Human Resources - Term Paper Example

?introduction Today, Human resource has been considered as the most important asset of any organization and therefore it is important for the management to make the most of these assets. Although, the role of human resource is somewhat restricted in manufacturing industry in comparison to service industry but despite of that, importance of human resource cannot be neglected in any of these industries. It is because of the quality of human resource and proper management of human resource that an organization is able to differentiate itself from others and the organization is able to attain competitive advantage (Blau, 1978). Organization invests in different projects and assets so that they would yield returns to the company in the long run and the company only invests in them if the expected value of the returns of the projects or assets would be more than their total present investment cost. This theory can also be linked to the human resource of the organization and organizations invest in human resource so that they would yield them profits in the years to come and help the organization to grow as a successful venture. As human resource is the most important asset of the organization and therefore it is imperative for the organization to properly manage its human resource so that the investment yields maximum return (Roslender, 1997). There can be different kinds of investment on human resource like the cost of training, cost associated with recruitment of employees etc and therefore it is important for the management to properly analyse the cost and returns that human resource would yield and for this purpose, human resource accounting has emerged as the solution (Mirvis, & Lawler III, 1984). The concept of human resource accounting is the process by which organization analyses and compares the investment that they have made in the human resource and the benefits that human resource yields to the organization (Pyle, 1970). This information about the cost and benefit of human resource is then conveyed to the interested parties in the organization. This kind of investment is not reported in the conventional financial statements of the organization however this investment is an important one for the long run success of the organization. This report analyses the concept of human resource accounting and how organization uses the concept of human resource accounting along with the importance of human resource accounting. In addition to this, this report also discusses about different methods with which organizations analyses the performance and cost of employees in an organization and limitations of each method and then the conclusion. Concept of human resource accounting and how organization uses it Human Recourse Accounting is the term used to measure the worth and cost of their organization’s employees. Thus, it is the process of identifying, quantifying and communicating the data and information about Human Recourses to the parties involved (Roslender, & Dyson, 1992). It is an effort to identify and report the investments and funds made in organization’s human recourse that are presently not accounted for in the usual accounting practices. Different organizations use the idea of human resource accounting in different ways. With the passage of time, more and more organizations have started implementing this concept considering its importance not only for the human resource department to better evaluate the performance of individuals but as it helps in improving the long profitability of the organization as they are able to identify which human resource or employee is most important to the organization and which human resource should be included in their long run plan and therefore using human resource accounting the management is able to plan things in a better way (Caplan, & Landekich, 1974). However, despite of an increasing use of human resource accounting in different industries around the world, still there are several organizations that do not utilize this concept. Human resource accounting has been used in different ways in different organizations and some of the most noticeable ways how businesses use this idea are described below: The objective of human resource accounting is to portray the potential of employees in financial terms. This notion can be checked from two directions i.e. Cost of Human Recourses: The expenses and costs incurred in hiring, staffing, training and maintaining the value of employees Worth of Human Recourses: The income or profit which the investment on employees can yield in the coming years. The other important purpose why organizations use the concept of human resource accounting is that it is helpful in decision making for the management as they can plan for future using the human resource accounting methods as they know the investment and outcomes of different types of employees or employees in different departments (Flamholtz, 1985). Another important purpose is that it assists in the development of proper decision making and management principles for the future by categorizing financial results/outcome of various practices (Flamholtz, Bullen, & Hua, 2002). The other reason why organizations use human resource accounting is that they want to analyse the value of their human resource and whether the value of human resource is appreciated, depreciated or conserved the same. Apart from the above purposes regarding using of human resource accounting, different firms around the world utilize human resource accounting in order to monitor the performance of their human resource. Firms expect different employees to generate a sufficient amount of revenue and then they compare the amount of revenue generated against the expected revenues or benefits (Mirvis, & Macy, 1976). Therefore human resource accounting has become an important part in today’s organizations because of their usage and reasons and this has been the reason why organizations have been implementing this concept. However one of the limitations of this cost to benefit analysis or human resource accounting is that the cost calculated using human resource accounting is not considered for tax purposes and at times, the management feels an additional work to calculate all the costs and benefits provided by each individual. Importance of human resource ACCOUNTING Human resource accounting has become an important part in today’s competitive market as organizations and management are more concerned regarding what they are spending on their human resource in comparison to what they are giving them in return. Many views human resource as an investment and therefore they analyse the return on the investment made on the workforce of the organization therefore just like any other investment decision, investment on human resource has become an important investment decision and to make sure that this investment yield good return to the organization, they monitor the performance of their human resource and compare the amount of investment made and the amount of profits generated by the human resource (Likert, & Pyle, 1971). There are different reasons why human resource accounting has become an important part of the organization and different organizations use human resource accounting for different purposes. However, the most important reasons about why human resource accounting is important in organizations have been described below: 1. Analyzing the utilization of human resource An organization that is able to utilize its human resource in the most effective manner is able to gain competitive advantage against others considering the other things remain constant and therefore most of the organizations have been highly emphasizing on managing the human resource in a better way and they have been emphasizing on improving the productivity level of employees. One of the most important reasons for organizations to use human resource accounting is that it is helpful in analyzing the organization about how better they are in utilizing their human resource and in managing them (Turner, 1996). 