Impact of Human Resources Accounting on Employees' Performance in Organization
By
Dr. Hamid Saremi
Department of Accounting,
Quchan Branch, Islamic Azad University, Quchan, Iran
Email: hadi_sarem@yahoo.com
&
Shida Hanafi(Mrs)
Management Association of Iran
Khorasn Branch- Mashad Iran
hanafi_s68@yahoo.com
Abstract
In an age of technology and economics, human capital has important and axial role in the
organization and human resource accounting has a wide perception to key resources of
organization i.e. human resources . Human resources accounting is new branch of accounting
that has Short-lived and generally deals to a range of policies and measures that are related to
various aspects of human resources and It gives importance to an organization's most
important asset is its human resources and human resource management is the key to success
in an organization and to achieve this important matter must review and evaluation of human
resources data be with knowledge of accounting based on empirical studies and methods of
measurement and reporting of human resources accounting information. Undoubtedly human
resource management without information cannot be done and take decision and human
resources accounting is practical way to inform the decision makers who are committed to
harnessing human resources,, human resources accounting with applying accounting
principles in the organization and is with conducting basic research on the extent of the of
human resources accounting information" effect of employees' personal performance. In
human resource accounting analysis and criteria and valuation of cost and manpower
valuating is as the main resource in each Institute. Protection of human resources is a process
that according to human resources accounting is for organization profitability.
In fact, this type of accounting can be called as a major source in measurement and trends of
costs and human resources valuation in each institution. What is the economic value of such
assets? What is the amount of expenditures for education and training of professional
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individuals to value in asset account? What amount of funds spent should be considered as
lost opportunity cost?
In this paper, according to the literature of human resource accounting we have studied the
human resources matter and its objectives and topic of the importance of human resource
valuation on employee performance review and method of reporting of human resources
according to different models.
Key words: Human resources, human resources, accounting, human capital, human resource
management, valuation and cost of human resources, employees, performance, organization.
Introduction
It is true that worldwide, knowledge has become the key determinant for Economic and
business success, but the companies focus on ‘Return on Investment’ (RoI), with very few
concrete steps being taken to track ‘Return On Knowledge'. What are needed are
measurement of abilities and their performance of all employees in a company, at every level,
to produce value from their knowledge and capability. “Human Resource Accounting (HRA)
is basically an information system that tells Management what changes are occurring over
time to the human resources of the business i.e. their employees. HRA also involves
accounting for investment in employees and their replacement costs, and also the economic
value of people in an organization.
Human capital also provides expert services such as consulting, financial planning and
assurance Services, which are valuable, and very much in demand. Many organizations are
now realizing the bottom-line effect on retaining quality employees. Retaining quality
performers quite simply adds to increased productivity and morale, while reducing the
associated costs of turnover. Employee retention is one of the primary measures of the health
of the organization. If the organizations are losing critical staff members, they can safely bet
that other people in their departments are looking as well. So the organization aim is to
understand expectation of employees, their need accordingly change the organizational
culture to improve retention rates. Now the employee need to more flexible than before.
Here human resources accounting is as effective tool in management of organization acts as
evaluator of human resources management behavior regarding employees' performance.
Human resources accounting, is more considerable by managers who show their indifference
towards keeping human resources. The managers who are unresponsive to create job
and do not think for job security, hope satisfaction and positive incentives on employees
and a sense of loyalty, allegiant and creating opportunities for advancement and human
resource problems removal and provide causes for the dismissal or resignation of staff .
According to the statement of the American Accounting Association (AAA) human
resources accounting includes the employees' evaluation process of an organization and its
assessment during the time. Accounting, human resources, included human resource
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identification and its measurement process and also transferring this information to concerned
and interested groups in the year of 1970. Flamholtz has provided a same definition to (AAA)
in year 1971 he described the human resource accounting as measurement and cost report and
individuals ' value in organization resources. In fact human resources accounting is
application of concepts and methods of accounting in human resources management area.
This branch of accounting is assessment and selection criteria, cost and valuating of human
resources as the main resource of each organization, each source has two aspects:
1. Sources value, 2.determing sources costs.
there is no doubt that human resources should also be priced and displayed on the balance
sheet as part of corporate assets and depreciation of these resources be calculate and
considered in specific method as in many countries depreciation of human resources will
be placed at acceptable tax costs category This in its turn increases the profit. In today's
knowledge-based economy, human resources is one of the most important resources that
could have a significant role in the productivity organizations can continue their survival f
each organization? Success or failure of any organization largely depends on its employees.
Those organizations can continue their survival that due to constant changes in today's world
and knowledge-based economy where knowledge and human capital are considered the main
sources of wealth generation. In this debate there are two definitions:
First, be aware of the importance of human resources and the played role that these resources
can be organized in flexibility to adapt to environmental conditions.
Second, is to operate appropriate and useful managerial policies will be effective and efficient
use of resources (kulatitlaka, Markes, 1988, p 377).
The that view has been suggested recently, is that accounting for human resources is an
organization that can be considered as modern criteria in economy area. Many experts
believe that human resources are valuable assets and these assets should be measured. It
seems in order to achieve the following objectives of human resource accounting should
find quantitative and practical aspects:
1. To record the human economic value in the financial reports.
2.To compute an organization's investment in its human resources.
3. To increase the human resource management efficiency and create the facilities for
employees evaluation policies such as training programs.
4.To assess of human resources of an organization in this view that It has been maintained or
depleted or has developed.
5.To calculate the value extant that human resources create in other physical and financial
resources of an organization.
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6. To identify the created non-operating profit and productivity caused by the investment
in human resources.
Due to need of management to information for decision making, human resource accounting
(HRA) provides information that managers work better and more efficiently use their human
resources under provided as much as possible could make use of their holding human
resources bitterly and usefully. Since up till now many definitions of human resource
accounting has been presented that some of them are given below:
1. Human resource accounting is" the process of diagnosis and provide information about
human resources to facilitate the in an organization' management
2. Human Resources accounting with information providing needed by managers can help
them to make use of their human resources more effectively. (Verma & Dewe, 2004, p 46).
3., Human Resources Accounting is a theoretical perception on the nature and value of
individuals in organizations and economic units that with development of valid and reliable
methods for measuring cost and value of individuals in organizations trying to design and
develop operational systems to implement these methods and obtained information report to
the users.(Hadizadeh,Mohamad Reza ,2003)
As it can been considered various definitions of experts in this field is presented, but they all
are common in three basic principles:
The Individuals are valuable resource of every organization.
Usefulness of manpower as a source of organization can be determined through
management practices.
For decision making in organizations, information on investment and value of human
resources, is useful.
Human Resource accounting history
The early stages in HRA development, particularly from 1971-1977 as noted by Flamholtz,
Bullen and Hua (2002, p.949), was a period of rapid growth of interest in the field and
involved a significant amount of academic research throughout the Western world and in
Australia and Japan, with increasing attempts to apply HRA in business organizations.
During this time, the American Accounting Association (1973) established committees on
Human Resource Accounting in 1971-1972 and 1972-1973. These committees published
reports on the development of HRA, and the AAA’s involvement proved a catalyst for a
stream of research during this period.
