Human Capital Index (HCI)

Human Capital Index measures how well an organization makes use of the ability of an individual to perform and create shareholder value through his/her competencies, knowledge and expertise. A higher human capital index indicates better management of human capital by the organization. It is measured on a scale of 100. The human capital index can be enhanced by providing training to increase the expertise and competencies of individuals, providing bonuses to performing individuals, etc.[1] In general, human capital index is a measure of effective human resource management.

The Human Capital Index measures countries’ ability to maximize and leverage their human capital endowment. The index assesses Learning and Employment outcomes across 5 distinct age groups, on a scale from 0 (worst) to 100 (best), and assesses 130 economies.[2]

The 6 primary human capital performance drivers:[3]

  • Strategic alignment: the extent to which all leaders share a consistent perspective about, and commitment to the organization’s stated mission and vision, its goals, and its strategies for achieving success.
  • Leadership quality: the extent to which leadership quality is recognized as a strategic differentiator that drives performance, quality, customer satisfaction, engagement, and overall organizational results.
  • Engagement: the extent to which employees at all levels and functions are meaningfully treated in ways that lead to full participation in their jobs and contribution to the growth of the company.
  • Culture and identity: the underlying and collective beliefs about an organization’s purpose, and the degree to which culture is both recognized as a critical factor in organizational effectiveness and is actively managed.
  • Change agility: The speed and accuracy by which the organization is able to adapt, change direction, and implement new initiatives and strategic priorities.
  • Execution: The extent to which members of the company, from leaders to the front line, are accountable, deliver on promises, and focus on performance.

Human Capital Index (HCI)
source: FMG Leading

The Watson Wyatt Human Capital Index is an ongoing study that quantifies the link between specific human-capital practices and shareholder value. Conducted every two years, beginning in 1999, it has a four-pronged objective: 1) toprovide HR with financial-performance metrics; 2) to test the belief that itpays to manage people right; 3) to help managers assess their human-capitalinvestments; and 4) to determine whether some HR practices offer a “biggerbang for the buck” than others. Seven hundred and fifty large publicly traded companies in the United States,Canada, and Europe took part in the 2001 study. Human resources executives atthe companies were asked a wide range of questions about how the organizationscarried out their HR practices, including pay, people development,communication, and staffing. Their responses were matched to objective financialmeasures, including market value, three- and five-year total return toshareholders, and Tobin’s Q, an economist’s ratio that measures anorganization’s ability to create value beyond its physical assets.[4]

The Global Human Capital Index[5]
As a leader in the analysis and improvement of human capital disparities worldwide, the World Economic Forum considers factors and indicators of individuals as well as long-term trends that shape a nation’s workforce and talent pool. The Global Human Capital Report presents information and data that are compiled and/or collected by the World Economic Forum. The Global Human Capital Index provides a means of measuring the quantifiable elements of the world’s talent potential so that greater attention can be focused on delivering it. By measuring countries’ talent resources holistically according to individuals’ ability to acquire, develop and deploy skills throughout their working life rather than simply during the formative years, we hope to foster a true revolution in educational systems where education is geared to meeting the needs of the future workforce.

There are four guiding concepts underlying the Index, forming the basis of how indicators are chosen, how the data is treated and the scale used.

  • Outcomes vs. inputs: The Global Human Capital Index evaluates countries based on outcomes rather than inputs or means. And provides a snapshot of a country’s current human capital,

current investment in building future human capital and current outcomes in the labour market. The Index examines each indicator in relation to a meaningful maximum value that represents “the ideal.” Every indicator’s score is a function of the country’s “distance from the ideal” for the specific dimension measured. By establishing an absolute measure of countries’ performance, the Global Human Capital Index allows for both intra- and inter-country comparisons year-to-year.

  • Distance to the ideal: The Index holds all countries to the same standard, measuring countries’ “distance to the ideal” state, or gap in human capital optimization.
  • Human capital as a dynamic concept: “Human capital” does not mean individuals themselves but the knowledge and skills they possess that enable them to create value in the global economic system. This requires investment both on the side of individuals and by public and private stakeholders across people’s lifetimes. The Index thus treats human capital as a dynamic rather than fixed concept. It recognizes that human capital is not defined solely through formal education and skilling but can be enhanced over time — growing through use and depreciating through lack of use.
  • Demographics count: Whenever possible and relevant, the Index aims to take a generational view and disaggregates indicators according to five distinct age groups, highlighting issues that are unique or particularly crucial for the human capital development of each cohort. This view across age groups allows for more targeted policy interventions and human resource planning.

To better understand the human capital index, the American University School of International Service’s International Relations Online created this infographic that illustrates the four pillars that the WEF uses to measure human capital and provides a comparison of national performance within the context of the index.

World Economic Forum's Human Capital Index
source: American University

See Also

Human Capital
Human Resource Management (HRM)
Human Capital Management (HCM)
Human Resources Analytics (HR Analytics)
Human Resources
Performance Management
Applicant Tracking System (ATS)
Personnel Management
Enterprise Resource Planning (ERP)


Further Reading