What is Human Resource Accounting?: Objectives, Features, & Models
The concept of human resource is essential for any organisation as this department is responsible for searching, recruiting, and managing the employees in any company. From start-ups to multinational corporations, the value of Human Resources team is extremely high as they act as the intermediary between the employees and the management of the company, ensuring the smooth and efficient working of the organization.
Since they manage the most valuable resource for any organisation, HRs often come under the scrutiny of the management. This is where Human Resources Accounting (HRA) comes into the picture. HRA ensures that the efforts put in by the HR team are tracked accurately and the outcomes measured, to understand the efficacy and cost of human resources in the organization. According to the Infosys Annual Report 1996-97, the human resource valuation was ₹ 184 crores, while their physical assets’ valuation was only ₹ 84 crores, which was the first company in India to allocate monetary value to their staff members, highlighting the importance of human resource accounting.
With this blog, we will be checking out the value of human resource accounting in detail, including the various methods used to undertake it, its benefits, features, and objectives, as well as the various models such as the cost method, Morse model, and others, used to undertake human resource accounting efficiently.
What is Human Resource Accounting?
Human Resources Accounting (HRA) is the process of tracking the investments made in the employees of an organisation. In simple terms, human resource accounting is the process of identifying and measuring the cost of employing and managing staff and understanding the cost and value of human resources for the organisation. By keeping track of the time, effort, and money spent on the employees, the management can have a better understanding of their workforce and take the necessary steps to improve the efficiency in managing them.
Objectives of Human Resource Accounting
One of the most important objectives of human resource accounting is to measure the cost of managing the employees in the organisation. However, there are other important objectives of human resources management, which makes it one of the most relevant aspects of business processes for any company.
The importance of the use of human resources management can be understood with the help of the following objectives of human resource accounting:
1. Allocate Resources Efficiently
Human resource accounting is responsible for finding the right human resources and ensuring that they are being utilized effectively in an organisation. Hence, the staff members are provided with the best resources and facilities possible, to help them undertake their job efficiently. HRA also helps find areas within an organisation, where human capital is required, making it a robust tool for resource allocation.
2. Track Effectiveness of HR
The importance of human resource also lies in the fact that it helps understand the effectiveness of HR strategies such as recruitment, training, performance evaluation, expense management, and others. By analysing the information gathered with human resource accounting (HRA), the management can fill any process gaps and ensure that their strategies are yielding the right results. This information also proves helpful in improving the existing processes to engage employees effectively.
3. Assign Value to Human Resources
The Human Resource department also assigns monetary value to the employees, based on the data collated with HRA. It measures the costs related to employees such as their recruiting, training, salary, expertise, etc. to understand the value of human resources and the monetary benefits they bring to the organisation. The value of human resources in the company also enables the management to allocate the funds necessary to develop their workforce and help them stay with the organization for longer.
4. Support Decision-making Process
Since human resource accounting (HRA) is in-charge of measuring and maintaining human resources and the records of employees from their hiring to their everyday activities and performance, it aids the management in decision-making. HRA enables the management to understand the resources required for effective training and development of the staff, the ideal number of staff members required in each department within the organisation, and more.
5. Ensure Statutory Compliances
Since HRA deals with all information about the employees, it enables the management to comply with the statutory guidelines related to employment. HRA also provides HR and management with compliance-related data, helping organisations avoid penalties and fines. It helps the management to stay compliant with the various regulations such as minimum wages, safety rules, etc.
Features of Human Resource Accounting
HRA enables the HR teams to understand the economic value of human resources for their organisation and the resources required to ensure that they remain engaged with their company. There are specific features of human resource accounting which make it the ideal tool for understanding the data related to the human capital within an organisation.
Let us understand these features:
➔ Cost Tracking
Since human resource accounting deals with employees’ valuation and associated costs’ analysis, tracking the expenditure on employees is a major feature of HR accounting. It considers the various costs associated with employees such as recruiting, training, salaries, additional benefits, sharing company assets, performance management, etc. which enables the management to identify the areas where optimization is required.
➔ Human Resources Evaluation
Since the basic function of human resource accounting is to measure the effectiveness of HR initiatives in managing the employees of the organisation, it provides human resources with multiple evaluation features. While it evaluates the company policies to ensure goal attainment, HRA also proves instrumental in identifying and measuring data related to employee performance, which enables the management to make the right decisions, such as incentivizing the performers and training the underachievers.
➔ Investment Analysis
Human resource accounting is also essential for analysing the investments undertaken on employees, such as the expenses related to their training management system, recruitment, performance analytics, etc. By analysing these expenses, companies can identify whether their expenses are providing adequate returns on investment (ROI). Armed with this knowledge, the HR and management can optimize their company practices to ensure maximum ROI, while keeping their employees engaged with their organisation.
➔ Performance Evaluation
Human resource accounting also comes with performance analytics features which measure the performance of individual employees as well as their teams. Such in-depth analytics helps the management understand how effective is their workforce in accomplishing their company-wide objectives. It also helps them analyze whether training and development is required for certain team members to ensure that everyone is working satisfactorily.
