaders should take steps to personalize the way they approach staff members. Business experts advise employers to assess employees' personalities and preferences and use those insights to customize communication methods. This will increase engagement and ensure initiatives are successfully internalized.

3. Use Technology

Modern businesses can enhance their human capital management system by adopting the right technology tools. In today's world, there are mechanisms that will automate processes and consolidate key data. Employers can use these solutions to reduce the use of paper and manual work so they can interact with employees directly.

4. Have Positive and Transparent Communication

Open and transparent communication is important for company culture and for managing employees. The workforce is entitled to know about the ins and outs of a company. Managers must make sure to communicate budget cuts, operational adjustments, and policy changes honestly. Communication is also key for ensuring new hires and recently promoted employees can seamlessly transition into their new roles.

Conclusion for Human Capital Management

  • Human capital management, also known as HCM, is the process of recruiting, hiring, and managing employees.
  • Small businesses to large enterprises need to have a human capital management system to ensure they are effectively overseeing employees.
  • An HCM system provides many benefits, such as improved training and more goal achievement.
  • Some tips businesses can use to improve their HCM processes include focusing on current employees and having thorough communication.