Development on HRA Measurement Models
The Research during the early stages also involved the continued development of concepts
and models for measuring and accounting for human resource cost and value. According to
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Flamholtz’s model for measurement of original human resource costs (1973, 1999, p. 59),
human resource costs may be explained in terms of the two major categories of acquisition
costs and learning costs. Acquisition costs include the direct costs of recruitment, selection,
hiring and placement, and the indirect costs of promotion or hiring from within the firm.
Learning costs include the direct costs of formal training and orientation and on-the-job
training. In a human resource accounting system, these costs are reported in asset accounts
with future economic benefits rather than as expenses.
Another HRA model is the Stochastic Rewards Valuation Model (SRVM), originally
developed by Flamholtz (1971) and further explained in Flamholtz (1985, 1999), focused on
HRA value rather than HRA cost. Flamholtz utilized both nonmonetary and monetary
measures in drawing upon both behavioral and economic variables. The Flamholtz model
proposes that an individual’s value to an organization is based on the future services that are
expected to be rendered to the organization in future roles or service states, and views the
movement of people among organizational roles over time as a Markovian stochastic or
probabilistic process with service rewards. The SRVM is a multi-step process that begins
with defining the various service states or organizational positions that an individual may
occupy in the organization, and then determines the value of each state to the organization,
the service state values which can be calculated either by using a number of methods such as
the price-quantity method or the income method. Next the person’s expected tenure or service
life in the organization is calculated and the person’s mobility probability or the probability
that a person will occupy each possible state at specified future times is derived from archival
data. The model follows with discounting the expected future cash flows that the person
generates in order to determine his or her present value. As Flamholtz (1999, pp 160-161)
indicates, there is a dual aspect to an individual’s value—“expected conditional value” and
“expected realizable value.” The first, a person’s expected conditional value, is the amount
the organization could potentially realize from a person’s services if that person maintains
organizational membership during the period of his or her productive service. The second, a
person’s expected realizable value, is the amount actually expected to be derived, taking into
account the person’s likelihood of turnover.
Continuing Developments in HRA Research and Applications
The earlier HRA studies emphasized the need for future research in the field, and a number of
Researchers continued or began work in the area. As noted in Sackmann, Flamholtz and
Bullen (1989), Flamholtz, Bullen and Hua (2002), and Flamholtz, Kannan-Narasimhan and
Bullen (2004), throughout the ensuing years many studies were conducted in the area of
HRA. Some of the most interesting research recognized significance to organizations of the
process HRA measures, as well as the measurements themselves.
Effects of the Process of HRA Measurement in Decision-Making
As much as the measures themselves are relevant in managerial decisions, it is also useful to
Recognize that when managers go through the process of HRA measurement treating human
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Resources as capital assets, they are more likely to make decisions that treat the company’s
Employees as long-term investments of the company. Flamholtz (1979) describes the HRA
Paradigm in terms of the “psycho-technical systems” (PTS) approach to organizational
Measurement. According to the PTS approach, the two functions of measurement are: 1)
process functions in the process of measurement and 2) numerical information from the
numbers themselves. Whereas one role of HRA is to provide numerical measures, an even
more important role is the measurement process itself. The HRA measurement process as a
dual function attempts to increase recognition that human capital is paramount to the
organization’s short and long-term productivity and growth. When managers go through the
process of measuring human resources, they are more likely to focus on the human side of the
organization and are more likely to consider human resources as valuable organizational
resources who should be managed as such.
HRA Measurement
As noted earlier in the discussion of HRA model development, according to Flamholtz (1999,
p.160), the concept of human resource value is derived from general economic value theory,
and like all resources people possess value because they are capable of rendering future
service. Thus as Flamholtz notes, an individual’s value to an organization can be defined as
the present value of the future services the individual is expected to provide for the period of
time the individual is expected to remain in the organization.
Using the Stochastic Rewards Valuation Model, originally developed by Flamholtz (1971)
for human resource valuation, and further explained in Flamholtz (1985, 1999), Flamholtz,
Bullen and Hua (2003) showed a practical method for calculating ROI on management
development, and reported the incremental cash flows that an organization will receive due to
investment in management development. The article concluded that use of HRA as a tool to
measure the value of management development enhances not only the value of human capital
but also the value of management accounting. The authors utilized the HRA measure of
expected realizable value, and found that employees’ participation in a management
development program increased the value of the individuals to the firm. In addition the
authors noted (p. 40) that the HRA measures provided upper level management with an
alternative accounting system to measure the cost and value of people to an organization.
Thus HRA represented both a paradigm and way of viewing human resource decisions, and
the set of measures for quantifying the effects of human resource management strategies
upon the cost and value of people as organizational resources.
Davidove and Schroeder (1992) indicate that too many business leaders have no generally
Accepted definition or accounting procedure for tracking training investments, and note that a
Lower training investment is not automatically better for an overall return on investment.
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The authors suggest that although many business leaders still view training as an overhead
Expense, with thorough ROI evaluations, training departments can convince business to view
Them as partners in creating the assets crucial to organizational success.
Importance of Human Resource Accounting:
Human Resource Accounting provides useful information to the management, financial
analysts and employees as stated below:
1. Human Resource Accounting helps the management in the Employment, locating and
utilization of human resources.
2. It helps in deciding the transfers, promotion, training and retrenchment of human
resources.
3. It provides a basis for planning of physical assets vis-à-vis human resources.
4. It assists in evaluating the expenditure incurred for imparting further education and training
in employees in terms of the benefits derived by the firm.
5. It helps to identify the causes of high labor turnover at various levels and taking preventive
measures to contain it.
6. It helps in locating the real cause for low return on investment, like improper or underutilization of physical assets or human resource or both.
7. It helps in understanding and assessing the inner strength of an organization and helps the
management to steer the company well through most adverse and unfavorable circumstances.
8. It provides valuable information for persons interested in making long term investment in
the firm.
9. It helps employees in improving their performance and bargaining power. It makes each of
them to understand his contribution towards the betterment of the firm vis-à-vis the
expenditure incurred by the firm on him.
Objectives of Hunan Resources Accounting
The main objective of human resource accounting is to facilitate the management to get
information on the cost and value of human resources. Human resources accounting brings to
light the quantum of human resources and indicates the right control of conservation,
depletion and appreciation of it .in the right perspective. It provides data to the interested
persons about the cost of human resources and correspondingly comparing it with the benefit
obtained out of its utilization.
The objective of HRA is not merely the recognition of the value of all resources used by the
organization, but also includes the management of human resource which will enhance the
quantity and quality of goods and services. The basic objective of HRA is to facilitate the
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efficiency of human resource. It is basically adopted to treat human resources as assets, to
generate human data about human resources, to assign value to human resources and to
present human assets in the balance sheet.
