PERFORMANCE BASED HUMAN RESOURCE ACCOUNTING

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PERFORMANCE BASED HUMAN RESOURCE ACCOUNTING

Dr. Umesh V. Arvindekar

, Vibhavari M. Chavan

1Dean (MBA), ²Assistant Professor, Dhananjay Mahadik Group of Institutes, Vikaswadi, Kolhapur, Maharashtra,(India)

ABSTRACT

Manpower has become the most crucial resource for any organization in the dynamic corporate world today. Unlike any other resources, it appreciates with every passing moment. Though traditionally several accounting models have been proposed to quantify human resources, but very few organizations have been actually using these in practice. Most of these models are based on futuristic approach; an attempt is made in the present work to quantify human resources objectively based on their involvement, commitment and dedication resulting in final performance at the end of the accounting year.

Key words: Approaches, Contribution, HRA, Valuation Model

I. INTRODUCTION

The paramount factor of prosperity of any nation, any state or any organization is its human resources.

Transformation of traditional economies into the modern economies depends upon the development of human resources for making use of natural resources. An organization is known by the people it is comprised of. The survival and development of any organization depends upon the quality of its personnel. The optimization of resources however, differs from organization to organization and also from person to person within the same organization.

On one hand, the physical assets like land, building, plant and machinery are recorded in the books of accounts at their purchase price. Depreciation on these assets is considered as the cost for the particular year and debited to Profit and Loss Account and the remaining balance is shown in the Balance Sheet as written down value of the assets. But in practice, human resources are hardly recognized as assets by majority of the Indian organizations on the grounds of ownership, future benefits and non-recognition by Income tax laws.

In a typical public or private enterprise, it is observed that there are different types of persons working in the organization, such as honest, hard workers, punctual, sincere, highly skilled, flatterers, etc. Some persons really work hard whereas others pretend to be hard workers and very busy, some are only talkative but hardly do anything, and few persons go on praising superiors and even management. Honesty and hard work is at times rewarded but only after a long time. On the other hand, the flatterers enjoy anything in all respects like less workload, higher salary, duty leave facilities, sanction of unwanted expenses, promotions, etc. Thus, in any organization perhaps 10 percent to 15 percent employees are discounted whereas, the rest are over-valued.

593 | P a g e This has been striking the researcher throughout his tenure of service that “Whether there exists any system of evaluation and measurement of individuals on the basis of their performance and to bring out the real facts to the management?” If not, how to develop the system, which can be used by the management to find out who is who? What can be done to whom? No doubt, this is for the improvement of individual performance as well as for the development and progress of the organization.

This study focuses on the valuation as well as the performance of individuals which in turn depends upon the abilities, skills, involvement, and contribution of a person under consideration. Therefore, an effort is made to develop a model based on the practical applications and be useful to the management on regular basis as a system for effective monitoring of the employees‟ contribution. This paper deals with the contribution and valuation of human assets, accounting and utilization of the same.

Though several attempts have been made in last five decades by the researchers to quantify human resources in the organization, the real work regarding consideration of human resource as an asset had started only after the evolution of behavioral approach that is after 1960” (Panda Tanmay, 2003). Many models are available under the title Human Resource Accounting (HRA). Table 1 depicts some of the prominent approaches developed by different experts.

The cost-based approach suggests that the actual cost incurred on recruiting, selecting, hiring, training and developing the human resources of an organization are capitalized and amortized over the expected useful life of the human recourses. In India, the different types of expenses are not large enough to maintain separate records on yearly basis, and so, these expenses are merged in other heads of accounts such as telephone, postage, labor welfare, and miscellaneous expenses.

The Monetary Value-based Models suggest that the future salaries and wages are to be projected considering the promotional policies, annual increments, periodical union agreements, etc., and the present value of such projected salaries and wages are to be calculated. This calculated present value of future earnings is called as the value of human resources. It is noticed that different models use different formulae. The methods of calculation and duration of valuation are different in different models.

