Mapping success: Human Capital at work

Jonathan Faurie
Founder: Turnaround Talk

One of the unfortunate fall outs of the Comair saga is that Comair employees face unemployment as the company is likely to move from provisional to final liquidation. As many industry experts have pointed out recently: there should be no reason why the liquidation is not made final. The loss of human capital is never a good thing.

One of the pillars of business rescue is the preservation of jobs. This will help the company return to a profitable core to add value to shareholders. Human capital is often overlooked but is a major role player in a company’s success story. Alexforbes recently flagged human capital as a major contributor to the company’s recent turnaround strategy. Nike – one of the worlds biggest brands – recently said that human capital and the willingness of employees to embrace digitization is a major reason why the company achieved its five year sales target in a single year.

McKinsey recently wrote a series of articles pointing out how human capital, and the value of experience, can benefit a company.

This information is important for turnaround professionals who are implementing a business rescue or are planning a business turnaround or corporate recovery. Human capital plays a big role in this.

Human capital is an important resource

The article points out that the most important resource in any economy or organization is its human capital—that is, the collective knowledge, attributes, skills, experience, and health of the workforce. While human capital development starts in early childhood and continues through formal education, the McKinsey Global Institute and McKinsey’s People & Organizational Performance Practice have focused new research on the next stage, which spans the full working life.

Human capital is much more than a macroeconomic abstraction. Each person has a unique, living, breathing set of capabilities. Those capabilities belong to the individual, who decides where to put them to work. The degree of choice is not limitless, of course. People are the products of geography, family, and education; their starting points matter. Having career options also depends on an individual’s abilities and attributes, their networks, their family obligations, the health of the broader labor market, and societal factors.

Human capital is a major contributor to success
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The report adds that, while we recognize these constraints, career moves are nevertheless an important mechanism for expanding skills and increasing earnings. The patterns within our data set show that moving into a new role pays off—and even more so when someone lands a new position that stretches their capabilities or represents a match that better utilizes their skills.

In McKinsey’s data sample, roughly a third of US, German, and UK workers, and almost a quarter of Indian workers, are on a path to move up one or more quintiles in estimated lifetime earnings from their career starting points. This upwardly mobile group stands out for making more frequent and bolder role moves. For people without educational credentials who start out in low-paying positions in particular, movement is critical to boosting their earnings.

Role moves help individuals continuously upgrade their skills, raise their income, and build track records that translate into value. However, individuals can’t make bold moves that represent a real leap unless an employer sees their potential and takes a chance on hiring them. The most effective way for an individual to maximize the “experience effect” is to join an organization that prioritizes and strengthens their development.

Work experience adds to the value of human capital

McKinsey’s research focuses on how work experience builds on the foundation of formal education and enhances the value of human capital (see Sidebar, “How we model the link between role moves and the addition of skills to lifetime earnings”). We define work experience holistically as the accumulated knowledge that workers gain by being in the labor market. This can occur through doing the work itself, formal employer-provided learning and development programs, and job changes that better match someone’s existing skills or enable that person to add new skills.

The report adds that organizations set up their working environments with systems and practices that help employees become more productive. When people enter these settings, value is created. In addition to earning wages, workers gain knowledge and new capabilities that they carry with them for the remainder of their careers. Many roles require employees to become proficient with new types of software or equipment. Employees benefit from structured learning programs and daily coaching on the job. There are insights to be gained from watching colleagues handle tricky situations gracefully (or not) and seeing how managers motivate their teams (or do not).

Someone who starts out taking orders in a fast-food restaurant learns the art of handling difficult customers and staying cool under pressure. Someone who starts in IT by answering questions on a help desk absorbs technical knowledge that they continue to use when they become a network administrator. An inventory clerk who watches his manager solve logistical logjams can apply those approaches in a future role as a warehouse manager or procurement agent.

When assessing value in human capital, it is important to note that key skills are evenly distributed across workers who have a tertiary education and those who don’t. Companies should not be apprehensive to consider a worker who doesn’t have a university degree/diploma.

Work experience contributes 40% to 60% of a worker’s human capital

By our estimates, the value of human capital represents roughly two-thirds of an individual’s total wealth. Skills acquired or deployed through work experience contribute an average of 46% of this value over a typical working life. However, this is an average for the four focus countries, and it contains a wide range of variations.

The experience effect looks strikingly similar across the advanced economies we studied. McKinsey’s analysis finds that work experience contributes 40% of the average individual’s lifetime earnings in the United States, and 43% in both Germany and the United Kingdom.

By contrast, work experience contributes 58% of average lifetime earnings in India. Access to education remains a key challenge in India—and with only 12%of the population having tertiary education as of 2020, work experience will be a more important driver of income for the workforce as a whole by default.

In other emerging economies that have similarly low levels of educational attainment plus high productivity and wage growth from a low baseline, lifetime earnings are likely to exhibit similar patterns. This is particularly important in Africa which has thew worlds youngest workforce which will be the human capital hub of the future.

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Work experience is a massive determinant

The article points out that people who start out in occupations with higher educational and credentialing barriers (such as lawyers and dentists) earn more than other workers over their lifetimes. For most of them, entry-level skills contribute a larger share of those earnings than acquired skills.

The reverse is generally true for people who start out in occupations with lower educational requirements. They typically earn less over a lifetime, with the greater share driven by work experience. The income growth of a dishwasher who becomes a food prep cook, then a line cook, and eventually a sous chef is almost entirely fueled by techniques and tricks of the trade learned on the job. In addition to enabling someone to acquire skills, work experience gives that person a track record, which is valuable in and of itself for the signal it sends to potential future employers.

The article points out that, in the United States, for example, the size of the experience effect varies substantially across starting occupations. At the low end are chiropractors. Before treating patients, they must complete a doctor of chiropractic degree program that can take three to five years, then pass a series of licensing exams. Their entry-level skills account for 85 percent of their lifetime earnings. At the other end of the spectrum are food batchmakers, who operate equipment that blends ingredients for manufacture. People who start in this type of factory job are less likely to have higher education; the experience they amass over time determines 90 percent of their lifetime earnings.

This will be a massive role player in the future development of human capital.

Role moves bring new skills and can unlock higher earnings

The article points out that movement is an inherent feature of labour markets. Across the entire data set, the average person switched roles every two to four years, with a median skill distance of 25 to 45 percent, depending on the country. This matters because role moves enable individuals to build or demonstrate their skills.

Moves can involve workers assuming new roles within their current company, moving to a different employer, changing specialties or occupations, or pursuing a combination of these strategies. At any given time, a significant proportion of role moves are triggered by firings and layoffs in addition to voluntary job changes.

In McKinsey’s data set, each move increased wages by 6 to 10 percent on average. However, this includes people who moved into lower-paying roles, whether by choice or out of necessity.

Forty to 50% of the role moves observed in the decade involved pay increases. The workers who made these moves managed to boost their earnings by 30% to 45% on average each time.

More than 80% of the role moves observed in the data set involved someone moving from one employer to another. Far fewer moves involved people being promoted into more senior roles or branching into different specializations within their existing organizations. This high level of external movement holds true across all cohorts. This seems to indicate that many employers do not have internal advancement tracks that are wide enough to keep most people growing and working toward higher rewards over time. Individuals who want to reinvent themselves and take on more senior roles often have to go to a new environment to do so.

It is the turnaround professionals role to try and preserve human capital in a rescue and to encourage the best recruitment and retention of human capital in a business turnaround. Human capital is a major determinant as to whether a company will successfully navigate their financial distress or if they are perfect candidates for liquidation.

Harness the power of human capital wisely and reap the rewards.