Limitations of Human Resource Accounting:
Human Resource Accounting is the term used to describe the accounting methods, system
and techniques, which coupled with special knowledge and ability, assist personnel
management in the valuation of personnel in financial terms. It presumes that there is great
difference among the personnel in their knowledge, ability and motivation in the same
organization as well as from organization to organization. It means that some become liability
too instead of being human assets. HRA facilitates decision making about the personnel i.e.,
either to keep or dispense with their services or to provide training. There are many
limitations which make the management reluctant to introduce HRA. Some of the attributes
are:
I) there is no proper clear-cut and specific procedure or guidelines for finding cost and value
of human resources of an organization. The systems which are being adopted have certain
drawbacks.
ii) The period of existence of human resource is uncertain and hence valuing them under
uncertainty in future seems to be unrealistic.
iii) There is a fear that HRA may dehumanize and manipulate employees.
iv) For e.g., an employee with a comparatively low value may feel discouraged and develop a
complex which itself will affect his competency to work.
v) The much needed empirical evidence is yet to be found to support the hypothesis that HRA
as a tool of the management facilitates better and effective management of human resources.
Though HRA has had its inception in the 1960s, it is an evolving concept, which is still at
nascent stage. Nonetheless, its relevance to organizations is immensely gaining ground.
Armed with various measures and figures, managers and firms can focus on decisions
regarding investments in areas of intellectual capital that will have the greatest payoff for the
firm.
Internally and externally, HRA would provide information to investors and other staff, of the
value of human resources, the returns on investments in training and development and also
the link between HR interventions and financial results.
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As a way to assess human capital, HRA represents a new way of thinking strategically.
Boudreau has noted that measures of HRA and benefits can serve a variety of purposes. It
acts as a catalyst for change. It tends to enhance the credibility of the HR functioning for it
was not long back that this function was looked down disdainfully as only a department to
organize picnics for its staff. HRA also helps persuade others to support investment in HR
and also to improve the quality of HR decisions.
Change is taking place at the tremendous rate. To make it effective and in order to make the
team, HR professionals need to develop the business skills of strategic planning and process
technology. And the first step towards the sustainable growth is accounting HR in financial
terms.
Benefits of HRA
The major advantage of the most researchers have pointed to it is the use of human resource
accounting information for management decision making. Stephenson and Franklin (1982)
introduced the primary reasons for establishing a human resources accounting system to
provide relevant and more complete financial information to improve and rectify of
decision making of a company. They also counted t he following benefits and objectives
accounting:
Human resources accounting indicates impact of human resources on firm performance.
Human resources accounting should help to managers of company in evaluating various
strategies of company.
, Human Resources accounting can develop capital budgeting system to improve the quality
of investment returns.
Human Accounting, resource can enable managers to make better use of scarce resources
(Hussi & Ahonen, 2002).
1. The adoption of the system of HRA discloses the value of human resources. This helps in
proper interpretation of Return on Capital Employed. Such information would give a long
term perspective of the business performance which would be more reliable than the Return
on Capital Employed under the conventional system of accounting.
2. The maintenance of detailed record relating to internal human resources(i.e. employees)
improves managerial decision-making specially institutions like direct recruitment versus
promotions; transfer versus retention retrenchment or relieving versus retention; utility of
cost reduction programs in view of its possible impact on human relations and impact of
budgetary control on human relations and organizational behavior. Thus, the use of HRA will
definitely improve the quality of management.
3. The adoption of the system of HRA serves social purposes by identification of human
resources as a valuable asset which will help prevention of misuse and under use due to
thoughtless or rather reckless transfers, demotions, layoffs and day-to-day maltreatment by
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supervisors and other superiors in the administrative hierarchy; efficient allocation of
resources in the economy ;efficiency in the use of human resources; and proper
understanding of the evil effects of avoidable labor unrest / disputes on the quality of internal
human resources.
4. The system of HRA would no doubt, pave the way for increasingly productivity of human
resources, because, the fact that a monetary value is attached to human resources and that
human talents devotion and skill considered as valuable assets and allotted a place in the
financial statements of the organization, would boost the morale, loyalty and initiative of the
employees, creating in their mind a sense of belonging towards the organization and would
act as a great incentive, giving rise to increased productivity.
HRA scenario
It is true that worldwide, knowledge has become the key determinant for economic and
business success, but Indian companies focus on ‘Return on Investment' (RoI), with very few
concrete steps being taken to track ‘Return on Knowledge'.
What is needed is measurement of abilities of all employees in a company, at every level, to
produce value from their knowledge and capability. "Human Resource Accounting (HRA) is
basically an information system that tells management what changes are occurring over time
to the human resources of the business. HRA also involves accounting for investment in
people and their replacement costs, and also the economic value of people in an
organization," says P K Gupta, the director of strategic development-intercontinental
operations, of Legato Systems India. The current accounting system is not able to provide the
actual value of employee capabilities and knowledge. This indirectly affects future
investments of a company, as each year the cost on human resource development and
recruitment increases.
Experts point out that the information generated by HRA systems can be put to use for taking
a variety of managerial decisions like recruitment planning, turnover analysis, personnel
advancement analysis and capital budgeting, which can help companies save a lot of trouble
in the future.
Information management in HRA
Like any accounting exercise, the HRA too depends heavily on the availability of relevant
and accurate information. HRA is essentially a tool to facilitate better planning and decision
making based on the information regarding actual HR costs and organizational returns. The
kind of data that needs to be managed systematically depends upon the purpose for which the
HRA is being used by an organization.
For example, if the purpose is to control the personnel costs, a system of standard costs for
personnel recruitment, selection and training has to be developed. It helps in analyzing
projected and actual costs of manpower and thereby, in taking remedial action, wherever
necessary. Information on turnover costs generates awareness regarding the actual cost of
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turnover and highlights the need for efforts by the management towards retention of
manpower.
Accountability in the management process is often enhanced when information involving an
evaluation of managerial effectiveness is generated.
Finally, information on the intangibles like intellectual capital/human capital becomes
necessary to measure the true worth of the organization. This information, though unaudited,
needs to be communicated to the board and the stockholders.( Gebaure, M. ,2003)
Measurement in HRA
The biggest challenge in HRA is that of assigning monetary values to different dimensions of
HR costs, investments and the worth of employees. The two main approaches usually
employed for this are:
1. The cost approach which involves methods based on the costs incurred by the company,
with regard to an employee.
2. The economic value approach which includes methods based on the economic value of the
human resources and their contribution to the company's gains. This approach looks at human
resources as assets and tries to identify the stream of benefits flowing from the asset.
Economic value approach
The value of an object, in economic terms, is the present value of the services that it is
expected to render in future. Similarly, the economic value of human resources is the present
worth of the services that they are likely to render in future. This may be the value of
individuals, groups or the total human organization. The methods for calculating the
economic value of individuals may be classified into monetary and non-monetary methods.
Monetary Measures for assessing Individual Value
a) Flamholtz's model of determinants of Individual Value to Formal Organizations
According to Flamholtz, the value of an individual is the present worth of the services that he
is likely to render to the organization in future. As an individual moves from one position to
another, at the same level or at different levels, the profile of the services provided by him is
likely to change. The present cumulative value of all the possible services that may be
rendered by him during his/her association with the organization is the value of the
individual.
b) Flamholtz's Stochastic Rewards Valuation Model
The movement or progress of people through organizational ‘states' or a role is called a
stochastic process. The Stochastic Rewards Model is a direct way of measuring a person's
expected conditional value and expected realizable value. It is based on the assumption that
an individual generates value as he occupies and moves along organizational roles, and
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renders service to the organization. It presupposes that a person will move from one state in
the organization, to another, during a specified period of time.