➔ Records Management
Since human resource accounting helps measure various performance-related parameters and related factors, a records management feature is essential for it. With a robust database, HRs and managers can view records and understand the improvement their strategies have on their workforce. Similarly, having this data also helps with statutory compliance since some of these factors as required by law to be kept in the organization database for a certain duration.
➔ Report Generation
A dedicated report generation mechanism makes records management worth the time and effort as it can present the data in a visually appealing and easy-to-grasp format, enabling the process of decision-making to be quick and easy. Human resource accounting also comes with summarized reports generation enabling the management to make crucial decisions without resorting to email chains.
➔ Decision Making
With the help of data collated from the company and the handy report generation feature, companies can make practical decisions related to their workforce. For example, a performance analytics report can let HR know that a specific department is understaffed, while the expenses report will help them understand whether hiring a new employee is the solution or whether the issue can be resolved with upskilling.
➔ Risk Management
Another major feature of human resource accounting is risk management, which enables the HR teams to mitigate risks such as high turnover rates, high absenteeism, lack of professional skills, etc. Similarly, HRA can also let the HR and the management understand how safe their workplace is and help them avoid hefty fines due to lack of safety adherence.
Benefits of Human Resource Accounting
HRA is essential to understand the value of human resources to the organization. Additionally, it provides the company with multiple benefits, that justify the time, money and efforts required to deploy a robust HR accounting system within the organization.
Now that we have understood the various aspects of HR accounting, we can check out some of the major benefits of deploying an HR accounting plan in the organization.
1. Competitive Advantage
By having a robust human resource accounting system in place, organisations will have a good idea of their workforce and the initiatives required to help them reach their full potential. It also provides you with the data required to improve employee engagement throughout the company. Such efforts from the management lead to an overall better work environment, attracting better talent, leading to better products and services, and giving the company a major competitive advantage.
2. Improved Efficiency
Similarly, by utilizing human resource accounting, companies would be able to understand employee performance and its monetary impact on the organization. Using this data, the HRs can develop robust training and development programs to upskill and cross-skill their staff, improving their productivity and efficiency, and generating more revenue for their business.
3. Better Decision-making
Another major advantage of HR accounting is that it provides accurate information related to employee performance, training, and other related metrics, which provide the management with a robust idea of the current scenario of their organisation. It helps them make effective, yet practical decisions, which improve the business while also ensuring employee engagement.
4. Enhanced Employee Engagement
Since HR accounting helps the management understand the shortcomings of the workforce, they can work on it to improve the overall quality of their employees. As a result, they can upskill their staff, and provide competitive compensation and benefits, ensuring their wellbeing. Employees who understand their value to the company are more likely to stay longer and remain engaged with their company.
5. Reduced Turnover
Engaged employees are less likely to leave their organisation since they understand their relevance to their company. Additionally, employees are less likely to leave organisations where there are excellent engagement initiatives, thanks to human resource accounting. This, having a robust HR accounting system ensures reduced turnover.
6. Cost Savings
The primary requirement of human resource accounting is to understand the expenses borne by the organisation for hiring and managing their employees. Hence, it helps the management understand the cost and value of human capital, letting them save costs wherever possible, without hampering the employee experience. Hence, having a robust human resource accounting in place also results in enhanced cost savings.
Models of Human Resource Accounting
There are different models of human resource accounting developed by various entities throughout history, which undertake the task of keeping track and measuring data about employee management expenses within an organisation, and communicating this information to the human resources.
Some of the most used methods are:
➔ The Lev and Schwartz Model
The Lev and Schwartz Model or the cost method provides the HR with the value of the employee in terms of providing their expertise in their designation. This model also includes the cash flow they are supposed to generate for the company, depending on their job role. However, a major limitation of this model is that it allocates more weightage to the average value than that of any individual, while it considers the cost of replacing the employee.
➔ The Eric Flamholtz Model
Developed in 1996, the Eric Flamholtz Model of human resource accounting aligns the business goals with human capital investments, ensuring that the organisations receive maximum ROI. Hence, this model evaluates the employees based on their contributions and provides the companies with an in-depth framework to develop strategies to improve workforce efficiency.
➔ Ogan’s Model
Pekin Ogan developed Ogan’s human resource accounting Model in 1976, which measures the contribution of an employee’s knowledge and the company’s collective knowledge to understand the company’s success and performance. Hence, this model considers both individual and organisational knowledge to be relevant for undertaking HR accounting, as well as the cost of replacing these employees.
➔ Linkert Model
The Linkert Model of human resource accounting measures the present value of human capital by assessing how much are the organisational goals aligned with the individual goals of the employees. To ensure organisational success, the Linkert Model measures four key factors, namely, motivation, leadership, communication, and job satisfaction.
➔ Morse Model
The Morse human resource accounting Model was developed by Richard Morse, which provided various factors to measure the value of human capital to the organisation accurately. Using the Morse Model, companies can understand the individual goals and align the company objectives with these goals to optimize the efficiency of the staff and the overall business.
