The relationship between human capital, value creation and employee reward

Purpose – The purpose of this paper is to examine the relationship between human capital (HC) and value creation and employee reward. HC is an important component of intellectual capital (IC). There is growing interest in how IC can be used to create organizational value. This paper addresses the need for critical analysis of IC practices in action. Based on data gathered from three annual surveys at Australia’s second largest public sector organization, the paper introduces psychological contract (PC) as new HC factors, and develops a method to measure HC in terms of value creation (work activity) and employee reward (pay). The findings have practical implications for managers in using the paper’s HC measurement to achieve strategic alignment (SA) of the workforce. Design/methodology/approach – The research was based on data gathered from three annual surveys (2009-2011) of staff at Australia’s second largest public sector organization. A total of 248 questionnaires were completed. Three independent variables conceptualized HC: first, employee capability (HC1); second, employee satisfaction (HC2); and third, employee commitment (HC3). Two dependent variables were tested: work activity and pay. The data collected in this study was analyzed through the use of bivariate correlation and linear regression using SPSS software. Findings – The paper’s major finding is that HC1 (employee capability) and HC2 (employee satisfaction), had a direct positive relationship with the importance of work activity. The paper’s second finding was that only HC1 has a direct positive relationship with the pay. However, HC3 (employee commitment) had a direct negative relationship with the importance of work activity. Further, HC2 and HC3 had no relationship with pay. The research project organization (RPO) achieved SA with employees’ capability and motivation; as well as employee capability and pay. However, inequities emerge in terms of employee commitment and value creation (work activity) and in the PC factors and pay. Research limitations/implications – While the research findings are limited by them being based on a single RPO, this is offset to some degree by the longitudinal nature of the study and the size of the RPO. It also presents opportunities for further research, particularly in terms of further testing of the new conceptualization of HC in other organizations and industry settings, and investigation of the failed hypotheses: PC and pay; and employee commitment and work activity. Practical implications – While strong PC employees are being asked to do important work, they are not always being paid at the rate of colleagues doing similar work. This will create perceptions of distributive justice, which will make those with strong PC unhappy, thereby decreasing their PC, disrupting the SA of the value creation, and lead to employee turnover. Managers can address this problem by using the HC method outlined in this paper to introduce methods such as merit increases and variable pay. While this is problematic for public sector organizations often constrained by having to fit salary awards, innovative organizations are increasingly considering more flexible pay systems. Originality/value – The paper introduces a new conceptualization of HC, and two proxies for organizational performance: pay and work activity. The paper addresses calls for IC in practice research to make the field more relevant for practitioners. The HC model introduced will allow managers to act on IC measurement by linking HC value with adequate pay, increasing motivation, commitment, and productivity, leading to increased innovation and reduced employee turnover.