It is observed from the available literature that at present in India 14 organizations in Public Sector (BHEL, SAIL, CCI, ONGC, MMTC, NTPC, OIL INDIA, etc.), 5 organizations in Private Sector (ACC, MRL, Infosys, DSQ Software and Satyam Computers) and one joint sector organization (SPIC) are adopting HRA .The companies following HRA spare a separate section in their Annual Reports (unaudited) for a detailed account of their human resources.

594 | P a g e Table 1: Approaches to Human Resource Accounting

Basis Approach Proponents Year

1 The historical cost Pyle, Brummet and Flamholtz 1969 Cost-

based

2 The replacement cost Flamholtz 1973

3 The opportunity cost Hekimian and Jones 1967

1 Adjusted discount future wages Hermanson 1964

model

2 Present value of future earnings Lev and Schwartz 1971

model

3 Stochastic Rewards Valuation Flamholtz 1971

Model

Monitory 4 Human Resource Valuation Model Jaggi and Lau 1974 value-

based 5 Net Benefit Model Morse 1973

6 Certainty Equivalent Net Benefit Ogan 1976

Model

7 Human Resource Valuation Model S K Chakraborty 1976

8 Economic value method of group Brummet, Flamholtz and Pyle 1968

valuation

9 Human Resource Accounting D Prabhakara Rao 1983

Non-

monetary value- based

1 Causal intervening Rensis Likert and David Bowers 1969 and End-result variable Model

2 Statistical based model

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- -

“The Lev and Schwartz Model was the most popular and adopted (with a little modification) by some Indian companies including BHEL, MMTC, SPIC and others. However, companies like SAIL adopted Flamholtz‟s Replacement Cost Model (Chandran, 2003)”.

The common criticisms on these models are as follows:

• These models are based on the assumption of continuity of services by the employees till retirement, which may not be true in reality.

• All the models are based on projections of future earnings.

• No model is related with contribution of an employee to the organization.

Prabhakara Rao (1993) pointed out that in the Indian context the payments made to the employees are not directly linked to productivity. Under the Lev and Schwartz (1971) Model, the value of human resources will be more or less increasing, even if the organization continuously incurs losses. The attitude and morale of the employees, the contribution of employees to the organization, and such other factors are out of the purview of the Lev and Schwartz model of human resource valuation. Therefore, the companies may consider a human resource model based on the employees contribution to the organization.

As regards the use of the models in the Indian context is concerned, “the fact is that out of the 13 organizations which have the Lev & Schwartz model-based HRA systems, none puts its output to any managerial use” (Gupta Dinesh K, 1991).

Hence, the need was felt to develop a new model based on practical applications and be useful to the management on regular basis as a system for effective monitoring of the employees‟ contribution.

II. OBJECTIVE

The objective of the present study is to identify various parameters that determine the contribution and performance of employees in the organization. The parameters are then objectively quantified to determine the value of individual working in an organization.

This study aims at testing the hypothesis that the valuation of human resources varies in proportion with their contribution. A technique of Coefficient of Correlation is used to test the relationships between variables under consideration. The hypothesis testing was done by „t‟ test.

III. SCOPE OF THE STUDY

Though there are various types of skilled, semiskilled and unskilled employees working in any organization, the scope of the study is restricted to the middle level management in a manufacturing unit - M/s. Bemco Hydraulics Ltd., Belgaum. The study was based on the five years data. The trend of performance, contribution and evaluation of human resources in total were found out for five years. In order to evaluate every individual manager, a detailed study is required with respect to salary, education, experience and leave records. Therefore, the latest three years have been considered for detailed study of middle level management. The individual

596 | P a g e managers were evaluated on the basis of their performance during these three years.

IV. METHODOLOGY

Primary data has been collected from various original sources, such as standardized enquiry schedule interviews, observations, formal or informal, structured and unstructured discussions which have helped to validate and corroborate the findings. The document schedule used for collecting the secondary data contained 12 personal data items. Besides this, both published as well as unpublished records were collected in the form of annual reports, personal files, pay sheets and leave records.

