Human capital management (HCM) is a term that’s been rising in popularity within the technology and everyday HR spaces. Narrowing down exactly what it means can be confusing, as, at first glance, it may seem like a fancy word for human resource management.
However, human capital management does have a distinct focus that organizations will want to consider as they work on improving their HR practices or building their HR strategies for 2025.
Here’s what you need to know about human capital management practices and solutions.
What is human capital management?
Human capital management is a set of practices that focus on strategically managing the people within your organization. It encompasses many areas, such as talent management, compensation and rewards, talent acquisition, and more.
This is similar to human resource management (HRM), but HCM usually refers to the strategy, analysis, and planning elements of HR, while HRM incorporates more of the administrative HR functions. However, the two areas overlap moderately.
Components of human capital management
HCM is a practice that is an overall approach to many different human resource activities. Here are some of the areas that HCM encompasses.
Talent management
Manage talent throughout the employee lifecycle with an organized onboarding process, ongoing training and development, and regular performance reviews. Being intentional about supporting talent from the new hire phase until their final day with your company will help you get the most out of your team members.
It’s also a great way to build your employer’s reputation and enhance your recruiting outcomes, as candidates want positive reviews from past employees and a solid commitment to career development in potential employers.
Compensation
HCM strategically offers compensation through salaries, bonuses, perks, and employee benefits to attract and retain top talent. Building a well-rounded incentive program can motivate employees to work harder toward achieving their performance or productivity goals.
Meanwhile, a well-rounded benefits package and competitive salaries can help you attract the best applicants and keep them on board long-term.
Time tracking and attendance management
HCM involves verifying that employees are following their schedules and looking for ways to optimize them. For some organizations, the labor budgeting and workforce planning components of HCM may include adjusting work schedules to provide proper coverage across business areas.
For other businesses, the focus may be more on developing attendance policies and procedures that will reduce absenteeism while providing the flexibility desired by employees.
Compliance
Legal compliance and risk management are core functions of human capital management. With an ever-changing array of labor laws and regulations, businesses must maintain up-to-date compliance knowledge and appropriately update their policies and practices.
Talent acquisition
Talent acquisition is part of HCM. These processes may include building your employer brand, creating compelling job ads, budgeting for new hires, assessing candidates, and candidate selection.
Workforce analytics
Your employee data can offer valuable insights into workplace practices and employee satisfaction. It can also help you evaluate current initiatives, such as boosting engagement or fostering diversity and inclusion.
HCM technology and practices aim to help you use this data for everyday HR decision-making. For example, you may look into your recruiting data and see a specific step where you’re losing candidate interest or slowing down the process.
Importance of human capital management
Human capital management (HCM) helps your business improve organizational performance and align its human resource activities with strategic business plans. There are plenty of benefits of human capital management processes, such as:
- Improving employee engagement and retention: Human capital management strives to improve the employee experience by making data-driven decisions to target causes of turnover and incorporating things like talent development and more competitive compensation to increase employee satisfaction.
- Hiring more strategically: Engaging in better workforce planning and leveraging your people analytics properly will help you hire more strategically.
- Adapting more effectively to change: Aligning your workforce management strategy with your overall business strategy makes it easier to track both continuously and shift them together as needed. Over the past five years, the market and the people management landscape have changed significantly, so organizations need to remain adaptable.
- Maintaining compliance: Staying current on compliance issues around time and attendance, training certifications, time off policies, and more will help your organization reduce the risk of compliance claims and legal matters.
Common human capital management challenges
Explore common HCM challenges organizations face and how your team can navigate them.
Process inefficiency
Many organizations have inefficient HR processes that can make their workflows excessively slow and minimize their adaptability. These often include manual processes. These processes have convoluted approval requirements.
Or, they may involve poorly defined processes. These processes could benefit from automation. They could also benefit from the creation of standard operating procedures. This ensures consistency and efficiency.
It’s a good idea to get everyone on the same page about how things should be done and look for ways to cut down unnecessary steps or leverage HR technology to streamline steps.
For example, many human capital management systems allow you to build in-platform approval processes that send notifications when something needs approval and automatically move it to the next stage once approval is granted.