2. Taking human resource decisions Human resource accounting is also important for organizations because it is helpful for the human resource department as well. Human resource department in the organization uses this technique to take different kinds of decision like promotions, increment in salaries, bonuses, giving employees extra compensation and other benefits, coming up with better methods for evaluating employees etc. Apart from these decisions, human resource department also evaluates whether an employee should be transferred to another department or not as human resource department evaluates the skill and competency of an individual and then takes decision whether he should be transferred to another position as he might not be as productivity or as profitable for the company as he is at the current position in which he is working (Mirvis, & Macy, 1976). In addition to this, decisions that are related to training of employees are also taken with human resource accounting as management analyses how effective training has been in improving the productivity level of employees and then they take different decisions about whether the training has been effective or not. Therefore decisions whether to train employees is also taken using techniques related to human resource accounting. 3. Evaluating the cost and benefit on employees One of the most important reasons why human resource accounting has been used by organizations around the world is to evaluate the cost of hiring, training and educating employees against the benefits or returns that the employees give back to the organization (Woodruff, 1973). If the employee gives higher return in comparison to his total cost, then it is beneficial for the organization whereas if the organizations spend more cost then the total revenue generated by the employee then it will not be beneficial for the organization and organization either would like to reduce the cost or transfer him to another job where he could be more productive and yield more returns or organization could dismiss him if they feel that he would not be beneficial for the organization in the long run. Therefore evaluating the cost and benefit of an employee is one of the reasons why organizations have been using human resource accounting method. 4. Helps in retaining employees The other importance to the organization for using human resource accounting is that it is helpful in analysing the most important human resource or employees and by identifying the most important human resource the organization can compensate them accordingly and also give them different kinds of reward. Employees that are important to the organization if are given higher compensation and rewards, then it is easier for the organization to retain them as they would be satisfied with their job. If an organization is able to retain important employees which are profitable for the organization, then it is valuable for the company in the long run because these employees would be retained and therefore they would continue providing profits to the organization and this would be helpful in the long run profitability. 5. Analyzing the strengths of human resource Human resource as defined is the most important asset for any organization and it is important for the organization to evaluate its strengths and weaknesses. By using human resource accounting, the organization is able to identify and analyse the most important strengths of its human resource (Rhode, Lawler III, & Sundem, 1976). Human resource accounting is helpful in identifying the most important and most productive talent for the organization and after analysing the most effective and productive area or department; the organization can invest more on that department in order to improve its profitability in the long run. 6. Identifying workforce for future planning Human resource accounting is important to the organization as it identifies the most important human resource as well as most profitable department to the organization. Once the organization knows which department is the most important one, then it can invest in by increasing the workforce in that particular department so that it helps in increasing the overall profitability of the organization (Toulson, & Dewe, 2004). Once the organization is able to identify the kind of employees that are most profitable and effective for the organization, then the organization can hire more employees having similar kind of abilities and skills so that the profitability of the organization can be improved. 7. Identifying the contribution of each employee Just like when an investor or an organization invests in a project it identifies and evaluates whether the project is feasible or not and whether the project would be helpful for the organization in the long run or not. Similarly, organizations evaluate the profitability and contribution of each employee and then identifies whether the contribution of each employee is good enough to make him part of the organization in the long run (Tomassini, 1977). Organization evaluates the costs that have been made on the employee in training, in educating, in making him familiar with the organizational procedure against the benefits that the employee would yield and this is done with the help of human resource accounting. Just like an organization evaluates the productivity of each department, it also evaluates the performance of each employee in the organization. The organization evaluates contribution made by each and every individual in the profits and then identifies whether the contribution made by the employee is worth his cost or not. Methods of human resource accounting The methods of human resource accounting can be broadly divided into two methods: A. Cost based methods B. Value based methods Both of these methods can be further divided into different methods. The report will first cover, the cost based methods: A. Cost based methods: There are different methods in cost based models and these methods are: i. Capitalization of historical costs ii. Replacement costs iii. Opportunity cost model So the report will define each of the cost based models in detail along with their limitations: i. Capitalization of historical costs One of the methods of human resource accounting is capitalization of historical costs. Using this method, the organization first of all calculates all the cost that are related to that particular employee. These costs generally include cost of recruiting or hiring the employee, the acquisition cost, cost incurred in formal training as well as informal training, the cost incurred in familiarization of employee as well as the cost incurred in developing the skills of the employees and enhancing the skill level of the individual. The organization accumulates all these cost and then calculates the value of the human resource or that employee. This total cost is then amortize by the organization over the total expected time of the service that individual would be with the organization. The cost that is unamortized is called as the investment in human resource or assets. If the employee leaves the organization before the expected time then the net value is charged to the current revenue. Limitations of capitalization of historical cost model Although this method has been used by several organizations but still there are several limitations of using capitalization of historical cost models. The limitations of this method are as follows: a. The model ignores costs that are incurred for maintenance of employees and different costs that might be occurred in future and only includes the initial costs along with costs related to training and development of the employees. Therefore the total costs do not show the accurate total costs of the employee and