Enhancing Business Outcomes through the QWL Index and the Human Capital Production Function

In many organizations, human capital is the largest controllable investment, yet accounting practice still records it largely as an expense. Leaders struggle to obtain reliable, actionable data that explains variation in engagement, retention, and productivity. Traditional engagement surveys often suffer from low response rates, bias, and weak connections to business outcomes. To bridge this gap, we employ a motivation‑theoretical Quality of Work Life (QWL) Index that synthesizes psychological, social and managerial factors into a single indicator. The index correlates with productivity and risk, enabling leaders to align people decisions with financial results.

The QWL index framework

The QWL Index integrates Herzberg’s motivation–hygiene theory with Kano’s idea of must‑be, satisfier, and attractive attributes, adapted to the employee context:
A. PE-Physical and Emotional Safety (must‑haves): trust, fairness, clarity, psychological safety.
B. CI-Collaboration and Identity (satisfiers): teamwork quality, role clarity, shared goals and belonging.
C. OC-Objectives and Creativity (exciters): purpose, autonomy, learning, innovation. Operationally, the index is calculated as:
QWL = PE × (CI + OC) / 2, with the range 0–100%.

Foundational PE issues should be addressed first adequate level so that motivators (CI, OC) can be effective. The index thus represents the operative utilization of human intangible assets, indicating how well an organization converts the potential of its people into value‑creating work.

From QWL to profit: The Human Capital Production Function (HCPF)

To connect QWL to financial outcomes, we define a parsimonious human capital production function for annual profit proxied by EBITDA:
EBITDA = K × HR × TWh × (1−Ax) × QWL- Variable Cost- HR cost- Other Cost
Where:
A. K is the customer value coefficient (quality of value creation per effective hour),
B. HR is the number of full‑time equivalents (FTE),
C. TWh is theoretical annual working hours per FTE,
D. Ax is auxiliary/structural time share (vacation, sick leave, onboarding, training, admin, etc.),
E. QWL is the Quality of Work Life Index (0–1), measuring the effective utilization of human intangible assets,
F. Variable Cost, HR cost and Other Cost are standard cost components.

Interpretation. K, HR and TWh set the potential capacity. The factor (1−Ax) converts potential hours into time available for work. QWL then transforms available time into value‑creating performance by capturing the combined impact of safety, collaboration, identity, objectives, and creativity. In practice, increasing QWL raises revenue at a given cost base and reduces cost leakage from errors, rework, turnover and absenteeism. Link to HCROI. Human Capital Return on Investment (HCROI) ≈ GrossMargin/HRcost improves via two mechanisms: (1) Revenue enhancement: higher QWL increases effective output per hour, expanding gross margin. (2) Cost reduction: higher QWL lowers staff turnover and absence (reducing Ax and HR‑related frictions) and decreases quality costs. Both effects increase HCROI and, via the HCPF, flow into EBITDA.

Managing variance and team‑level risk

Beyond the mean level of QWL, its distribution across teams matters. Empirical observations show that organizations with narrower team‑to‑team QWL variance experience fewer quality errors and more reliable workflows, particularly in knowledge‑intensive domains (e.g., healthcare). Monitoring team‑level QWL surfaces weak links in end‑to‑end processes, enabling targeted interventions and reducing operational risk even when the corporate average appears acceptable [1-5].

Practical roadmap for leaders and accountants

A. Measure QWL quarterly at team level using PE, CI, and OC items focused on leadership‑controllable factors.
B. Prioritize PE gaps first; then address CI and OC with targeted managerial practices (e.g., role/goal clarity, learning and innovation routines).
C. Link QWL to HR and finance data (turnover, absenteeism, quality costs, revenue per FTE). Track Ax explicitly.
D. Use the HCPF to simulate scenarios: estimate EBITDA sensitivity to changes in QWL or Ax, and test alternative practice portfolios.
E. Manage variance: identify low‑QWL teams in critical workflows and provide coaching/support to stabilize performance.
F. Report QWL and HCROI on the management scorecard to align incentives and investment decisions.

The QWL Index provides a compact, theory‑grounded gauge of human intangible performance. When embedded in the Human Capital Production Function, it offers a transparent bridge from leadership practices to financial outcomes. Treating human capital as a measurable, manageable asset allows organizations to reduce risk, improve HCROI, and lift EBITDA. For accounting and management, QWL serves as a leading indicator of sustainable competitiveness and should be reported alongside traditional financial metrics.

1. Herzberg F, Mausner B, Snyderman BB (1959) The motivation to work. Wiley.
2. Kano N, Seraku N, Takahashi F, Tsuji S (1984) Attractive quality and must‑be quality. Journal of the Japanese Society for Quality Control 14(2): 39-
3. Kesti M (2012) The tacit signal method at human competence‑based organization performance development. University of Lapland, Rovaniemi, Finland.
4. Kesti M, Syväjärvi A (2015) Human capital production function in strategic management. Technology and Investment 6(1): 1-10.
5. Sirgy MJ, Efraty D, Siegel P, Lee DJ (2001) A new measure of Quality of Work Life (QWL) Based on need satisfaction and spillover theories. Social Indicators Research 55(3): 241-