HUMAN RESOURCES

Measuring the value of human resources

BY SHRADDHA VERMA AND PHILIP DEWE
ACCA is shortly to publish a research study dealing with the use of performance measurement in the area of human capital management (HCM). Human capital is one of the key non-financial areas of business activity where greater disclosures in the annual report and accounts are likely to be demanded in the future. The proposed mandatory Operating and Financial Review statement will require companies to discuss significant issues impacting on past and future performance and to disclose employment related policies when these are significant for an understanding of the overall performance. As businesses increasingly become dependent on intellectual capital and know how, rather than on physical fixed assets, so the recognition of the value added through the development, management and retention of human capital becomes ever more important from an external analysis perspective. In 2003, the UK Government issued a consultation paper, Accounting for People, in which it sought views on which aspects of human capital and human capital management could be usefully disclosed in the annual report and accounts package. In its response ACCA argued that there is considerable value attached to improved reporting of HCM issues. The growth of the socially responsible investment (SRI) is one important driver in this respect. In addition, improved reporting of HCM issues will enhance relationships with all stakeholder groups, not just the investment community. The research, conducted for ACCA by Shraddha Verma and Philip Dewe of Birkbeck College London, reveals a widespread lack of agreement on what might constitute generally accepted performance measures in the human resources area. ACCA believes that the best way of ensuring widespread and consistent HCM reporting would be to include it as an issue for consideration by the proposed Standards Board which will eventually take responsibility for providing guidance on the content of the mandatory Operating and Financial Review statement. The major obstacle to wider disclosure is likely to be the difficulty of demonstrating in any quantified manner that HCM issues cross the materiality threshold for OFR disclosure purposes. In the event that companies fail to improve significantly their disclosure performance, the Government may wish to consider mandating a set of core HCM disclosure requirements. The research paper is an important contribution to the debate on HCM performance measures and is available in PDF format from www.accaglobal.com/research.

uman resource accounting (HRA), defined as the process of identifying and measuring data about human resources and communicating this information to interested parties by the American Accounting Association, was first proposed in the 1960s and was a popular topic of research in the 1970s. Contrary to the dominant image of human resource accounting as putting people on the balance sheet, the aim of HRA was wider. In fact, as outlined by Flamholz (1999), HRA had three main roles: to provide organisations with objective information about the cost and value of human resources, to provide a framework to guide human resource decision-making and to motivate decision-makers to adopt a human resources perspective. Despite the strong research interest in the area, human resource accounting did not gain wide acceptance in practice for a variety of reasons. These included questions as to whether it was appropriate to quantify people, whether people qualified as assets in accounting terms, and a lack of consensus on how to measure human resources in practice. In the 1980s, interest in human resource accounting slowed down but it never completely died away. Linked to the recognition that, in todays economy, the greatest source of competitive advantage to many organisations is their workforce, there has been a resurgence in interest in valuing human resources. Recently, there has been recognition that the focus within human resource accounting needs to be on the value or worth of human resources rather than upon the cost of human resources. In addition, human resources need to be measured in terms of their strategic management potential, expressed through such concepts as human value management and human resource expense models. Other issues such as how human resource measurement systems should be designed, the link between human resources and accounting, the need to provide information to effectively guide and manage behaviour and the need for accounting requirements to move away from a purely financial focus have also been raised. There has also been much discussion in academic and professional literature of concepts and techniques such as return on investment, intellectual capital and balanced scorecards which incorporate the valuation of human resources. However, there has been little implementation of these in practice and we therefore need to understand why valuing human resources is important, to whom it is important and its links with organisational and human resource strategies.

The ACCA survey

Roger Adams, ACCAs executive director technical.

