What Is Human Capital Management? (With Benefits And Tips)

By Indeed Editorial Team

Published 25 September 2022

The Indeed Editorial Team comprises a diverse and talented team of writers, researchers and subject matter experts equipped with Indeed's data and insights to deliver useful tips to help guide your career journey.

Organisations implement various strategies to improve employee engagement and productivity and increase business value. They use human capital management (HCM) to improve the efficiency and effectiveness of their workforce and meet strategic objectives. Learning about HCM can help you understand how organisations utilise it to recruit, manage and develop employees to achieve short-and-long-term goals. In this article, we answer the question, 'What is human capital management?', find out how organisations can benefit from using it, learn its limitations and review some tips for improving HCM.

What Is Human Capital Management?

The answer to 'What is human capital management?' is that it is a set of actions or best practices that an organisation incorporates to manage various processes, such as performance management, payroll administration, training employees and maintaining records. Employers use HCM to hire skilled employees, manage their workforces and improve the performance of their employees.

Organisations use various HCM software, which is an integrated suite of technologies designed to assist businesses in managing employees, from hiring to retirement. It helps in recruitment, talent management, payroll processing and benefits administration. Integrating these modules allows organisations to control all aspects of employee experience.

Functions Of Human Capital Management

Some of the primary functions of HCM include:

Talent recruitment

A key function of HCM involves recruiting talent to fulfil organisational objectives. With the HCM system, HR departments can present their organisations as great places to work, attract more talent and improve recruitment efforts. This helps find suitable candidates for various job openings during the recruitment process.

Related: What Is Recruitment In HR? (With Types, Process And Tips)

Training and development of employees

Human capital management also involves training employees so that they can contribute to the organisation's success. It enables individuals to develop new skills and capabilities so they can perform better. This encourages a growth-oriented workplace.

Employee retention

Another primary function of HCM is to increase employee job satisfaction by enabling them to use their skills and knowledge to support organisational goals. It creates a sense of belonging among employees and makes them feel valued and committed to the company. Feeling valued at work increases engagement, motivation and satisfaction among employees.

Related: What Is Employee Retention? (And How To Increase It)

Managing performance

The purpose of managing performance is to ensure that employees' output aligns with the organisation's objectives and goals. HCM implements various performance measurement systems to improve productivity and efficiency through employee reviews and surveys. Organisations can increase employee productivity and efficiency by providing feedback, resources and training.

Related: What Is Performance Management? A Comprehensive Guide

Access to data

Statistical insights are essential to evaluating an organisation's overall performance. The system offers managers actionable insights that help them provide guidance to employees and add value to their organisations. Organisations can adjust their strategies to improve work environments by using performance evaluations, personality tests, skill assessments, turnover rates and other vital statistics.

Why Is Human Capital Management Important?

Human capital management is important because it helps organisations manage their operations more effectively. Here are some of the main benefits of HCM:

Develops human resources

A key benefit of HCM is the systematic management of human resources. A human resource (HR) department can find the right talent and train them to achieve the company's objectives. HCM team members can oversee all hiring, training and retention of top employees to meet organisational goals.

Related: What Are The Essential Human Resource Management Objectives?

Improves the recruitment process

Companies can recruit suitable candidates with the help of an HCM system that provides hiring managers with an extensive database of candidates with the right skills and experiences for the job. The HR department helps interviewers and the public relations department position the company as an ideal employer to attract talented candidates. With this system, a new hire can better adapt to the company culture during the onboarding process.

Increases organic growth

HCM is a robust tool for organic growth since it helps identify the unique traits and competencies of employees and channels them in the right direction. Optimising internal resources helps organisations increase productivity and revenue. HCM programmes invest in the development and growth of employees, so they can better contribute to the organisation's success.

Related: 10 Tips For Working Effectively And Improving Productivity

Improves productivity and efficiency

HCM aims to maximise the return on human resources. It helps enhance productivity by investing in training designed to develop specific abilities. HCM also aids in creating a healthy work environment and optimises employee performance by placing them in positions that suit their strengths.

Related: How To Improve Work Efficiency And Become More Productive

Enhances performance reviews

HCM involves enhancing the effectiveness of performance reviews. An employee appraisal system includes self-reviews, peer reviews and manager reviews. Providing employees with constructive feedback helps them feel supported in their positions and roles. It also encourages them to improve their efforts to contribute to an organisation's success.

Improves career planning

HCM helps employees to advance their careers through training, surveys and performance reviews, followed by mentorship programmes. Companies can invest in providing additional resources to help employees identify areas of improvement and improve their skills. This enables employees to deliver better results on a personal and professional level.

Related: The Career Planning Process: Practical Steps

Challenges Of Human Capital Management

Here are some common business challenges related to human capital management:

Employee engagement

Employee engagement refers to employees' emotional connections to the workplace, affecting productivity, profitability and customer satisfaction. It may not be easy to measure employee engagement. Companies can try various methods, including collaboration tools and employee surveys and simplifying key processes like onboarding and team activities to improve employee engagement.

Related: What Is Employee Engagement? (And How To Improve It)

Skills development

Training and skills development can be challenging for some organisations. Skills development comprises activities that prepare employees to perform their roles effectively and handle challenging tasks. The HR team can conduct a skill gap analysis to determine desired skills, measure current skills, identify gaps and take necessary action. The skills development programme provides employees with opportunities to enhance their skills in decision-making, project management, strategy, networking and team management.

Related: 12 Ways To Build Leadership Strategies At The Workplace

Compensation and benefits

An employee's compensation refers to the monetary salary earned while working in a particular position, while benefits refer to the non-monetary payments an employee receives. An improved compensation package increases employee engagement, loyalty and productivity. Profit-sharing, stock options and pensions can also increase employee retention rates.

It is essential to design a benefits programme that meets the needs of employees and aligns with the business goals. Businesses can adjust their compensation packages to match industry rates by using data from reliable sources.

Related: Q&A: What Are Compensation And Benefits? (Plus Importance)

Employee retention

Employee retention is an organisation's ability to prevent employees from leaving their jobs, either voluntarily or involuntarily. The retention of employees directly impacts the success and performance of businesses. They can take measures such as choosing the right candidates during recruitment, offering fair compensation to employees and enabling a healthy work environment.

Tips To Improve Human Capital Management

Here are some tips to improve HCM at an organisation:

Take advantage of centralised data

Managers and supervisors can access employee data in a central repository. The data can include performance reviews, disciplinary actions and client feedback. They can easily access this data without losing any relevant information.

Invest in existing employees

An organisation can meet its business objectives by investing in the growth and development of its current employees. It can improve job satisfaction and increase employee retention rates. Companies can sponsor offsite education opportunities, such as conferences or workshops, through which employees can work together to solve challenging problems.

Provide flexibility

Organisations can provide employees with the option of working remotely and the ability to set their schedules. This has a positive effect on their productivity and performance. Organisations with flexible work environments are more likely to attract top talent.

Utilise technology

Using the right technology can improve human capital management. For example, a mobile app can facilitate better communication by reducing location barriers and commute time. Companies can also use HR tools to gain valuable employee insights and automate various business processes.

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