therefore comparing the inaccurate total cost against the benefits that the employee would generate in the long run would not give appropriate results. b. The value of the employees that are more skillful and require less training would be less in value in comparison to those employees that do not have comparable skills and require more training. Therefore an experienced and skillful person would be valued less than a less experience or less skillful individual. c. One of the major criticisms that this model has received over the years is that the historical costs are sunk costs and organizations need to make decision considering the long term benefit and therefore such costs are not as important in making decisions. ii. Replacement costs model As with the passage time, there were several criticisms raised on the historical cost model and therefore a new method which was aimed to replace the capitalization of historical cost method was introduced, named as replacement cost. This method considers the cost to the organization if they replace the existing employee by another employee (Dawson, 1994). There are two different types of replacement cost discussed in this model and these costs are: Individual replacement costs: Individual replacement costs is referred to the cost that the organization would have to incur when they replace an individual by another individual having similar kind of skills and would be able to produce the similar kind of services. Position replacement costs: The other cost is the position replacement costs which basically mean that the cost incurred by organization when they replace an individual by another in the defined position. Limitations of replacement cost model: The major limitation of replacement cost is that determining the replacement cost of an employee in the organization is very subjective and at times it is almost impossible for someone to calculate the replacement cost. Particularly at the top management or employees that are at the higher level, it is difficult to replace them with another one and at times the total value of the human resource assets is decreased by a higher value than expected if someone from the top management leaves the organization. iii. Opportunity cost model In 1967, Hekimian and Jones introduced a new model regarding the human resource accounting and this model is also known as Market Value Method. Opportunity cost model is based on the idea of opportunity cost of the employee in other words; opportunity cost is the value of the human resource if it is used in another alternative position. Limitations of opportunity cost model The limitation of this method is that it ignores the employees that the organization can hire immediately from outside the organization. Therefore it can be said that this approach only considers employees within the organization and from one department of the organization to the other department. B. Economic value models: Economic value models are the other type or category of models related to human resource accounting and the models included in this category are: i. Present value of future earning model ii. Reward valuation model iii. Valuation on group basis So the report will cover each of the economic value models in detail as well as limitations of each model: i. Present value of future earning model Lev and Schwartz in 1971 introduced the present value of future earnings model of the human resource. This method has been widely used by different organizations around the world to evaluate the cost and benefit of the employee. This method is very much similar to the net present value method in investment in which an organization analyses the performance or profitability of the project by comparing the present value of the future expected cash flows of the investment against the cost incurred at present. And in this model, the organization evaluates the decision to hire an individual using the long term benefit at the present value against the cost incurred. If the present value of the net future benefits of the individual is higher than the present value of the cost then it would be beneficial for the organization to retain the individual. Limitations One of the limitations of this model is that this model of human resource accounting ignores the chances and probability that the individual could leave the organization or that he might take an early retirement from the job. Therefore this aspect should also need to be considered. In addition to this, the other limitation of this model is that the individual might change his field and this model ignores another important aspect as well. Despite of these limitations, this method has been one of the most widely used models around the world. ii. Reward Valuation Model The other model in the economic value model category is the reward valuation model which is also known as the Flamholtz model. According to him, the value of the individual in an organization should be calculated in accordance to the services an individual is expected to render in the organization (Flamholtz, 1999). This method has been prepared after analyzing the present value model to evaluate the cost to benefit ratio of the human resource and in this model, the probability of the individual is also considered. Limitations One of the major limitations of this model is that it is difficult to estimate the probabilities of an individual would remain with the organization. The other limitation of this model is that it does not include the qualities of an individual to work as a team (Flamholtz, 1973). iii. Valuation on group basis When the above models were used by different organizations and more problems arise, a need for another model came up and for this reason valuation on group basis model was introduced. In this model, the contribution of the group is considered instead of the contribution of an individual only as it is easier to expect the time length of the services of the group rather than an individual. Therefore in this method, the present value of the whole group is calculated and this present value is calculated using the following steps: i) Determine the total number of employees at each level of the organization ii) Identify the chances of an individual that he would be in the same position within the organization. iii) Then in the next step, the economic value of the individual is calculated at each time period. iv) The total present value of the all the employees at different levels is calculated by multiplying the above three points at an appropriate discount rate. Limitations of valuation on group basis model One of the major limitations of this model is that it does not consider the performance of an individual but rather it evaluates the performance or evaluates the value in group basis therefore the contribution made by each individual in the profitability of the organization would be ignored. CONCLUSION Human resource accounting has become an important part in today’s organization particularly because of the fact that organizations have started realizing the importance of human resource. With the passage of time, more and more organizations have been making use of this concept and they have been realizing how important it is to properly manage and make the most of human resource. Although there are certain limitations of human resource accounting like the period of continuation of employees is unsure and hence valuing them under uncertainty in future looks to be impractical however, if organizations are able to make use of human resource accounting methods by staying within their limitations then it can be very helpful for the organization in the long run as with these techniques, organizations would be able to retain and manage their employees in a better way and therefore it would be highly beneficial for the long run success of the organization. References Blau, G.E. 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