Non- monetary methods for determining value
The non-monetary methods for assessing the economic value of human resources also
measure the Human Resource but not in dollar or money terms. Rather they rely on various
indices or ratings and rankings. These methods may be used as surrogates of monetary
methods and also have a predictive value. The non-monetary methods may refer to a simple
inventory of skills and capabilities of people within an organization or to the application of
some behavioral measurement technique to assess the benefits gained from the Human
resource of an organization.
1. The skills or capability inventory is a simple listing of the education, knowledge,
experience and skills of the firm's human resources.
2. Performance evaluation measures used in HRA include ratings, and rankings. Ratings
reflect a person's performance in relation to a set of scales. They are scores assigned to
characteristics possessed by the individual. These characteristics include skills, judgment,
knowledge, interpersonal skills, intelligence etc. Ranking is an ordinal form of rating in
which the superiors rank their subordinates on one or more dimensions, mentioned above.
3. Assessment of potential determines a person's capacity for promotion and development. It
usually employs a trait approach in which the traits essential for a position are identified. The
extent to which the person possesses these traits is then assessed.
4. Attitude measurements are used to assess employees' attitudes towards their job, pay,
working conditions, etc., in order to determine their job satisfaction and dissatisfaction
The Relationship between Human Capital and Employees Performance
The human capital focuses two main components which is individuals and organizations.
This concept have further been described by Garavan et al., (2001) that human capitals have
four key attributes as follows: (1) flexibility and adaptability (2) enhancement of individual
competencies (3) the development of organizational competencies and (4) individual
employability. It shows that these attributes in turn generate add values to individual and
organizational outcomes. There are various findings that incorporate human
Capital with higher performance and sustainable competitive advantage (Noudhaug, 1998);
higher organizational commitment (Iles et al., 1990); and enhanced organizational retention
(Robertson et al., 1991).
Some recent literature shows the importance of training. In any case, it is fitting to point out
that the workforce’s lack of training is related to low competitiveness (Green, 1993). In turn,
a greater human capital stock is associated with greater productivity and higher salaries
(Mincer, 1997). Likewise, training is linked to the longevity of companies (Bates, 1990) and
greater tendency to business and economic growth (Goetz &Hu, 1996). In addition,
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Doucouliagos (1997) has noted human capital as a source not only to motivate workers and
boost up their commitment but also to create expenditure in R&D and eventually pave a way
for the generation of new knowledge for the economy and society in general. Also, for small
businesses it is a valuable asset, which is positively associated with business performance.
Finally, investment in training is desirable form both a personal and social perspective.
From the organizational level, human capital plays an important role in the strategic planning
on how to create competitive advantages. Following the work of Snell et al., (1999) it stated
that a firm’s human capital has two dimensions which are value and uniqueness. Firm
indicates that resources are valuable when they allow improving effectiveness, capitalizing on
opportunities and neutralizing threats. In the context of effective management, value focuses
on increasing profits in comparison with the associated costs. In this sense, firm’s human
capital can add value if it contributes to lower costs, provide increased performances.
Another study by Seleim, Ashour, and Bontis (2007) analyzed on the relationship between
human capital and organizational performance of software companies. They found that the
human capital indicators had a positive association on organizational performances. These
indicators such as training attended and team-work practices, tended to result in superstar
performers where more productivity could be translated to organizational performances. This
was also supported by Dooley (2000) who found a significant positive correlation between
the quality of developers and volume of market shares. Based on the above arguments we
Can conclude that human capital indicators enhanced the firm performance directly or
indirectly.
A study by Bontis and Fitzenz (2002) found that the consequences of human capital
management and they established the relationship between human capital management and
economic and business outcomes. In this study, a total of 25 firms in the financial services
companies were selected. The study measured human capital effectiveness with four metrics;
revenue factor, expense factor, income factor and HC ROI. The fundamental aspects of any
organization are to generate more revenue and income per employee. Human capital has a
direct impact on the intellectual capital assets that will yield higher financial results per
employee. The development of human capital is positively influenced by the educational
level of employees and their overall satisfaction. Therefore, development human capital has a
direct impact on ROI of firms.
A causal model using a set of cross-sectional data developed by Selvarajan et al. (2007)
indicates that human capital enhancement paves a way for greater innovativeness and this in
turn offers positive implications on firm performance. In the meantime, firm performance and
human capital could also be viewed in the context of high performance work systems (Hsu et
al., 2007). It is argued that the formation and emphasis on the human capital enhancement
will result in high performance or rather high performance work systems.
Admittedly, human capital development and enhancement in organizations tend to create a
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significant contribution on organizational competencies and this in turn becomes a great
boost for further enhancing innovativeness and the current literature to a large extent supports
the fact that firm performance is positively impacted by the presence of human capital
practices (Noe et al., 2003; Youndt et al., 2004). Some even endorsed that human capital
development is a prerequisite to good financial performance (Delaney &Huselid, 1996) and
in addition, the importance of organizational human capital with regard to firm performance
was further supported by Hsu et al. (2007). In addition, evidence shows that the relevance of
Human capital to firm performance has also become prevalent among the technology-based
new ventures, and it seems that the use of human capital tool (emphasizing quality of
employees) per say in small technology based new ventures tends to have a great impact on
the firms’ success (Shrader & Siegel, 2007).
In the meantime, human capital enhancement can also be viewed in the context of top
management team (TMT). Heterogeneity or sometimes is called diversity in TMT will tend to
lead to greater performance because the argument is heterogeneity promotes various
characteristics to be absorbed into the workforce team; this includes people of different age
groups, functional backgrounds, education backgrounds, tenure and gender. These
characteristics have a positive impact on firm performance as argued under the upper echelon
theory (Hambrick & Mason, 1984). Studies reveal that heterogeneity cultivates greater
knowledge, creativity and innovation among the team members (Watson et al., 1993;
Maimunah & Lawrence, 2008). Heterogeneity is positively linked to better problem solving
and offering creative solutions (Michel & Hambrick, 1992).
Hence, diversity is positively related to performance. Even in the context of an organization,
the implementation of certain management approaches or philosophies also deals with the
infusion of human capital (e.g. quality circles, team of employee’s experts) especially when
faced with problems (Kanji, 1997).
Human Resources Accounting Applications
Human Resources accounting can be useful in the evaluation process in an organization
because it makes possible to manage the monetary and nonmonetary criteria measurement
and assists to the management in appropriate and timely decisions making process.
also human resource Make it possible the Implementation of accounting systems reward
accounting including salary and fringe benefits, and possible improvements in the
organizational level in order to appreciate of previous performance and motivate employees
and to strengthen employee performance improvement. (Organ, 1998).
Human Resources accounting allows management to adopt appropriate decisions about
rewards with regard to the employees' value. On other hand human resource accounting can
be used in performance and efficiency evaluation in standard costing of training, employment
and other expenses relating to manpower. These standard costs compares to real costs of
14
employment and develop employees and existing deviations be studied and analyzed (
Groejer & Johanson, 1997) .