This can help prevent things from getting lost in someone’s inbox or stalled because someone must remember to push it forward to the next step.
Organizational planning and goal-setting
Your HCM practices are meant to align with and contribute to your organization’s overall goals and strategic planning. As such, the HR team would need clear direction on your company’s overall strategic plan to engage in their own HCM planning.
However, many businesses, especially small businesses, need help defining and communicating their strategic plans and core goals. Forecasting a budget can also be tricky in the current turbulent environment.
This can hinder HR professionals. It makes proper workforce planning difficult. For instance, they need to know what roles they can fill. Moreover, they must determine if funds are available for employee development programs.
Including the HR team in strategic planning sessions and budgeting, meetings can help ensure everyone is in the loop and that the upcoming HCM focuses align with the organization’s strategic focuses.
Employee engagement
Keeping employees engaged throughout each step of the employee lifecycle and during periods of change is a common challenge that organizations attempt to tackle through HCM. It can be difficult to balance focusing on business objectives and pushing productivity while keeping employees engaged and building a positive workplace culture.
HR teams need to emphasize employee satisfaction within each component of HCM intentionally. This might involve seeking ways to enhance the candidate experience. Moreover, it includes improving the onboarding process.
Ultimately, the goal is to help employees start positively. Additionally, you might adjust the benefits package. This adjustment could incorporate perks that improve employee wellness. Furthermore, consider employee desires regarding work hour flexibility and remote work.
Human capital management solutions
There are various human capital management solutions on the market. These are often referred to as human capital management software or abbreviated to HCM software. They can help you manage multiple areas of human capital management, including compensation management, benefits administration, recruiting, performance management, employee engagement, labor budgeting, and more.
These solutions are more comprehensive than other HR tools, such as human resource management systems (HRMS) and human resources information systems (HRIS), with a broader range of features and more advanced data tools. Some major HCM solutions include:
- ADP
- Workday
- Oracle HCM
- Paycor
- UKG
Each solution will offer slightly different features, but some standard components of HCM solutions include:
- People analytics: Review and analyze your workforce metrics and employee data with detailed and customizable reporting. These data tools can help you streamline decision-making by making critical metrics about your employee population more readily available.
- Workforce planning: Identify and plan for current and upcoming staffing needs. Many HCM solutions also offer predictive analytics to help you forecast future needs such as turnover or labor spending.
- Payroll and compensation management: Like standard HRIS and payroll software solutions, HCM systems can help you run payroll. They also tend to have added tools for salary benchmarking and compensation analysis to ensure you properly pay staff fairly and competitively to retain your top performers.
- HR automation: Automate administrative HR processes to optimize efficiency and improve employee experience. Workflow automation can expedite payroll, onboarding, and other cumbersome processes.
- Employee self-service tools: The right HCM self-service tools make it easy for employees to check their pay, enroll in benefits, review performance goals, and update information like their addresses.
Human Capital Management FAQs
Still have questions about human capital management? Check out the HCM FAQs below for more information.
What is human capital?
Human capital refers to the people within your organization. These individuals bring valuable assets to your company, including skills, competencies, knowledge, credentials, productivity, enthusiasm, and diverse perspectives.
Furthermore, each person plays a crucial role in achieving strategic goals. Simultaneously, they contribute to a positive and productive company culture. Therefore, effective human capital management is essential.
How do you build human capital?
You can build human capital by hiring the right talent to fit your company’s current and anticipated needs and continuously developing existing employees. Allocating resources for employee training and performance development can help you build human capital from within your current team.
How does human capital management differ from human resource management?
HCM is a more strategic approach to people management, while HR management focuses more on the administrative processes associated with people management. For example, HRM may concentrate on running payroll. Simultaneously, HCM may incorporate more strategic elements. Also, these elements include compensation benchmarking.
Additionally, HCM might find ways to automate the payroll process. As a result, this automation diverts time and resources to more people-focused initiatives.
More resources:
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An in-depth analysis of the best HR software solutions and how to pick one
The best HR software for small business owners