V. TOOLS FOR DATA COLLECTION

5.1 Enquiry Schedule

The schedule used for the study contained nine variables relating to managerial area, like a manager‟s concern for people and task, motivation, control, the process of goal setting, style of decision-making, evaluation of subordinates performance, conflict resolution, fulfillment of responsibilities, and fulfillment of commitments.

Each variable has five statements and each statement describes one managerial style. Thus, each variable covers all the five styles as explained in, “The New Managerial Grid” (Blake and Mouton, 1994). The variables incorporated in the schedule highlight all facets of managerial functions leading to his contribution to the organization.

5.2 Document Schedule

The document schedule used for collecting the secondary data contained 12 items. This was used to collect the personal information about the respondents like date of birth, qualifications, present position, number of subordinates, joining date in the present organization, previous experience, leave record and details of salary.

5.3 Marking Scheme

In order to quantify the qualitative aspects like education, experience, punctuality, status, and skills (the factors of abilities on the basis of enquiry schedule), a marking scheme is also developed. Five points scale is used for quantifying the qualitative aspects. The points arrived with the help of marking schemes are termed as evaluation points and these points are used for further calculations. The reliability of the enquiry schedule is tested by using both the Split-Half Method 11 and Test-Retest Method 11. The results of both methods are tabulated below show that the instrument developed is highly reliable

.

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Table 2: Results of Split-half Method and Test-retest Method

Methods Results

1. Split-half method

a) Coefficient of correlation „r‟ 0.855

b) Corrected „r‟ by Spearman—Brown Prophecy Formula 0.922

2. Test-retest method

a) Coefficient of correlation „r‟ 0.223

b) Test of significance t < 0.05

3. Scaling pattern(Task vs. People)

a) Coefficient of Correlation „r‟ 0.223

VI. DEVELOPMENT OF VALUATION MODEL

In the case of Lev and Schwartz model, the valuation is made by discounting the future earnings at the rate of cost of capital. Future earnings of the employees may or may not be correct and at the same time the cost of capital also fluctuates every year.

In the present model, cost of capital is not considered because, whatever capital is raised by the company, it is not always invested only in fixed assets. Some portion of it is blocked in investment in other companies, some amount might have been spent in working capital, and some amount might have been already spent in preliminary expenses. Again the dividend on equity shares depends upon the willingness of board of directors, which leads to fluctuation in cost of capital. So, in the present model it is not justifiable to use the cost of capital for capitalization of the contribution.

It is true that whatever contribution a company derives during any particular period, it is contributed by two factors, fixed assets and human resources. In the absence of any of these factors the raw materials cannot be automatically converted into finished goods. So, both the factors are equally important. Therefore, the following factors are considered in the new model.

• Investment in Fixed Assets;

• Abilities and skills of the persons; and

• Contribution of Organization, Human Resource Contribution in Total, Group Contribution, and Individual Contribution.

a) Organization: The contribution of the organization is the difference between the sales value of production and variable cost. This can be found out for any period under consideration.

Human Resource Contribution in Total: The portion of the total contribution attributable to the total manpower of an organization can be identified with the help of the present model. This contribution can be capitalized at the calculated rate of capitalization for valuation of human resources in total as shown in Table 3.

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Table 3: Contribution and Valuation Human Resources

Particulars 2010-11 2011-2012 2012-2013 2013-2014 2014-2015

Amount in Lacs Gross Value of

Fixed Assets

- - - - -

Net Block + Depreciation Total

331.90 012.60 344.50

473.71 16.02 489.73

425.76 13.66 439.42

382.84 13.47 396.31

352.83 13.37 366.20

Contribution of H.R. =

(Total

Contri.XDeprn.