Also Gebauer in 2003 defined the human resources applications as follows:
Demonstrate critical thinking skills to manage that employees in organizations are of value
and Personnel decisions making should be taken with considering the value and cost of
human resources and providing necessary information for effective and efficient
administration of human resources by management. Benitez also in 1999 divided human
Micro and macro levels, as follows: resources accounting applications into two
Macro Level:
1. Changing patterns of production, work organization and employment patterns.
2. Changes in regulations and rules of government, companies and individuals.
Micro level:
1 - To improve human resources management.
2 - To overcome the problems resulting from the measurement of intangible assets
3 - to overcome the problems in providing sufficient information for investors in
conventional financial statements.
4 – Considering employees as assets for the separation of social responsibilities between
public and private sectors.
5 - For shaping the company and improve its image.
6 - For Preserve competent workforce.
7. for employment of future employees.
Christine in 1998 said that: Human Resources Accounting, typically is measurement
development and human capital management objective, and is and approach to improve
assessment of accounting procedures and human resources management.
Verma & Dewe. In 2004 added that human resource accounting specify the function of
human resources in achieving organizational goals ,their strategies and overall organizational
productivity with providing information regarding human resources evaluation criteria such
as absenteeism rate learning, job satisfaction, rate of return on human capital, organizational
commitment, effectiveness and costs of learning and training and value added of each
employees. Thus it provides areas for improvement and his promotion.
To study of human resource accounting method on human resources performance
Human Resources accounting in fact is, the application of accounting concepts and methods
is in the range of human resource management. This accounting is measurement and selection
expense and manpower valuation as the main resources of each Institute. These criteria of
costs other expenses are consist of two parts current and of capital expenses.
15
Another interpretation could include such costs as consumer expenses and the costs of lost
that include of two elements that are direct and indirect costs opportunities.
Human resource costs consist of both initial cost and replacement cost will that are as
follows:
1.2 Initial costs
Initial cost of human resources is all funds that are used to supply manpower education and
training
Include the costs of manpower selection, recruitment, deployment, orientation to job training
service retraining and applicable and professional training in order comprehend
during
required skills.
This definition is almost used in other resources because the prime cost of equipment and
manufacturers are those amounts that are spent for this resource determination.
2 -2 .Replacement costs
Are expenses that bearded for replacement of personnel that are working in the institution or
enterprise and are divided in two parts as follows?
1. Replacement and designation or occupational costs.
2. Personal expenses.
2.2.1 Replacement and designation or occupational costs
The cost that must be bear to replace the person who has occupied an organizational post
with a person who can provides similar service in this organizational position and such
expenses itself consists of three parts (ensuring costs, education or training costs, costs of
resignation).
2.2.2 .Costs of Resignation
They are amounts that are paid on resignation of each or any number of persons employed by
the organization. These costs include: Bonuses or pay the cost of resignation, cost difference
before resignation, cost of unoccupied organizational post. We should not forget that the
bonus cost or resignation remuneration is in fact the redemption price of service duration
and is difference costs of before the employee resignation due to a decrease in productivity
of employee before resignation,
Because efficiency of each employee before resignation usually is reduced. Cost of
unoccupied Organizational post is indirect cost that is affected from reduced efficiency that is
due to the posts which remain vacant (Raisi, 1381). The human resources economical value
like economical value of all resources depends to employer capacity to use the potential of
16
these forces. Specifically, the economic value of human resources is of service present value
that they are expected in future.
Human resource Accounting Methods for human resources value measurement
Human Resource Accounting can be studied in two methods:
1. Human Resources Costing
A Human Resources accounting system at first need to identify the costs occurred
associated with manpower that should be separated from other costs of business. Methods
and techniques used should distinguish between capital and current costs. Human resources
costing consist of the following two parts:
1. Initial costs: is all funds that spend to meet the education and preserve for manpower
includes the work force selection , employment ,settlement deployment and training during
service, retraining and applicable training and specialty for skill determination.
2. Replacement costs: the costs of replacing employees who are currently engaged in the
organization; they include:
I. Post Replacement or occupational costs: these are cost that are for individual replacement
in an organization or with the person who can provide similar services that includes
employment, education, training and resignation. The resignation costs are consists of
resignation remuneration costs, unoccupied post and difference before resignation.
II. Other personnel expenses include rewards (cash and non cash), Facilities (tools, furniture
and equipment necessary for the welfare of employees), Health and cleanliness costs, cost
related to consultation and conversation, wages and salaries and other payments such as
insurance payments.
Human Resources valuating:
Human Resources Accounting needs to valuation, more than costing. The concept of human
resource based on theory of value in the general economy. Considering that the human being
is capable of further potential benefits, Can define human values such other sources as the
present value of expected future service. Therefore individual's value is present value of a
series of service that expected the employees creates during his service in an organization. A
group rejected this theory and believes that human is beyond evaluation and in fact is
unevaluated.
According to the researchers to measure theory, human resources, there are two basic steps,
this means that at first we should specify the concept of human resources in term of nonmonetary or qualitative so that can provide it in balance sheet of organization in money
expression.
Human resources Measurement models
17
In 1970' decade some researchers suggest some models about human resource accounting
evaluation in order to promote human resources practical measurement. In 1971, Flamholtz
suggested model that was considered employees' replacement in different positions of an
employee organization. He calculated the resulting service by an employee in a given time
period with help of this model. On bias of the occupying probability of each parts
organization for an employee, the expected service levels is obtained as follows:
In this model Si represents the amount of can be expected to receive services from an
employee who
Is taking a certain position. Monetary value of these services can be found by multiplying the
service part in expected service level or can consider it equivalent to a profit amount that is
expected to be achieved from employee service (Flamholtz 1971). To determine changes in
the participation rate of employees in the office of the enterprise uses the Markov process. In
the same year sehwartz and lev assigned the economic value to an employee in form of prsent
value of employee's income during of its useful life and their models were adjusted for the
probability of an employee's death.Thier model is as follows:
In this model:
E (Vr*) =Individual human capital with r years life
I (t) =Employee's income before retirement
r= Discount rate (special for employee)
T= Retirement age.
Dr (t) = Conditional probability for a person with r year life who will die in the year of t.
I* (t) =f [I0 (t)], t=r, t.
In 1973, Morse studied the two previous models and combines together. He has accepted
Flamholtz tried to determine organization's human assets value by using net present that
value of services provided by employees. But Lew, schwatrz had tried to measure else. In the
second model Human capital the residual income from employment of an individual is
estimated by using the present value of organization. Therefore a resource obtained of any
18
person directly and indirectly in organization increase in human capital is focused on
where an employee works.
Therefore Morse has developed a more compound model it is as follows:
That in above model:
A= Human assets value for an organization.
N=the number of indivduals who are currently employed by the organization.
t= present time.
T= the maximum period that takes time when an employed person, desert his organizations
Gi (t) Gross value of services provided by it employee to the organization at the time of the t
=
Eli(t)=All direct and indirect compensation paid to ith employee at time of t. ٍ
X(T)=Surplus-value services to all people on the value of each of individuals' services
when they work together in time of t.
r= money time value.
Lau&Jaggi developed a Markov practical model in 1974 as follows:
I.e. In this model:
[TV]= Vector sum of the economical values in each job category .
[N] = Vector number of employees in each occupational category at time zero.
n=Number of time periods.
r = discount rate percentage for each period.
