Human Resource Accounting

"People are our business.....our greatest asset".

Such homilies are glossy and persuasive. They slip easily off the tongue and weave
through managerial conversation. We read such benedictions in company reports and
internal communications. But be sceptical - are the committments deeply meant or is lipservice more in evidence?
In their mission statement, many organisations persist in quoting, the cliche yet the
contract of employment requires employees to journey to work daily through heavy traffic
and subordinate themselves to workplace dictate. The contradiction is between the selfdirected individual, meaningful in and of themselves and the individual locked into a
master-servant relationship where the employer only values their horse-power. In a hire
and fire relationship, the employer may never realise the creative energy and capacity of
those who are members of their organisation. Organisational leaders define missions and
directions and implement requirements which may pull in an opposite direction to
individual aspiration and quality.
The human asset account debate is heavily value laden and has pretensions to "prove" its
veracity by empirical means. Thus we get measurement and estimating statements such
as
if a person's salary is X, their true value to the firm is probably X times 2.5
when we take into account their replacement costs, training/embedding in of
replacements, pressure on remaining staff who have to cover, lost production
and loss of their network. Lose a good player and who will replace them? How
much time will pass before the organisation regains their know-how and drive?
Will such new organisational forms as telework or flexi-time contribute to productive gains
and reducing potential turnover?
Defining a capital value for individual staff may assist in decisions regarding the adoption
of such alternative forms of organisation. Alternative forms of organising and workattendance may thus emcompass more "human and flexible non-financial employment
strategies" to realise this value. Capital and people become complementary not opposites.
We can value the organisation's capital in terms of its ownership and legal form, its
revenues, profits and assets and performances.... (products, brands, market share,
growth, premises etc.) but beyond conventional factors the company exists as a group of
committed people engaged productively for mutual benefit. The extent and depth of the
mutuality of interest and cooperation versus the plurality and conflict between of
objectives is the thing under our gaze.
Human asset account advocates would argue that enterprises which, in their policies and
practices of employment, achieve such mutuality are often the most successful. But note the argument is couched in terms of values and commitments - social and human. These
tend to be given ascendency over cost, profitability, competitive and ownership and may
fail to account for such contexts.
The arguments are unitary in their focus and tend to see a grewater propensity for
sharing, altruism, harmony and concensus over self-interest, competition and conflict.

Investors in People
The Investors in People movement in the UK encouraged by government, albeit nonmandatory, promotes values which emphasise the skills and competencies of employees.
It promotes these values and spurs employers to action in respect of making employee
investments.
Some employers are renowned for their commitment to good, well-resourced employment
policies. But they still seek to minimise staff costs and investments. In pursuit of
competitiveness and profits - firms will implement redundancies (down-sizing or right
sizing) and even export jobs to countries where labour costs are the cheapest. Such
policies bring the interests of individuals and groups into conflict with those of their
employers. Bad, rogue, exploitative employers still exist. Even the exemplars of good

practice may become caught in a trap of low profitability, unable to invest in their staff
because their business generates insufficient funds.
Those speaking from a human resource investment perspective would say that investment
in staff contributes to improved profitability as creative abilities are unleashed. The firm
will prosper in its market place. This is the "People are our business............our greatest
asset" argument - yet the missionary rhetoric and zeal of HRM discourse wrestles with the
hard, cost and performance oriented reality of business.

Ownership and Employer-Employee Relationships

At all times when discussing "HRM" keep in mind the problem of the law of property.

