Costing Human Costing Human ResourcesResources

The Costs and Benefits The Costs and Benefits

Of Human ResourcesOf Human Resources

In the past. . . In the past. . .

““HR professionals have HR professionals have been getting by focusing been getting by focusing on the day-to-day. They on the day-to-day. They need to develop a need to develop a broader and farther-broader and farther-reaching vision and reaching vision and understand where their understand where their organization is headed organization is headed and how they can help and how they can help steer the company in steer the company in that direction.”that direction.”

Human Resource AccountingHuman Resource Accounting

HRA procedures are the first step in developing HRA procedures are the first step in developing sophisticated measurement and accounting sophisticated measurement and accounting procedures to enable to company to report procedures to enable to company to report accurate estimates of the worth of the accurate estimates of the worth of the organization’s human assets.organization’s human assets.

Historical-cost approach to employee valuation Historical-cost approach to employee valuation looks at costs actually incurred. Most appropriate looks at costs actually incurred. Most appropriate for external reporting used to inform interested for external reporting used to inform interested parties of the financial position & results of a parties of the financial position & results of a company’s operations.company’s operations.

More on historical-cost approachMore on historical-cost approach

Based on false assumption that the Based on false assumption that the dollar is stable. dollar is stable.

Because the assets are not salable Because the assets are not salable there is no independent check of there is no independent check of valuation (subjectivity).valuation (subjectivity).

Measures only costs to the Measures only costs to the organization; it ignores completely organization; it ignores completely any measure of the value of the any measure of the value of the employee to the organization. employee to the organization.

Replacement CostReplacement Cost Measures the cost of replacing the employee rather Measures the cost of replacing the employee rather

than the historical cost of an employee.than the historical cost of an employee. Most appropriate in the context of dismissal and Most appropriate in the context of dismissal and

replacement staff.replacement staff. Include: recruitment, selection, compensation, and Include: recruitment, selection, compensation, and

training coststraining costs May lead to upwardly biased estimates because an May lead to upwardly biased estimates because an

inefficient firm may incur greater costs.inefficient firm may incur greater costs. How often do company’s make decisions regarding How often do company’s make decisions regarding

dismissing & replacing staff?dismissing & replacing staff?

Present Value of Future EarningsPresent Value of Future Earnings

Organization establishes what an employee’s future Organization establishes what an employee’s future contribution is worth to it todaycontribution is worth to it today Can be measured by its cost or by the wages the Can be measured by its cost or by the wages the

organization will pay the employeeorganization will pay the employee Measure is limited because it assigns value to the Measure is limited because it assigns value to the

average rather than to a specificaverage rather than to a specific

group or individual.group or individual.

Details. . . Details. . .

Uses statistics such as consensus income Uses statistics such as consensus income returns and mortality tablesreturns and mortality tables

Since there value is assigned to the average, Since there value is assigned to the average, there is no benefit to monitoring an individual there is no benefit to monitoring an individual firm’s investment in employee development firm’s investment in employee development since the investment would have little or no since the investment would have little or no impact on the impact on the present present

value of future earnings.value of future earnings.

Endless SearchEndless Search

The search continues for a single, limited-The search continues for a single, limited-criterion measure for HRA but it is unrealistic criterion measure for HRA but it is unrealistic to expect that such a measure will be to expect that such a measure will be developed.developed.

We judge the value of athletes by We judge the value of athletes by

measuring how much a particular measuring how much a particular

team is willing to pay him.team is willing to pay him.

Costing Employee BehaviorsCosting Employee Behaviors ““The criterion should measure the The criterion should measure the

contribution of the individual to the contribution of the individual to the overall efficiency of the organization…It overall efficiency of the organization…It centers on the quantity, quality, and cost centers on the quantity, quality, and cost

of the finished of the finished product. Such product. Such factors as factors as skill are latent-their skill are latent-their effect effect is realized in the end is realized in the end product.”product.”

Costing Emp BehaviorsCosting Emp Behaviors

The contribution each The contribution each employee makes it not employee makes it not related to the size of a related to the size of a firm’s investment in that firm’s investment in that employee, but it is employee, but it is directly related to how directly related to how each person works and each person works and what is produced.what is produced.

Fixed costs (salaries)Fixed costs (salaries) Variable costs (sales Variable costs (sales

commissions)commissions) Opportunity costs (forgone)Opportunity costs (forgone)

Outlay costs (ex. Materials Outlay costs (ex. Materials used in training new used in training new employees) v. time costs (ex employees) v. time costs (ex supervisors’ time spent supervisors’ time spent orienting new employees)orienting new employees)

Intellectual CapitalIntellectual Capital Traditional financial statements are less Traditional financial statements are less

illuminating with respect to the assets that illuminating with respect to the assets that create wealth than they were in the past.create wealth than they were in the past.

Intangible assets such as brand names, Intangible assets such as brand names, intellectual capital, patents, copyrights, and intellectual capital, patents, copyrights, and expenditures for research and development expenditures for research and development now generate an increasing amount of wealth now generate an increasing amount of wealth for firms.for firms.

““Soft” assets – not recognized in financial Soft” assets – not recognized in financial statementsstatements

Put People on the Balance SheetPut People on the Balance Sheet

““Every country, every company, and every Every country, every company, and every individual depends increasingly on knowledge individual depends increasingly on knowledge – patents, processes, skills, technologies, – patents, processes, skills, technologies, information about customers and suppliers, information about customers and suppliers, and experience.”and experience.”

This has brought up a new way of strategic This has brought up a new way of strategic thinking about “how to put people on the thinking about “how to put people on the balance sheet.”balance sheet.”

Valuing Intellectual CapitalValuing Intellectual Capital

““A way of describing the A way of describing the otherwise intangible otherwise intangible dimensions of the operation, dimensions of the operation, and not as an attempt to create and not as an attempt to create added value in the likes of the added value in the likes of the emperor’s new clothes.”emperor’s new clothes.”

Found in one or more of three Found in one or more of three places: people, structures, and places: people, structures, and customers.customers.

Define YourselfDefine Yourself

Human capital: knowledge, skill, and Human capital: knowledge, skill, and capability of individual employees to provide capability of individual employees to provide solutions to problems that customers think are solutions to problems that customers think are important – “outside-in approach”important – “outside-in approach”

Structural capital: sharing, transporting, and Structural capital: sharing, transporting, and enabling human capitalenabling human capital

Customer capital: value of an organization’s Customer capital: value of an organization’s relationships with the people with whom it relationships with the people with whom it does business, including suppliersdoes business, including suppliers

Measuring Intellectual CapitalMeasuring Intellectual Capital

1.1. Keep it simpleKeep it simple

2.2. Measure what is Measure what is

3.3. strategically importantstrategically important

4.4. Measure activities that produce Measure activities that produce intellectual wealthintellectual wealth

Measurement of intellectual Measurement of intellectual capital can help managers and capital can help managers and investors by providing a more investors by providing a more accurate estimate of the true accurate estimate of the true value of the company than value of the company than would a single accounting of its would a single accounting of its physical holdings. physical holdings.