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HR AS ASSETS
Human resource (or personnel) management, in the sense of getting things done through
people. It's an essential part of every manager's responsibilities, but many organizations
find it advantageous to establish a specialist division to provide an expert service
dedicated to ensuring that the human resource function is performed efficiently.
"People are our most valuable asset" is a cliché which no member of any senior
management team would disagree with. Yet, the reality for many organizations is that
their people remain
• under valued
• under trained
• under utilized
• poorly motivated, and consequently
• perform well below their true capability
The rate of change facing organizations has never been greater and organizations must
absorb and manage change at a much faster rate than in the past. In order to implement a
successful business strategy to face this challenge, organizations, large or small, must
ensure that they have the right people capable of delivering the strategy.
The market place for talented, skilled people is competitive and expensive. Taking on
new staff can be disruptive to existing employees. Also, it takes time to develop 'cultural
awareness', product/ process/ organization knowledge and experience for new staff
members.
These issues motivate a well thought out human resource management strategy, with the
precision and detail of say a marketing strategy. Failure in not having a carefully crafted
human resources management strategy, can and probably will lead to failures in the
business process itself.
This set of resources are offered to promote thought, stimulate discussion, diagnose the
organizational environment and develop a sound human resource management strategy
for your organization. We begin by looking at the seven distinguishable function human
resource management provide to secure the achievement of the objective defined above.
Finally, some questions are posed in the form of a HRM systems diagnostic checklist for
you to consider, which may prove helpful for you to think about when planning your
development programs for the human resources in your organization, if they are truely
"your most valuable asset."
Functions:
Approaches to Human resource accounting was first developed 1691 the next stage was
during 1691-1960 and third phase post-1960. There are two approaches to HRA. Under
the cost approach, also called human resource cost accounting method or model, there is
a) Aqvisition cost model and b)replacement cost model. Under the value approach there
are a) present value of future earnings method, b) discounted future wage model, c)
computative bidding model.
100000\30=3333.33
3333.33*25=83333.33
100000-83333.33=16666.67
This method is the only method of human resource accounting which is based on sound
accounting principals and policies.
Limitations:
• The valuation method is based on false assumption that the dollar is stable.
• Since the assets cannot be sold there is no independent check of valuation.
• This method measures only the costs to the organization but ignores completely
any measure of the value of the employee to the organization (Cascio 3).
This approach measures the cost of replacing an employee. According to Likert (1985)
replacement cost include recruitment, selection, compensation, and training cost
(including the income foregone during the training period). The data derived from this
method could be useful in deciding whether to dismiss or replace the staff.
Limitations:
• Substitution of replacement cost method for historical cost method does little
more than update the valuation, at the expense of importing considerably more
subjectivity into the measure. This method may also lead to an upwardly biased
estimate because an inefficient firm may incur greater cost to replace an employee
(Cascio 3-4).
Lev and Schwartz (1971) proposed an economic valuation of employees based on the
present value of future earnings, adjusted for the probability of employees’
death/separation/retirement. This method helps in determining what an employee’s future
contribution is worth today.
According to this model, the value of human capital embodied in a person who is ‘y’
years old, is the present value of his/her future earnings from employment and can be
calculated by using the following formula:
where E (Vy) = expected value of a ‘y’ year old person’s human capital T = the person’s
retirement age Py (t) = probability of the person leaving the organisation I(t) = expected
earnings of the person in period I r = discount rate
Limitations:
• The measure is an objective one because it uses widely based statistics such as
census income return and mortality tables.
• The measure assigns more weight to averages than to the value of any specific
group or individual (Cascio 4-5).
Hekimian and Jones (1967) proposed that where an organization had several divisions
seeking the same employee, the employee should be allocated to the highest bidder and
the bid price incorporated into that division’s investment base. For example a value of a
professional athlete’s service is often determined by how much money a particular team,
acting in an open competitive market is willing to pay him or her.
Limitations:
• The soundness of the valuation depends wholly on the information, judgment, and
impartiality of the bidder (Cascio 5).
Expense model:
According to Mirvis and Mac, (1976) this model focuses on attaching dollar estimates to
the behavioral outcomes produced by working in an organization. Criteria such as
absenteeism, turnover, and job performance are measured using traditional organizational
tools, and then costs are estimated for each criterion. For example, in costing labor
turnover, dollar figures are attached to separation costs, replacement costs, and training
costs.
HUMAN RESOURCES METHODS AND APPLICATIONS
Introduction
The past few decades have witnessed a global transition from manufacturing to service
based economies. The fundamental difference between the two lies in the very nature of
their assets. In the former, the physical assets like plant, machinery, material etc. are of
utmost importance. In contrast, in the latter, knowledge and attitudes of the employees
assume greater significance. For instance, in the case of an IT firm, the value of its
physical assets is negligible when compared with the value of the knowledge and skills of
its personnel. Similarly, in hospitals, academic institutions, consulting firms etc., the total
worth of the organization depends mainly on the skills of its employees and the services
they render. Hence, the success of these organizations is contingent on the quality of their
Human Resource- its knowledge, skills, competence, motivation and understanding of the
organizational culture. In knowledge –driven economies therefore, it is imperative that
the humans be recognized as an integral part of the total worth of an organization.
However, in order to estimate and project the worth of the human capital, it is necessary
that some method of quantifying the worth of the knowledge, motivation, skills, and
contribution of the human element as well as that of the organizational processes, like
recruitment, selection, training etc., which are used to build and support these human
aspects, is developed. Human resource accounting (HRA) denotes just this process of
Definition
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’.
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 turnover and highlights the need for efforts by the management towards
retention of manpower.