)

Deprn + S&W

(409.2*211.38) 223.98

= 386.26

(456.12*246.49 )

262.51

= 428.28

(321.91*197.85 )

211.51

= 301.12

(238.47*185.23 )

198.70

= 222.30

(305.19*19.01) 207.46

= 392.75

Contribution of F.A. =

(Total

contri.XDeprn) Deprn. + S&W

(409.28/223.98 ) 12.60

= 23.03

(456.12/

262.51) 16.02

= 27.84

(321.91/

211.51) 13.66

= 20.79

(238.47/

198.70) 13.47

= 16.17

(419.81/207.46 )

13.37

= 27.06 Capitalization

% =

(Contribution of F.A. X 100) Gross Value of F.A.

23.03 *100) 344.50

= 6.69%

(27.84 * 100) 489.73

= 5.68%

(20.79 * 100)/

439.42

= 4.73%

(16.17 * 100) 396.21

= 4.08%

(27.06 * 100) 366.20

= 7.39%

Valuation of H.R. =

(Contribution of H.R. * 100 ) Contribution

(386.25 * 100) 6.69

= 5782.34

(428.28 * 100) 5.68

= 7540.14

301.12 * 100 4.73

= 6366.17

(222.30 * 100) 4.08

= 5448.53

(392.75*100) 7.39

= 5314.61

VII. INTERPRETATION

Positive Correlation is observed between the contribution and valuation of human resources except during the year 2014-2015. This requires further detailed study for the particular year.

Positive Correlation is observed between the contribution and valuation of human resources except during the year 2014-2015. This requires further detailed study for the particular year. The discussions with the

599 | P a g e management revealed that during the year 2014-15, the organization had got a special job which was purely of management consultancy type from Railway department the management had received Rs. 114.62 lacs for the same. Therefore, the balance amount of contribution [419.81- 114.62 = 305.19] is apportioned between human resources & fixed assets, and Rs. 114.62 lacs are added to the contribution of human resources. Thus, the total contribution of human resources comes to Rs. 285.52 + 114.62 = 400.14 lacs as depicted inTable 4.

Table 4: Contribution and Valuation Human Resources

Particulars 2010-11 2011-2012 2012-2013 2013-2014 2014-2015 Amount in Lacs

Gross Value of Fixed Assets

- - - - -

Net Block

Add Depreciation Total

331.90 012.60 344.50

473.71 16.02 489.73

425.76 13.66 439.42

382.84 13.47 396.31

352.83 13.37 366.20 Contribution of H.R. =

Total Contri. X S&W Deprn + S & W

409.28* 211.38 223.98

= 386.26

456.12*246.49 262.51

= 428.28

321.91* 197.8 211.51

= 301.12

238.47 *185.2 198.70

= 222.30

305.19 * 194 207.46

= 285.52 Contribution of F.A. =

Total Contri. X Deprn.

Deprn. + S & W

(409.28 /223.98) X

12.60

= 23.03

(456.12 / 262..5) X 16.02

= 27.84

(321.91 /211.5) X 13.66

= 20.79

(238.47/198.7) X 13.47

= 16.17

(305.19/207.46) X 13.37

= 19.67

Capitalization % =100x Contribution of F.A.

Gross Value of F.A.

23.03*100 344.50

= 6.69%

27.84 * 100 489.73

= 5.68%

20.79 * 100 439.42

= 4.73%

16.17 * 100 396.21

= 4.08%

19.67 * 100 366.20

= 5.37%

Valuation of H.R. = (Contribution of H.R.x100) Capitalization

386.25 x 100 6.69

= 5782.34

428.28 * 100 5.68

= 7540.14

301.12 *100 4.73

= 6366.17

222.30 x 100 4.08

= 5448.53

400.14 x 100 5.37

= 7451.40

1S & W : Salary & Wages, Deprn. : Depreciation, F. A. : Fixed Asssets, Contri. : Contribution

VIII. INTERPRETATION

It is observed that there is positive Correlation is observed between the contribution and valuation of human resources, as the Karl Pearson‟s Coefficient of Correlation comes to 0.78

b) Therefore, the system helps to find out the trend of valuation as well as the abnormal situations.

