HUMAN CAPITAL PERSPECTIVE

Presented By: Group D2Ajay Kumar Verma

Anusha JohnRuchi Gupta

Sagar SaxenaSumit Agarwala

Flow of Presentation

Introduction Capital Redefined Why is Human Capital Key? Valuation of Human Capital Human Resource Accounting Why valuation of Human Resource Essential? Approaches for valuation - Present Value Model

- Reward Valuation Model- Net Benefit Model- Certainty Equivalent Net Benefit Model

Conclusion

Introduction

Human Capital is defined as “the knowledge that individuals acquire during their life and use to produce goods services or ideas in market or non-market circumstances“.

It is the embodiment of productive capacity within people. It is the sum of people’s skills, knowledge, attributes, motivations, and fortitude.

Human capital cannot be owned or transferred.

Capital Redefined

Three kinds of capital: Customer capital

Refers to customer base Structural capital Refers to the manner in which its processes are

designed and operated i.e. efficiency of operations

Human capital Refers to the expertise of its employees which ensures that customers are acquired and retained, and the processes work efficiently to satisfy the customer's needs

Why is Human Capital Key?

New economy is often called the knowledge economy

Valuation of Microsoft > GM + Ford + Boeing + Lockheed-Martin + Deere + Caterpillar + USX + Weyerhauser + Union Pacific + Kodak + Sears + Marriott + Safeway + Kellogg.

Yet, the only value at Microsoft resides in the heads of its employees!

Valuation of Human Capital

“What gets measured gets managed.”

This suggests then that the fundamental source of wealth creation—human capital—is seriously under managed in most organizations.

Expenditures associated with the development of people such as education and training are treated as costs though these expenditures possess the attributes of an investment

Human Resource Accounting

The process of identifying and measuring data about human resources and communicating this information to interested parties

Flamholtz (1971) define HRA as “the measurement and reporting of the cost and value of people in organizational resources”.

Why valuation of Human Resource is essential?

Increases managerial awareness of the value of human resource.

Facilitates logical computation of return on capital employed.

The maintenance of detailed records relating to the human resources improves managerial decision making.

Increases productivity of human resources.

Helps potential investors and other users in making long-term investment decisions

Approaches for Valuation

Two approaches: Cost Approach Involves method based on the cost

incurred by the company with regard to an employee

Limitation: It takes into account only cost incurred

Economic Approach The Present economic value of the human

resource and their future contribution to a company’s profits are used for valuation.

Present value model

Developed by Lev and Schwartz in 1971 Yardsticks for calculations Average annual earnings of all the

employees who are classified in specific groups according to their age and skill is determined

Total earnings which each group will get up to retirement are calculated and discounted at the rate of cost of capital.

The value thus arrived will be value of HR as an asset

Present Value Model

Vr= value of an individual r year old I(t)= The individual’s average earnings up to

retirement t= Retirement age r= Present age of employee R= discount rate specific to cost of capital of the

company

Limitations

It ignores person’s inherent qualities, traits and skills while calculating human resource value

This model considers role of an employee stable and of unchanging nature

It fails to correctly evaluate the team work involved

It ignores reasons other than death or retirement due to which a person may leave the job

Reward Valuation Model

Ultimate measure of individual’s value- Expected Realizable valueSteps Involved

Forecasting the period he will remain with the organization i.e. expected service life

Identifying service status, i.e. the role he might occupy, time at which he will leave the organization

Estimating the value derived by the organization when a person occupies a particular position for a specific time period

Estimating the probable period for which the person will occupy each possible service status in future

Computing the total value of service

Limitations

Difficult to obtain reliable data for determining the value derived by an organization during the period a person occupies a particular position

Ignores the fact that individual working in group may have higher value than those working individually

Net Benefit Model

Given by Morse(1973) Steps involved The gross value of the services to be rendered in

the future by the employees individually and collectively

The value of direct and indirect future payments to the employee is determined

The excess of value of the future services (as per step 1) over the value of future payments (as per step 2) is calculated. This gives net benefit to the enterprise

By applying predetermined discount rate to the net benefit to calculate the present value

Certainty Equivalent Net Benefit Model

Suggested by Pekin Ogan (1976) Extension of Net Benefit Approach Steps involved Net Benefit from each employee as per ‘Net

Benefit Approach’ Certainty factor at which the benefit will be

available The net benefit from all the employees

multiplied by their certainty-equivalent net benefits.

Limitation : Computational difficulty

HRA in INFOSYS

The HRA Method used is Lev And Schwartz Accounting Model

The software deliver staffs are valued at Rs.26,550 crores while those in the support function are valued at Rs.1,784 crores.

Infosys had to take the following assumptions: employee compensation, incremental earnings based on group and age.

The FY 2005 annual report on HRA of Infosys mentioned the dichotomy in accounting between human and no-human capital is fundamental.

Conclusion

Human capital is the sum of people’s skills, knowledge, attributes, motivations, and fortitude.

BHEL pioneered in human resource valuation using Lev and Schwartz model.

The other companies like Infosys, BPCL etc have followed the suite.

References

Human Capital Accounting: Should Employees be Classified as Assets? , By Ezewuchi F. Amaefule

Valuation of Human Capital, By Navin Bhutoria

http://thepublicistsassistant.com/jobs-and-careers/human-resource-accounting-hra-practices-in-india/

http://www.infosys.com/hcm/pages/index.aspx