Most commercial businesses are

not owned by general employees.
Employees shareholdings are likely to be insignificant compared to institutional block
holdings - investors who call the tune on profitability.
What responsibilities and obligations should a business's owners accept (business ethics)
towards those they employ? Is the scope only limited to the basics of contractual
obligations and not extended more widely across "community or stakeholder" concepts.
The primary aim of a commercial business enterprise is to generate and secure wealth for
its owners. They, or their agents, decide how the surplus (after tax - the societal cut) is to
be distributed. Employees are one cost amongst many. Their efforts are rewarded under
contracts of employment by cash and non-cash modes of compensation. This is a limited
commitment. Arguably, the wage-work bargain and contractual obligations fulfil the
employer's responsibilities. Under existing societal structures of capitalist ownership and
distribution, an employer's basic ethical obligations towards employees are satisfied.
Structures of ownership and labour contracting - regulated by the law of the community represent a status quo. Powerhere is based on rights of ownership and control over factors
of production albeit regulated by minimum societal rules governing the implementation of
employment contracts.
This is one argument - what others may be offered?
Assignment
In your study group, discuss why this argument is a political one? What are the "political"
elements of this?

Accounting for Employees

Imagine a sole proprietor/entrepreneur whose business develops. The time arrives when
there is a need to take on a member of staff. A contact of employment is formed. There is
an offer of a job. It is accepted for a consideration (a rewards package). The employer
(the master) in offering the job contract assumes a range of legal obligations - to be
careful and be considerate to the employee (the servant). These extend to
rewards - cash-like and non-cash-like

facilities; tools, fixtures and fittings and accessories at work essential for the
welfare of employees. These form overheads.
necessary for specific training (an employer may expect that education and
generic business/trade is a societal obligation)
health and safety: policies and implementation systems
consultation and communications overheads
pensions and contributions to social security payments
costs of the infrastructure for initiating and maintaining constracts of
employment and co-ordinating the employers policies and practices in respect of
delivering its obligations to those that it employs.
costs of serverence (retirement, redundancy and dismissal)

Human Assets Accounting

Arguments have been advanced and some work done to quantify the value of human
capital to organizations - the buzz word refers to "the intellectual capital" of the
organisation.
The work of Leif Edvinsson and Skandia in Sweden is interesting. Skania supplement their
annual report. This seeks to measures and evaluate "soft " assets which would not
normally find their way into the shareholders annual report.
For further reading see Edvinsson L. and Malone, Intellectual Capital, Harper, 1997

Beyond the Wages Bill.

The wages bill may be understood but other financial aspects of employee/HRM decisions
are not always so well appreciated. Nor are staffing policies/actions often monitored well
enough to appreciate their impact.
Peter Armstrong (in Storey, 1995) argues that accountant views take precedence in
primary decision-making within a business. Personnel specialists may argue for employee
development and HRM contribution to organisational performance but this represents a
softer, principled view - secondary to the primary accounting view.
An accountant sees an asset as something with a value on the balance sheet. Employee
costs may feature in the profit and loss account but employee "value" does not appear as
an asset (or even a liability) on the balance sheet - other than for a publically quoted
football company! There is awkwardness in searching for and applying accounting-like
formulae to the management of people. But HRM is about resources. A harder focus
addresses matters of staff utilisation, wage costs and expenditure on employee-related
services.

Employees as Balance Sheet Assets

Is there benefit in placing a value on a trained employee of 9 years experience whose
loss might be a body blow to the company? These "balance sheet assets" take work home,
come to work when they are unwell and stressed. They keep confidences and support the
other "people/assets" they exhibit loyalty and strive to generate high quality, creative
performances. They serve the organisation - some with a life-time of committment others
with a short-term perspective and others with a selfish, possibly anti-organisation
approach.
The service sector emphasises the qualities and and expertise of staff - witness the Butlin
rad-coat, the Head Chef at the Grand Hotel, the smile and warmth of the Kwik-fit service
engineer. The service organisation's "people services" are products being sold to generate
revenue. Manchester United paid 7 million for Andy Cole, then ten days later Eric
Cantona was banned for the rest of the season. Such events are different only in scale to
a oil-rig fitter, computer systems programmer or social worker being off sick or handing in
their notice.
Leavers transfer their expertise (a company investment?) to their new firm. Yet transfer
fees are hardly known outside the football arena and even here - following the Brosnan
judgement - football clubs have reappraised assumptions about the transfer value of key
players. The emphasis has swung to the player negotiating the best contract of
employment they can secure and clubs not being able to demand transfer fees other than
to release a player from an existing contact.