600 | P a g e c) Group Contribution: The contribution of the group of people does not mean the departmental contribution

but is a contribution of the sample size which is the middle level management as shown in Table 5 in the present study. This means that all managers in the middle level management are grouped together.

Table 5: Valuation of the group

Particulars 2012-2013 2013-2014 2014-2015

Amount in Lacs

Gross Value of Fixed Assets - - -

Net Block

Add Depreciation Total

425.76 13.66 439.42

382.84 13.47 396.31

352.83 13.37 366.20 Contribution of Group. =

Total contribution X S & W Deprn + S & W

321.91 X 17.21 211.51

= 26.19

238.47 X 17.73 198.70

= 21.28

305.19 X 18.35 207.46

= 26.99(+10.84)

Valuation of Group. = Contribution of Group. X 100 Capitalization

26.19 x 100 4.73

= 553.70

21.28 x 100 4.08

= 521.57

37.83 x 100 5.37

= 704.47

1S & W : Salary & Wages, Deprn. : Depreciation

2Interpretation :- Valuation of the group of middle level management also shows positive correlation between contribution and valuation of the group. The Karl Pearson‟s Coefficient of Correlation comes to 0.992

Proportionate amount of consultancy charges are added to the contribution of the group during the year 2014- 2015. Therefore, the contribution of the group comes to Rs. 26.99 + 10.84 = 37.83 lacs.

d) Individual Contribution: An individual indicates a unit of population under consideration, i.e., each and every middle level manager of the concerned organization. The valuation of each individual is done with the help of enquiry schedule, document schedule and marking scheme, Table 6 presents in the results.

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Table 6: Apportionment of contribution and valuation

2012-13 2013-14 2014-15 Average

Co de

Sala ry

Ev.

Poin ts

contribut ion

Valuati on

Sala ry

Ev.

Poin ts

contribut ion

Valuati on

Sala ry

Ev.

poin ts

Contribut ion

Valuati on

Sala ry

Ev.poi nts

Contribut ion

Valuati on

A 1.57 83 1.18 14.34 1.60 88 1.82 19.79 1.71 88 2.76 21.71 1.63 86.33 1.92 18.61 B 2.95 82 1.16 14.17 3.00 87 1.80 19.57 2.36 82 2.57 20.23 2.77 83.67 1.84 17.99 C 1.41 80 1.14 13.82 1.43 80 1.66 17.99 1.54 80 2.50 19.74 1.46 80.00 1.77 17.18 D 1.62 95 1.35 16.41 1.67 95 1.97 21.37 1.77 90 2.82 22.21 1.69 93.33 2.04 19.99 E 1.76 120 1.70 20.73 1.80 110 2.28 24.74 1.90 105 3.29 25.91 1.82 111.67 2.42 23.79 F 1.26 118 1.68 20.39 1.29 113 2.34 25.41 1.38 113 3.54 27.88 1.31 114.67 2.52 24.56 G 1.32 80 1.14 13.82 1.34 85 1.76 19.12 1.43 85 2.66 20.97 1.36 83.33 1.85 17.97 H 2.02 124 1.76 21.42 2.05 134 2.77 30.14 2.17 124 3.88 30.59 2.08 127.33 2.81 27.39 I 1.62 61 0.87 10.54 1.64 66 1.37 14.84 1.75 61 1.91 15.05 1.67 62.67 1.38 13.48 J 1.67 68 0.97 11.75 1.71 63 1.30 14.17 1.83 63 1.97 15.54 1.74 64.67 1.41 13.82 K 2.64 99 1.41 17.10 2.67 114 2.36 25.64 2.82 109 3.41 26.89 2.71 107.33 2.39 23.21 L 2.17 130 1.85 22.46 2.20 125 2.59 28.11 2.33 130 4.07 32.07 2.23 128.33 2.83 27.55 M 1.63 100 1.42 17.28 1.65 105 2.17 23.62 1.77 100 3.13 24.67 1.68 101.67 2.24 21.85 N 1.28 67 0.95 11.58 1.31 67 1.39 15.07 1.39 67 2.10 16.53 1.33 67.00 1.48 14.39 O 1.11 67 0.95 11.58 1.13 77 1.59 17.32 0.00 0 0.00 0.00 0.75 48.00 0.85 9.63 P 1.84 92 1.31 15.89 1.88 97 2.01 21.82 2.00 87 2.72 21.47 1.91 92.00 2.01 19.73 Q 1.49 105 1.49 18.14 1.54 85 1.76 19.12 1.66 90 2.82 22.21 1.56 93.33 2.02 19.82 R 2.16 100 1.42 17.28 2.23 95 1.97 21.37 2.31 115 3.60 28.37 2.23 103.33 2.33 22.34 S 0 0 0.00 0.00 1.03 106 2.19 23.84 1.96 86 2.69 21.22 1.00 64.00 1.63 15.02 T 0 0 0.00 0.00 0.00 0 0.00 0.00 2.46 104 3.26 25.66 0.82 34.67 1.09 8.55