[𝑇]𝑛 =
Transfer probality matrix of (possibly job promotionto higer levels )during the time of n period
19
[V] = vector of expected economic value in each job category.
To use documents and evidences of personnel affairs in organization the promotion
possibility and compensation of organization n for each employee in a given year in the
following matrix is calculated and the tabloid.
End of service period
Beginning
of service
period
Job
category
1
2
3
4
1
2
3
4
0.4
0
0
0
0.4
0.5
0
0
0.1
0.4
0.8
0
0.1
0.1
0.2
0
According to this matrix, there are 0.4 probabilities for employees who working in first job
category to remain in the same job and there is 0.4 possibilities that they are prompted to
second job category and there is 0.1 of probability they leave the organization. (4th Job
category is related to give up the organization service) the total of probabilities in each level
of this matrix is equal to 1,Jaggi& Lau, 1974 provided numerical examples in a case. The
value of human resources in each Job category (per thousand Rails) is determined as follows:
[𝑉1 , 𝑉2 , 𝑉3 , 𝑉4 ] = [1000,2000,3000,0]
The number of employees in each job category is:
[𝑁1 , 𝑁2 , 𝑁3 , 𝑁4 ] = [100,100,100]
Probability matrix [T] is as follows:
0.4
T=
0.1 0.1 0.1
0.0 0.5
0.4 0.1
0.0 0.0
0.8 0.2
20
0.0 0.0
0.0 1.0
The expected economic value of the 100 employees in the occupational category in a time
period (say first year) is consisting of:
100x (0.4x1000+ 0.4x2000+0.1x3000)=150000Rls.
Using matrix operations, the expected values for each job category is calculated as follows:
100
0.4
0.4 0.1
0.1
1000
150000
100
0
0.5
0.4
0.1
2000
220000
100
0
0
0.8
0.2
3000
240000
0
0
0
0
1
0
0
x
x
=
If the probability matrix for the second year is as follows:
[T]2=
0.16 0.36 0.28 0.2
0 0.25 0.52 0.23
0
0 0.64 0.36
0
0
0
1
Therefore, the expected economic value to the employees of 1st job category in the second
year includes:
10×)10000+0/36×0002+0/28×3(
And expected values for each of the levels in the second years:
21
100
0.16 0.36 0.28 0.2
100
0
1000
0.25 0.52 0.23
2000
x
x
100
0
0
0
0
0
0.64 0.36
0
172000
1
206000
=
3000
192000
0
0
The total value of each job category for each two-year period (first and second year) is as
follows:
150000
220000
172000
x
240000
206000
192000
322000
=
426000
432000
The calculated value is not greatly distorted even assuming a period longer than 40 years, the
economic value of all employees has been calculated using computers at zero time (based on
. a 40-year period) is equal to 3.983 million rials.
A few years later, Ogan (1976) developed a generalized model into the form below.
i.e.:
k=
Total adjusted net present values of human resources in a professional services organization
VP =certain equivalent net Benefits
L = the estimated useful life of the employee to the organization
j=1 ‫ و‬2 ‫ و‬000 ‫ و‬n ‫ و‬It employee j
r = risk-free discount rate
22
In this model has been tried to calculate total benefits produced by employees after deducting
the employment expenses also in this model the certainty factor l based on continuity of
employment and employee survival probability of employment is used. It seems that the
application and subsequent development of such models is limited. Practical applicable
models are still largely depends on the availability of needed basic information. Pioneered
confess the use of such models for HRA using to employee groups and not individually and
(Which have invested heavily in human acknowledge The user organizations that such.
resources) are more valuable and applicable.
Criteria for measuring human capital
• Financial criteria such as sales and financial performance
Criteria for production efficiency, services produced customer service, numbers of errors,
customer satisfaction, and quality of service.
• Criteria for delay, absence
According to research in the field of human resource valuation was carried out in England In
the following criteria were considered as criteria in more than 50 percent of 2004,
organizations used for the valuation of human resources.
Possible measurements
Human capital activities
Cost, time, quantity, quality, compliance with the strategic criteria
Using the new force
Reasons for turnover, turnover rate
Dismissal
Payment levels, differences, justice evaluation, customer satisfaction,
employee satisfaction
Reward / compensation
for
service
Measuring the level of competencies, skills, competencies and the
investment in education
Competencies / Training
Age, promotion rates, participation in knowledge management activities, Diagram of human
diversity, leadership, organizational commitment
resources
Per capita income per person, per person operating expenses, real value
added per person
The role of human resource accounting in organizations:
23
Productivity criteria
With considering to increasing importance of human capital in the entire economy, there is
deep understanding of the role of human resource accounting in organizations. The first and
important role of human resources accountants in modern organizations is to help to
managers in role of human force counselors. In not long time personnel expertise in the
organizations were responsible for matters such as recruitment, training, promotion, salary
and wages planning, management of employee relations. The traditional role in the
evolutionary process was quickly transformed into a set of conceptual and strategic
responsibility became widespread. One of the apparent roles of human resource accounting is
to provide counsel to management on various issues that there is in human resources. It can
advise and counsel on how to create a corporate culture for efficient use of human resources
or to occur for answers to many questions about human resource management.
Questions Such as:
1. Whether the organization should have people in the low skill levels hire from outside the
organization and then gradually promote them up to high levels?
2. Whether the organization should eliminate the employees during the time of facing
financial crisis or keep them as protection of their human assets?
3. How much organizations need to invest in order to develop and improve human resources?
Successful companies such as Google and Microsoft's are allowed tremendous value for
accumulated, experienced and knowledge human resources accountants, executives and
consultants.
The most of these successful companies, , senior human resources accountants play an
important role in the line management decisions and are responsible for human resource
assessment and determine a position of any one in the business macro strategies of
organizations. Human resource accounting can be a constructive change for organizations
that already have deal with traditional practices and are now have programs for their
development.
But how can human resource accounting be effective in management decisions about cost
and people value as resources? With an example regarding employees' elimination can find
an answer to this question.
Many companies that are faced with economic recession began to dismissal and discharge of
their employees that its immediate result is reduction in payroll costs and improve the
company's net profit. The strategy, of dismissal and discharge of employees though have
benefits in the short term but also has hidden costs that cannot be measured by common and
traditional accounting, particularly, thence that some discharged employees may be
employed in other and even competing companies and when the company expanded again,
cannot again return them to their previous work.
As a result, companies need to invest in training new people that require the hidden
replacement cost is in this regard that may be incurred in the future. In meanwhile the
24
removal and dismissal of employees has cognitive and motivational effects. Although some
employees may work more seriously because of the fear of unemployment and some others
react to support their jobs and positions. However, the important result is that layoffs and
dismissals may be causing that employees feel their company use them and so employers
need to protect of themselves against employers.
One of others role of human resources accounting is to asset to top management of
organization for recognizing of their business decisions application. Human resource
accounting is the approach to analyze the results of decisions (Such as dismissal and
dismissal) on human organization and explanation the results to management and hidden
costs due to various and important decisions commercial matters. Another key aspect of
human resource accounting is using it to measure the cost and value of human resources. HR
professionals and accountants can measure the cost of dismissal and discharge (Estimated
replacement cost due to replace the lost work force).