Performance Ratios/Indicators for HRM

What data might we use when accountng for human assets?
FTEs - Full time equivalent staff (formulae may aggregate PT, short-term and
long-term contract staff).
Headcount (H) e.g. total FTEs at month end

Revenues (R) - total operating income (total sales)

Expenses (E) - operating expenditure excl. tax, interest and extraordinary items
Profit - R less E (far too simple, what is the true profit? Who decides what the
profit is?)
Cash-like rewards (C) - emoluments: salaries, wages, overtime, bonuses,
commissions including NI contributions.

Benefits (B) - other rewards which may or may not be taxed as "benefit in kind" cars, pensions, company loans etc

Staffing Performance Indicators

Internal

Sales per employee

- indicates general employee productivity. Compare SPE this year over last year
and with SPEs of rival organisations (benchmarking). Their turnover may be
smaller but they may have a better SPE.
SPE = R/H
H may increase if the business expands. Was the growth was worth it (SPE)?

Recovery Rate
Aggregate compensation and benefits then divide by revenue. RR compares
staffing costs with revenues delivered. Are we obtaining better or worse returns
on each of staff expenditure? A decreasing RR is desireable.
RR = C+B/R
Unravelling influences on RR can be difficult e.g. is it the staff turnover or a new
marketing approach or manufacturing plant? The impact on additional investment
should show through in RR later - revenue increases whilst staffing costs fall.

Utilisation %
- can be applied e.g. to a consultancy company or school whose main business is
allocating or selling the time of its staff. We assume that an increase in U% is
desireable - is this always the case?
U% = R/C+B
R (revenue) can be substituted by another measurable output e.g. wagons
delivered, dustbins emptied, examination results (points). Calculation must
include staff costs of the whole business unit - direct and support staff.

External

Profit per Head

Like RoCE, shareholders and business analysts may use profit per head or profitbefore-tax-per head to focus on employee-related costs and returns.
PpH = P/H
A firm's PpH rating may highlight under-achievement and profit potential when
compared to industry competitors. Corporate preditors may be attracted. A
publically funded organisation such as a college may see its funding reduced if its
funding authorities use the ratio as a control measure.

Compensation per Profit.

This evaluates profit against cost/employee rather than headcount. Interpretation
can be difficult. CpP can swing with profits e.g. where there are close links
between profits and staff compensation (profit related bonuses).

CpP = C+B/P
CpP is negative where a firm is making a loss. What if CpP is a small positive
number and CpP a small negative number? CpP may indicate that better
management could improve cost-effectiveness or controls.

Are we getting VfM from Personnel/HRM Services?

We can evaluate the productivity/contribution (value for money?) of those
delivering personnel/HRM services to the business. Organisation size, location,
corporate culture etc however makes external comparisons more difficult.

Personnel services expenses (PSE).

What are the total operating expenses of the personnel/HRM section (personnel
salaries, cost of facilities/equipment, training and development budgets,
research/project expenditure, communications activities etc.)
Personnel Services Headcount (PSH)
- total FTE for the personnel/HR section in the calculation period.
Personnel Services Cost %. (PSC)
Divide PSE by total operating expenses (E) to identify trends and to influence
budgeting processes.
PSC = PSE/E
Compare PSC to organisational headcount. Is PSC improvement better (or worse)
than expected due simply to changes in the population for which it holds
budgets.
For each operating unit, split the PSE element into its constituent budgets.
Identify the proportion that, say, central personnel services are consuming
compared to decentralised personnel sections. Where is the best/worst use of the
personnel services resource? An operating unit may have a worsening PSC
whereas another's may be steady yet have increased training and reduced
recruitment costs. The former may be investing in training people who then leave
for another job.

Developed and maintained by Chris Jarvis