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Human Capital is Worth the Investment

Author: Larry Chester, President

A mission-critical lesson that was reinforced for me in 2019 is that risk and return are inverse when it comes to investing financial capital in human capital!

A common adage when it comes to investment of any kind, from managing a real estate deal or a portfolio of stocks: the greater the risk, the greater the potential return. The economics 101 definition: “Higher risk is associated with greater probability of higher return and lower risk with a greater probability of smaller return. This trade off which an investor faces between risk and return while considering investment decisions is called the risk-return trade off.” However, the inverse is true for a business when it comes to investing in human capital.

When we look at the skills and experience variables that are defined for each and every role in an organization, the more variables that a candidate meets or exceeds, the higher the probability of return on investment in that hire. Investment decisions in human capital make a big difference even if they are on the margin, i.e. incremental hires. Given that most companies already have a functioning organization, hiring decisions made on the margin are probably the most important.

Sub-optimal investments in human capital will take a great company and make it only average. While a company that makes optimal investments in human capital can become a market leader.

Ask the most successful leaders, look at the top companies in any industry. Investment in human capital is a telling indicator of their outcomes. These same leaders will not have made random choices in selecting their hires, nor did they leave the outcome to luck by relying on job postings and applicants. They systematically engaged in a robust recruiting process, from defining role variables, research, proactive targeting and thorough vetting, to spending time only selecting from a pool of qualified candidates. Thus, limiting risk and increasing return.

Outside of luck, otherwise known as “post and pray”, only a professional recruiter can limit the risk around investment in human capital.

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