The key issue is that the company should not adopt a policy of removal and deportation
rather, management must consider the costs and benefits of such decisions. Thus one of the
roles of human resource accounting is to prepare and provide numeric information as one of
data for management decisions making.
Another impact of human resource accounting measurement is to control and determine the
costs and value of people in views of human resources. In the traditional method, people in
organizations are considered as cost. In common accounting all investments that are
essential for selection, choice, training and salaries and benefits is considered as cost to
determine the net profit of enterprise. While most of these expenditures determine the
investments in assets creation that generate future value to the organization. Consciously or
unconsciously management considers employees expenditures as cost in the organization.
Therefore one of the functions of human resource accounting is that to show management
the right method of dealing with such costs. (Brumment, 1969).
Figure 1: The role of human resource accounting
Human Resource
Accounting
Working framework
Application
Programs,
decisions and
instructions of
Human resource
management
Human resource
accounting
measures
25
Provocative
As you can see in figure- 1 for three human resources accounting determine three main tasks
of for human resources specialists, accountants, Provides framework to facilitate decision
making about human force, and compute Information required for cost people value as assets
to the organization and cause for the motivation of line management with considering the
perspective of human resource management in decisions making about the organization'
people. Specific applications of human resources accounting:
So far we discussed the article about the wide application of human resource accounting. In
this section we will try to review some specific applications as a model for human resource
management process pattern. This pattern which is depicted in diagram- 2 is a framework for
analyzing issues and problems of management from the perspective of human resources
accounting, based on the general theory of systems. This pattern indicates human resource
management tasks that can be respondent through human resources accountants by using the
needed basic information. (Dawson, 1994).
Figure 2: Input - Output Management System Model
Human Resource Management Processes
Improvement
Maintenance.
t
Absorption
and growth.
allotment
Productivityy
Evaluation
Reward
Organization of group
Services
Individual
Groups
Services
Individual
s
Resource
value
Group Services
Human Resources yield
Human Resources Data
‫داده های منابع انسانی‬
Human
26
Figure- 2 shows that human resource management is a system is designed for data conversion
(HR) to output data (Human Services) .Data are humans, individuals, groups and as total are
human organization. To convert the t data to output in any system is needed to process that in
this system process involves the capture, recovery and growth, allocation, maintenance,
operation, evaluation and reward of people under management systems.
The efficiency of this system is the same service is provided by individuals and groups and
these are services that determine people value in an organization. This pattern suggests that
the ultimate goal of human resource management, Enhance corporate value through the
transfer of raw data into valuable output for human. From a management perspective, the first
role of human resources accounting is to provide necessary information to attract, develop
and progress, allocation, maintenance, operation, troubleshooting, and reward the value of
resources. This statement means human resources accounting' professionals, required
different data for the transfer process.
Methods of valuation of human assets:
There are a number of methods suggested for the valuation of human assets. Many of these
methods are based on the valuation of physical and financial assets while others take into
account human consideration. Major methods of valuation of human asserts are historical
cost, replacement cost, standard cost present value of future earnings and expected realizable
value.
The major developments in HRA were started only during l96o's by some of the
organizations in USA. Of course, the first attempt to value the human being in monetary
terms was made by William Potty who opined that labor was the father of wealth and it must
be taken into account while making an estimate of wealth. On scanning through literature, the
approaches to HRA can be broadly classified as follows:
a) Cost based approaches
I) Historical Cost
ii) Replacement Cost
iii) Opportunity Cost
iv) Standard Cost
b) Monetary value based approaches
27
i) The Lev and Schwar
ii) The Eric Flamholtz Model
iii) Morse Model
c) Non- monetary value -based approaches:
i) Likert Model
ii) The Flamholtz Model
iii) Ogan Model
A. Cost Based Approaches:
i) Historical cost approach:
Brumnet, Flamholtz and Pyle have developed this method. It is on the basis of actual cost
incurred on human resources. Such a cost may be of two types- acquisition cost and learning
cost.
Acquisition cost is the expense incurred on recruitment, selection; entire cost is taken into
consideration including those who are not selected.
Learning cost involves expenses incurred on training and development. This method is very
simple in its application but it does not reflect the true value of human assets. For example,
an experienced employee may not require much training and therefore, his value may appear
to be low though his real value is much more than what is suggested by historical cost
method.
Under this approach actual cost incurred towards recruitment, hiring, training and developing
human resources of the organization are capitalized and amortized over the future expected
useful life of the human resources. Certain part of costs will be written off in proportion to
the income of the future years which those human resources will provide service.
When these human assets are prematurely liquidated, the amount not written off is charged to
income of the year in which such liquidation takes place.
When the useful life of the human resource is considered to be longer than originally
expected, revisions are to be effected in the amortization schedule. The historical cost of
human resource is almost similar to the book value of the other physical assets. The
additional costs incurred in training and developing is capitalized and is amortized over the
remaining working life of the employee. The unexpired value is investment in human assets.
ii) Replacement cost
Rensis Likert & Eric G.Flamholtz propounded it. This is a measure of cost to replace a firm‟s
existing human resources. Human Resources are to be valued on the assumption that a new
28
similar organization has to be created from scratch and the cost to the firm is calculated if the
existing resources were required to be replaced with other persons of equivalent talents and
experience. It takes into account all costs involved in recruiting, hiring, training and
developing the replacement to the present level of efficiency.
As against historical cost methods which take into account the actual cost incurred on
employees, replacement cost takes into account the notional cost that may be required to
acquire a new employee to replace the present one. Replacement cost is generally much
higher than the historical cost. For example, Friedman has estimated that the replacement cost
of an executive in middle management level is about 1.5 to 2 times the current salary paid in
that position.
Replacement cost is much better indicator of value of human assets though it may present
certain operational problems. For example, true replacement of a person may not be found
easily with whose cost the valuation is done.
This approach is more realistic as it incorporates the current value of the organization's
human assets in its financial statements prepared at the end of the year. Costs incurred by an
organization in replacing a terminated employee are defined as replacement cost like the
following –:
a) Communication of job ability
b) Pre-employment administrative functions
c) Interviews
d) Testing
e) Staff Meetings
f) Travel Cost
g) Employment Medical Examination.
c) Opportunity cost method:
Heckiman and Jones first advocated this approach. This is also known as “Market Value
Method”. This method of measuring the value of human resources is based on the
economist's concept of „opportunity cost‟.
Opportunity cost is the value of an asset when there is an alternative opportunity of using it.
In this method there is no opportunity cost for those employees who are not scarce. As such
only scarce people should form part of the value of human resources. The employee is
considered as scarce only when the employment in one division of an individual or group
denies this kind of talent to another division. Thus the opportunity cost of an employee in one
29
department is calculated on the basis of offer made by another department for the employees
working in this department in the same organization.
iv) Standard cost Method.
David Watson has suggested this approach. Instead of using historical or replacement cost,
many companies use standard cost for the valuation of human assets just as it is used for
physical and financial assets. For using standard cost, employees of an organization are
categorized into different groups based on their hierarchical positions.
Standard cost is fixed for each category of employees and their value is calculated. This
method is simple but does not take into account differences in employees put in the same
group. In many cases, these differences may be quite vital.