Tota l

31.5 2

167 1

23.73 288.69 33.1 7

179 2

37.08 403.04 36.5 4

177 9

55.70 438.93 33.7 4

1747.3 3

38.84 376.89

Note : Yearly Group contribution and valuation are apportioned to individuals on the basis of evaluation points and then the average is found out. These average figures are used for further calculations. The Karl Pearson‟s Coefficients of Correlation values point out high positive correlation between the following Evaluation and Contribution

a. The Correlation coefficient between Evaluation Points and Contribution : 0.99986 b. The Correlation coefficient between Evaluation Points and Valuation : 0.99985 c. The Contribution and Valuation : 0.99937

Thus, it is possible to find out the contribution and arrive at the valuation of the human resources in total, of the group of people and of individuals for any period of time. This is the peculiarity of the conceptualized model.

602 | P a g e On the basis of the above discussion, the newly developed model is presented.

1. Contribution of Human Resources =

*

(Depreciation Salary and Wages)

2. Contribution of Fixed Assets =

*

(Depreciation Salary and Wages)

3. Capitalization (%) =

*

(Gross value of Fixed Assets)

4. Valuation of Human Resources =

IX. FINDINGS AND SUGGESTIONS

The data collected from the organization under consideration was analyzed statistically (Table 7) and presented as Karl Pearson‟s coefficient of correlations.

Table 7: Statistical methods

Coefficient of Correlations Contribution and

Valuation of

a) Organization in total 0.78

b) Group of managers 0.992

c) Individuals 0.993

There is positive correlation between contribution and valuation of human resources in total of a group and of an individual. This indicates that at any level the valuation varies in proportion to contribution. Thus, it is evident that the conceptual model based on the contribution of management personnel to the organizations in the present research for both the manufacturing units have been tested and found useful. Hence, it is possible for the organization to valuate the management staff entirely based on the contribution of the employees. Not only present model focuses on valuation, but it can help management to evaluate periodically and to take remedial steps to improve the performance of both individuals as well as the organization. It is interesting to note that this model is not based on the present value of the future earnings of the employees. Hence, the model encompasses

603 | P a g e the criticisms of the human resource accounting models in vogue.

X. CONCLUSION

This conceptual model is neither based on future period, nor on salaries and wages predicated for future period.

It is based on the actual contribution on yearly basis. It also evaluates only those persons who have contributed to the actual contribution achieved by the organization. Therefore, the companies in India adopting human resource accounting can also consider shifting to the present model which has the practical applicability for measuring the performance of human resources and monitoring the same, periodically.

As far as the disclosure of valuation is concerned, it is left to the management. In order to maintain secrecy, it may not disclose the individual valuation, but it is not harmful to disclose the total amount of valuation as supplementary information in the balance sheet. This would help the investors to evaluate the market-worthiness of the organization.

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