Models for measuring

HUMAN ASSETS
THE
COST-BASED MODELS
 Historical Cost Method
• 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.

Costs
Expenditure
Costs Investments
Future Revenues
Assets
Historical Cost Method contd…
Advantages
• Expenditure incurred:
• Recruiting + Selecting +
Training + Developing
employees
Capitalized & shown in
Balance Sheets as Assets.
• Humans:
• Skills + Knowledge +
Experience
VALUE FOR
ORGANIZATION
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.
Replacement Cost Method contd..
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:
• The entity is divided in to investment centers.
• The investment center managers bid for scarce employees they need within the
entity
• The maximum bid price may be obtained by the capitalization of the excess profits
generated
Opportunity Cost Approach contd..
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
The 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 --
•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 Model
Also 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 – ar

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
Thank You!!