Models of Valuation of Human Resources Archives

Models of Valuation of Human Resources–

Human resources have much importance in the service sector. That’s why for quantify the knowledge, skills and workforce of employees, various models were suggested by various experts.

Some of the models of valuation of human resources are:-

Cost based Model
Economic Value based Model

Cost based models focused on the cost of employees i.e., expenses incurred by enterprises on employees.

Historical Cost Method

This method was developed by Payle Brummet, Flumholts. Firstly, this was adopted by R.G Bary Corporation, a leisure footwear company in Colombus, Ohio, U.S.A.

Under this method actual cost incurred on recruitment, selection, training and development are capitalized and amortized over the future expected useful life of human resources.

Merits:-

1. This method is simple to use and easily understandable.

2. This is based on old accounting techniques.

3. This follows the matching concept (i.e., cost is related to revenue).

4. This evaluates both human and physical asset in the same manner.

5. This method is helpful in the evaluation of return on investment in human resources.

Demerits:-

1. Difficult to estimate the exact life of human resources.

2. It covers only acquisition and development cost not potentiality.

3. Difficult to determine rate of amortization.

4. It does not cover the economic value of human resources.

5. It is not helpful in taking right decision.

Replacement Cost Method:-

Replacement Cost method- This method was propounded by Rensis Likert and Eric G. Flamholtz. Under this method, cost is to be calculated on the basis of replacement i.e., value of employee is estimated on the cost of replacement with a new employee of equivalent knowledge and experience. Cost includes:-
- Cost of Recruitment
- Cost of Selection
- Cost of Training
- Cost of Development
- Advantages:-
  - It signifies the current value of human resources.
  - It is considered more realistic in comparison of historical cost approach.
  - It takes into account individual skills of every employee
- Disadvantages:-
  - Difficult to calculate replacement cost.
  - difficult to replace employee with equivalent knowledge and exxperience.
  - It is irelevant.

Opportunity Cost Method

This method was advocated by Hekimian and Jone. This method is based on Economic concept of Opportunity cost. Under this method cost is to be determined on the basis of alternative use of employees. If employees are not scarce then there will not be opportunity cost. It implies that employees who are scarce can be included in human asset.

Example– Mrs. Sheetal Nahar works in ABC Co. Ltd. as an accounts manager and gets a monthly salary of Rs. 45000/- and other company offers her Rs. 48000/- for the same post. Hence, the opportunity cost would be Rs. 3000/-

Advantages:-
- It is easy to apply.
- It is suitable for scarce employees.
- it encourages employees.
- It is helpful in proper distribution of human resources.
Disadvantages:-
- It discourages other employees.
- It is subjective method.
- It can not be adopted by every business enterprise.
- It considers competitive bid price that may misleading and inaccurate.

Standard Cost Method

This method was suggested by David Watson. Under this method Companies use standard cost for the valuation of human asset. Standard cost is predetermined and fixed cost for each category of employees. Every year cost of recruitment, training and development of employees are determined.

Advantages:-
- It is easy and simple to use.
- It is determined by team of experts.
- It is helpful in controlling because of variances.
Disadvantages:-
- It is not realistic.
- This makes categories of employees.
- It may lower the morale of employees.

Economic Value based Methods

These methods are based on present value of human resources and determination of future contribution of employees.

Present value of Future Earning Method:- This method was developed by Lev & Schwartz. Under this method present value of future earning of human resources in an organization are determined. This is also known as Lev & Schwartz model.
- Important Points:-
  - The employees are classified in specific group based on their age and skill.
  - Average earning are determined for various range of age.
  - Total earnings upto retirement age for each group are determined.
  - Total earnings are discounted @ rate of cost of capital and result would be the value of human resources.
    - Formula– Vr=I (t)/(1+R)t-r
      - Where
      - Vr = Value of individual r year old.
      - I(t) = The individual annual earning upto the age of retirement.
      - t= retirement age.
      - r= present age of employees.
      - R = Discount rate
    - Advantages:-
      - It considers the time value of money.
      - It considers the expected future earnings.
      - It considers the discount rate on the basis of cost of capital which is justifiable.
    - Disadvantages:-
      - It is based on future i.e., no accuracy and precision.
      - It ignores the possibility that employees may leave the organization before death or retirement.
      - It does not consider the progress of employees and salary that does not remain same over a period of time.

Harmonson’s Model

This model had given by Roger H. Hermonson. Under this method earning is calculated by applying discount rate. This is also called Adjusted Discount Future Wage Model. The key point of this model is efficiency ratio.

Efficiency Ratio- is the weightage average of return on investment of firm to the return of all firms of the industry.

Flamholtz Model

This model was developed by Flamholtz in 1971. This is an improvement on present value of future earning model, it takes into consideration the possibility that employee may leave the organization before the death or retirement and move from one role to another. Under this model the ultimate measure of employee’s value is expected realizable value depend on conditional value and probability of remain stay in the organization. The following steps suggested in this model:-

Period is determined for which an employee is expected to serve in the organization.
Estimate the circumstances under which employee may retain or leave the organization.
value can be determined either by multiplying the price of services to rendered or expected income derived from the service rendered.
Total value of service is determined.
Total value of services is discounted with a certain rate to find out the present value of human resources.

Aggregate Average Payment Model

This model was advocated by Prof. S.K Chakraborty in 1976. Under this model value of human resources is determined in aggregate not an individual basis and classified the manpower in two parts. The average salary of the group is multiplied by average period of employment.

Unpurchased Goodwill Model

This model was discussed by Hermonnson. As per this model the value of human resources can be assessed by taking into consideration the excess profit over normal profit i.e., super profit and super profit is capitalized at normal rate of return.

Giles and Robinson’s Human Asset Multiplier Model

This model emphasized that human resources may be valued at going concern like other assets. Remuneration of employee of a particular category is multiplied by the factor of their contribution in the organization.

Morse Net Benefit Model

This model was propounded by Morse in 1973. Under this model value of human resources is determined on present value of net benefits derived from the services of employees.

This method suggested the following steps:-

The gross value of services of employees is determined.
The value of future payments is determined.
The excess value of human resources over the value of payment is determined.
The present value of net benefits derived is calculated with the help of discount rate.