According to this approach, standard costs of recruiting, hiring, training and developing per
grade of employees are determined year after year. The standard cost so arrived at for all
human beings employed in the organization are the value of human resources for accounting
purposes. The approach is easy to explain and can work as a suitable basis for control
purposes through the technique of variance analysis. However, determination of the standard
cost for each grade of employee is a ticklish issue.
Monetary value based approaches:
According to this approach, the value of human resources of an organization is determined
according to their present value to the organization. For determination of the present value, a
number of valuation models have been developed. Some of the important models are as
follows –
In this method the future earnings of various groups of employees are estimated up to the age
of their retirement and are discounted at a predetermined rate to obtain the present value of
future earnings used in the case of financial assets. It is the present value of future earnings.
To determine this value, the organization establishes what an employee's‟ future contribution
is worth to it today. That contribution can be measured by its cost or by the wages the
organization will pay the employee. The organization does not benefit by monitoring the
efficiency of its investment in employee development because the investment has little or no
impact on the present valuation of future earnings.
The Lev and Schwartz Model (Present value of future earnings method)
This model has been developed by Lav and Schwartz (1971). According to this model, the
value of human resources is ascertained as follows –
1. All employees are classified in specific groups according to their age and skill.
2. Average annual earnings are determined for various ranges of age.
3. The total earnings which each group will get up to retirement age are calculated.
30
4. The total earnings calculated as above are discounted at the rate of cost of capital. The
value thus arrived at will be the value of human resources/assets.
1. This model implies that the future work condition of the employee will not change over the
span of his working life, but will remain the same as at present.
2. The approach does not take into account the possibility that the employee will withdraw
from the organization prior to his death or retirement. It is therefore not realistic.
3. It ignores the variable of thee career movement of the employee within the organization.
An engineer will be an engineer throughout his career in the organization.
4. It does not take into account the role changes of employees. A Personnel Manager may
become Chief Legal Officer.
However, this method does not give correct value of human assets as it does not measure
their contributions to achieving organizational effectiveness.
Scarpello & Thekee (1989)
“At the theoretical level, HRA is an interesting concept. If human resource value could be
measured, the knowledge of that value could be used for internal management and external
investor decision-making. However, until HRA advocates demonstrate a valid and
generalisable means for measuring human resource value in monetary terms, we are
compelled to recommend that researchers abandon future consideration of possible benefits
from HRA.
Flamholtz Model (Reward Valuation method)
This model has been suggested by Flamholtz (1971). This is an improvement on „present
value of future earnings model‟ since it takes into consideration the possibility or probability
or an employee's movement from one role to another in his career and also of his leaving the
firm earlier, that his death or retirement.
According to this model, the ultimate measure of an individual's value to an organization is
his expected realizable value. Expected realizable value is based on the assumption that there
is no direct relationship between cost incurred on an individual and his value to the
organization at a particular point of time. An individual's value to the organization can be
defined as the present worth of set of future services that the expected to provide during the
period he remains in the organization.
Flamholtz has given the variables affecting an individual's expected value {IERV}:
individual conditional values and his likelihood of remaining in the organization. The former
is function of the individual's abilities and activation level, while the later is a function of
such variables as job satisfaction, commitment, motivation and other factors.
Morse Model (Net Benefit Model)
31
This approach has been suggested by Morse (1973). According to this approach, the value of
human resources is equivalent to the present value of net benefits derived by the organization
from the service of its employees. The method involves the following steps
1. The gross value of services to be rendered in future by the employees in their individual as
well as their collective capacity is determined.
2. The value of future payments (both direct and indirect) to the employees is determined.
3. The excess of the value of future human resources (as per 1 above) over the value of future
payments (as per 2 above) is ascertained. This, as a matter of fact, represents the net benefit
to the organization on account of human resources.
4. The present value of the net benefit is determined by applying a predetermined discount
rate (generally the cost of capital). This amount represents the value of human resources to
the organization.
c) Non- monetary value -based approaches:
Pekin Ogan (Certainty Equivalent Net Benefit Model)
This approach has been suggested by Pekin Ogan(1976). This, as a matter of fact, is an
ext4nsion of “net benefit approach” as suggested by Morse. According to this approach, the
certainty with which the net benefits in future will accrue should also be taken into account,
while determining the value of human resources. The approach requires determination of the
following –
1. Net benefit from each employee as explained under „net benefit approach‟.
2. Certainty factor at which the benefits will be available
3. The net benefits from all employees multiplied by their certainty factor will give certainty
equivalent net benefits. This will be the value of human resources of the organization.
In case of permanent exit on account of death, retrenchment etc. then the balance on the
deferred revenue account of that year of that person should be written off against the income
in the year of exit itself. For the purpose of finding the present value of estimated payments
the expected average after tax return on capital employed over the average tenure period
should be taken as the discount rate. As for disclosure of accounting information on human
resources as an asset, he has suggested to include human assets under investments in the
'financial statement' of the organization. He is not for taking it as 'fixed assets' as it will cause
problems of depreciation, capital gains or losses upon exit etc.; neither it could be taken as
'current asset' as it will not be in conformity with the general meaning of the term.
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choose
selection
Employment
appointment
Direct expenses
Human
recourse
employment
expenses
Promotion or
replacement
temporary
human force
in
organization
indirect expenses
Human resource historical
Cost indirect expenses
Official
training and
retraining
Training
during service
direct expeses
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training
expenses
Training
courses
indirect expenses
Lost efciency
during training
Conclusion
Promoting allergenic human capital and organizational performance level on various aspects
of the broader economic and social development of society is not hidden by any one and what
was said is the most important asset of any organization's human resources and performance
of human resources in the organization can determine its position in the business world The
necessity of accounting for human resources at present is irrefutable and the results of the
organization's goals and accounting information in investment decisions and managers is
essential Human resource accounting system can be as tool under the control of managers of
companies for solving many problems but if they believe that human resource is valuable
asset and how to make better use and do investment on human resources This paper explored
the current literature on human capital and its impact on employees performance. The
Conceptualization of human capitals is closely linked to some fundamentals of economics
and employees performance. The literature reviews show that there are reasonably strong
evidences to show that the infusion of ‘human capital enhancement’ in employees promotes
innovativeness and greater employees' performance.
Studies also clearly substantiate the fact that financial performance is positively impacted
through the consideration of human capitals.
In light of this, the understanding of employees performance in relation to human capitals
should not be regarded as a phenomenon that only adds ‘more zeros’ in a firm’s profits; it is
rather transforming the entire workforce as the most ‘valuable assets’ in order for the
organization to pave ways for greater achievements via innovativeness and creativity. Hence,
companies should therefore, come up with some effective plans especially in investing the
various aspects of human capital as not only does it direct firms to attain greater
Performance but also it ensures firms to remain competitive for their long term survival.
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Promoting human capital and its effect on various aspects of organizational performance and
in the broader level on social and economic development of community is not hidden from
anyone.
In the end, it should not be forgotten that today one of the most important development tools,
is management and if success is achieved in the development is due to manpower and social
environment. There is no doubt that the management of organizations should be serious about
human resources and increasing their performance which will affect on productivity and
efficiency. Then the role of human resources accounting and the appropriate valuation
techniques would be more sensitive.
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