Measurement in HRA
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.
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.
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 organisation.
4. Attitude measurements are used to assess employees’ attitudes towards their job, pay,
working conditions, etc., in order to determine their job satisfaction and dis satisfaction
Conclusion
The accounting of human resources can be seen as just as much a question of philosophy
as of technique. This is one of the reasons behind the variety of approaches and is further
underlined by the broad range of purposes for which accounting human resources can be
used, e.g. as an information tool for internal and/or external use (employees, customers,
investors, etc.), and as a decision-making tool for human resource management
(investments in human resources as well as personnel management in gene
If you want to make money in business, you must invest money. The same principle
applies to keeping quality employees on staff and motivating them to do their job well.
The turnover rate in the real estate services industry, which includes cleaners, security
guards, messengers and restoration workers, is out of control. Security guards and
cleaners at some companies report to work unkempt, unmotivated and ready ... to quit.
It doesn't have to be this way. Management can keep their employees happy and
motivated by following certain guidelines and constantly finding ways to improve the
company.
Since we are increasing our office space from 13,000 to 23.000 square feet, we've
decided to set up a service center to address employee needs. The center will be staffed
by people who are solely dedicated to addressing the needs of the Alliance workforce in
all its divisions.
Whether it's a change in a cleaner's medical plan or a security guard with a concern about
safety in his building, the staff will be attentive and responsive.
We also are upgrading our computer system and bringing in the latest technology,
including new hardware and new software.
This will benefit both the employees and our bottom line by making all computerized
operations more efficient.
We encourage our employees to strive for certain awards, such as Guard of the Year,
Cleaner of the Year and Messenger of the Year. Each honoree is compensated with a
bonus, a paid day off and a picture in Real Estate Weekly.
A good business owner or manager must value his or her employees as much as he or she
values clients. Like any other investment, caring about your employees will pay
dividends, particularly when they are confronted with difficult decisions in which they
can choose to benefit the company or perhaps unethically benefit themselves. A
motivated and happy worker will choose the company every time.
At First Quality Maintenance, we've had a cleaner return a large amount of cash and at
Classic Security recently, a guard stopped a burglary, for which he was honored by the
New York Police Department. Also at Classic Security, an employee helped in the arrest
of drug dealers.
Unmotivated or bitter employees wouldn't have done these things.
A company that is growing to a new level can't lose sight of what it's doing for its
employees.
Our company has grown tremendously, but if we don't invest in our people, we'll lose
them and any growth we've achieved. Companies grow because of good people doing
great work.
REPLACEMENT COST
The term replacement cost or replacement value refers to the amount that an entity
would have to pay to replace an asset at the present time.
Replacement cost coverage is designed so the policyholder will not have to spend more
money to get a similar new item and that the insurance company does not pay for
intangibles. [2]
For example: when a television is covered by a replacement cost value policy, the cost of
a similar television which can be purchased today determines the compensation amount
for that item.[3] This kind of policy is more expensive than an Actual Cash Value policy,
where the policyholder will not be compensated for the depreciation of an item that was
destroyed.
The total amount paid by an insurance company on a claim may also involve other
factors such as co-insurance or deductibles.
Cost/Benefit Analysis
Evaluating Quantitatively Whether to Follow a Course of Action
• You may have been intensely creative in generating solutions to a problem, and
rigorous in your selection of the best one available. This solution may still not be
worth implementing, as you may invest a lot of time and money in solving a
problem that is not worthy of this effort.
• Cost Benefit Analysis or cba is a relatively* simple and widely used technique for
deciding whether to make a change. As its name suggests, to use the technique
simply add up the value of the benefits of a course of action, and subtract the
costs associated with it.
Costs are either one-off, or may be ongoing. Benefits are most often received over time.
We build this effect of time into our analysis by calculating a payback period. This is the
time it takes for the benefits of a change to repay its costs. Many companies look for
payback over a specified period of time – e.g. three years.
In its simple form, cost-benefit analysis is carried out using only financial costs and
financial benefits. For example, a simple cost/benefit analysis of a road scheme would
measure the cost of building the road, and subtract this from the economic benefit of
improving transport links. It would not measure either the cost of environmental damage
or the benefit of quicker and easier travel to work.
These are all questions that people have to answer, and answers that people have to
defend.
The version of cost/benefit analysis we explain here is necessarily simple. Where large
sums of money are involved (for example, in financial market transactions), project
evaluation can become an extremely complex and sophisticated art. The fundamentals of
this are explained in Principles of Corporate Finance by Richard Brealey and Stewart
Myers – this is something of an authority on the subject.
Example:
Training costs:
Other costs:
Benefits:
Tip:
The payback time is often known as the break even point. Sometimes this is is more
important than the overall benefit a project can deliver, for example because the
organization has had to borrow to fund a new piece of machinery. The break even point
can be found graphically by plotting costs and income on a graph of output quantity
against $. Break even occurs at the point the two lines cross.
Inevitably the estimates of the benefit given by the new system are quite subjective.
Despite this, the Sales Director is very likely to introduce it, given the short payback
time.
Key Points:
Cost/Benefit Analysis is a powerful, widely used and relatively easy tool for deciding
whether to make a change.
To use the tool, firstly work out how much the change will cost to make. Then calculate
the benefit you will from it.
Where costs or benefits are paid or received over time, work out the time it will take for
the benefits to repay the costs.
Cost/Benefit Analysis can be carried out using only financial costs and financial benefits.
You may, however, decide to include intangible items within the analysis. As you must
estimate a value for these, this inevitably brings an element of subjectivity into the
process.