Models for measuring HUMAN ASSETS

Group no. 5Group members:

Ashish N. Ladda, Eshita BattaGaurav Golwalkar, Jatin Varshney

Komal Takavale, Niraj Shirsat, Pankaj Arora, Pankhuri Pandey Praveen Trivedi, Shashi B. Dwivedi, Varun Nandu Ahuja, Vivek Sinha

Section - C

THE COST-BASED MODELS

Proposed & Developed by: Brummet, Flamholtz, Pyle

Considers that: Intention of costs incurred on HR Development-obtaining future benefits.

Implemented in US- 1968 to 74 by

RG Barry Corporation.

InvestmentsFuture RevenuesAssets

Costs ExpenditureCosts

Historical Cost Method

Expenditure incurred:

Recruiting + Selecting + Training + Developing employees

Capitalized & shown in

Balance Sheets as Assets. Humans:

Skills + Knowledge

+ Experience

VALUE FOR ORGANIZATION

Historical Cost Method contd…Advantages Disadvantages

Costs didn’t reflect Value True Value : Difference

between real performance and total cost incurred, associated with human resources of organization.

Flaws in times of inflation:

The validity of historic accounting rests on the assumption that the currency in which transactions are recorded remains stable.

Replacement Cost Method Developed by Flamholtz, also called as Flamholtz

model. The cost to replace the existing human resources are

estimated relative to the cost incurred in employing. Replacement cost needs to reflects value of both the

employee as well as the organization. Replacement can be personal replacement or that of

the skills.

Benefits: Is present/ future oriented

Critical Analysis: Difficult to say in terms of value as generated over a period

of time. Difficult to measure contribution of an employee to the

company, in relation to the cost incurred to employ them. Critics feel that it is valid and applicable for only the key

employees. Multiple alternatives of replacement make the assessment

and choice of best alternative difficult.

Opportunity Cost Approach

Developed by Hekimian and Jones. Also called as Competitive Bidding Model.

The opportunity cost of key employees is assessed in relation to their performance and in accordance to the organization goal.

The bid price is a measure of employees competence and experience through which value will be generated for the organization.

The approach is based on economic concept which overcomes the deficiency in replacement cost app. Measured through a competitive bidding process within the entity.

Steps:

1. The entity is divided in to investment centers.

2. The investment center managers bid for scarce employees they need within the entity

3. The maximum bid price may be obtained by the capitalization of the excess profits generated

Benefits: overcomes the deficiency in replacement cost approach.

Critical Analysis:

Competitive bidding to assess future contribution to the organization goal may force disassociation of the individuals from the biding process, thereby making it difficult to measure their value.

Difficult to measure value as bid price may be based on the perception of the bidder. This may not give correct estimation of the employees true value.

Value measure through this approach is relative and may not be affective

Standard Cost Method

• According to this model, the costs of recruiting,selecting,training and developing a particular class or grade of employees were standardized.

• These costs were determined and evaluated over the years to get the total value of human resource in an organization

THE ECONOMIC MODELS

Goodwill Method / Hormonson Model• The component of HR Value in the additional

profits earned compared to the industry average can be calculated as below:

• HR Value = Goodwill x (Amount invested in HR)Total Investment

Drawbacks of Goodwill method• Additional profits generated in a year may be influenced

by other factors.• Moreover, critics argued that amount invested in

acquiring customers, suppliers, etc. was not a part of goodwill.

• The model was invalid in case the profit/revenues of the organization were less than the industry average.

• The model required correct definition of all variables and relationships that affected the company’s goodwill.

Behavioral Model

• Developed Rensis Likert.• Established a set of factors through which

psychological and sociological conditions of the employee determined productivity.

• It was assumed that these socio-psychological factors conditions would determine performance of the organization in the long run.

Drawbacks of Behavioral model Socio-psychological factors can’t measure the

value of HR in the organization. Various relationships could not be correlated to its

performance as it was difficult to establish a relationship to every organizational performance.

In case of lack of valid relationship, the true HR value would not be reflected by the HR performance.

The Economic ModelAlso called the Lev & Schwartz model

• The Model• Estimates the present value of the future earnings capacity of an employee –

from joining till retirement

• Follows the following formula:• H(Vi) = Aa(r+1) E(1+d)Pr – a• r• Where :

• H(Vi) : Human capital value of an employee ‘i’ years old

• E : Employee’s annual earnings till retirement

• r : the age of retirement• Aa(r) : Probability of an employee

aged ‘a’ dying at age r• d : Rate of discount

• Drawbacks• Employees may leave the organization or die before the end of estimated tenure

Jaggi & Lau Method• The Model

• Past performance – indicator of the future performance• Value of an employee – depends on – present value of (past

performance + relation to retirement + death & service performances)

• Present value of future services of employee – taken as value generated by the employee

• Drawbacks• Past performance not the real indicator – for future performance• Ever changing technology the potential may vary in future and

may not be a reflection of past performance

Myers & Flowers Method• The Model

• Employees’ attitude and outlook on a particular issues – determines productivity on his behavior in the organization

• Employee’s value • = (Employee’s attitude index) X (wages payable to the

employee)

• Attitude of an individual more important than of a group

• Drawbacks• Several factors other than attitude influence behavior of an

employee• Measuring the attitudes of individual employees – A complex

task

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