In order to assess current perceptions and practices on valuation in relation to human resources in a variety of

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HUMAN RESOURCES

Box 1: possible human resource evaluation measures

Absenteeism rate Accident frequency rate Average age Client satisfaction surveys Competencies Cost of people Cost per hire Cost-benefit analysis Economic value added (EVA) Educational level Experience

Healthcare cost per employee HR costs/investment HR ratio Innovation Job satisfaction Leadership Learning Organisational commitment Return on investment (ROI) Return on investment in human capital Return on training

Revenue per employee Seniority Tenure Time to fill jobs Total shareholder return (TSR) Training and educational costs Training lost Turnover cost Turnover rate Value added per employee Intellectual capital

UK organisations, a survey, sponsored by ACCA, has been carried out. The survey focuses on the importance of valuing human resources, current measurement practices and future plans relating to the valuation of human resources. The survey was sent to accounting professionals and human resource professionals in three types of organisations: manufacturing and retail companies in the private sector, knowledge intensive companies in the private sector and borough, city and local councils in the public sector. The companies in the knowledge intensive sector come from those companies where the knowledge and skills of their employees are expected to be the main source of competitive advantage. This group includes companies in the accounting/auditing, advertising/media, biotechnology, communications and telecommunications, information technology and computing, legal services, management consultancy/public relations and research and development sectors. The valuation of human resources has been defined widely. It includes measures used predominantly by the human resource function, such as absenteeism, cost of people, staff turnover rate, return on training and those suggested as important in the literature, such as return on investment, economic value added and intellectual capital. Altogether, 288 replies were received with approximately a third of responses coming from each of the three organisational groupings chosen. The main reasons for valuing human resources identified by the respondents were linked to accountability and strategy within their organisations. Respondents stated that valuing human resources was important for two main reasons. The first was to improve the accountability of the human resources function which needed to be more accountable just like any other function. The second was to facilitate strategic planning by giving information about whether

people resources would be available to achieve strategic plans, making the costs of different actions visible and focusing on people as an investment rather than as an expense. Respondents identified that the valuation of human resources was important for the human resource function but was also important for senior management and the CEO. Line management and the accounting function were identified as having moderate interest in the valuation of human resources. In respect of internal ownership of and responsibility for the human resources issue, 50% of the respondents stated that the HR function should drive the valuation of human resources because they had knowledge and expertise in dealing with human resources and access to the appropriate data. However, in relation to this, onethird of respondents also identified that human resource professionals did not have the necessary expertise to measure this. 35% of the respondents stated that a multifunctional team should drive the valuation and measurement of human resources in order to obtain the expertise of both the HR and accounting functions and to improve the acceptance and understanding of these measures across the organisation. From a list of 33 potential human resource related measures (see Box 1) respondents were asked to identify the ones used in practice and which ones were considered important, irrespective of whether they were currently calculated or not. It was found that there were a range of measures which were calculated by less than 30% of the respondents and a range of measures used by between 30% and 50% of respondents, and only seven which were used by more than 50% of respondents. These are shown in Box 2. When asked about how important the measures were, 10 were identified as being important by more
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HUMAN RESOURCES

Box 2: most commonly used human resource measures

resources would take place in the next five years, only 13% of the respondents considered that there would be significant progress, with most identifying little or moderate progress citing the barriers outlined above.

Absenteeism Accident rates Training and educational costs Turnover rate Cost of people Client satisfaction surveys Competencies

Conclusions
Overall, the survey shows that although valuing human resources appears to be important to UK organisations, most organisations do not value their human resources and plans to implement valuation of human resources are at a very early stage. Despite the interest in valuation, the survey concludes with the view that there will be little or moderate progress in the area over the next five years, as can be seen from the selection of quotes from qualitative comments given by respondents in the survey: I feel there is a lot of scope in this issue but other demands prevent it from being progressed significantly not a high priority for senior management in the short-term lack of time and staff resources. In order to show greater progress, more needs to be done at both the theoretical and practical level. More research into valuation methods and models, and the practical implication of these, is needed together with the engagement of both human resource and accounting professionals in the debate on valuation and its implementation in practice. A further implication of the research is that calls for extensive human resource related disclosures in the annual report and accounts packagepossibly in the soon to be mandatory Operating and Financial Review statementmay be premature. In the absence of generally agreed performance measures, companies might begin to disclosure a range of non-comparable data which would not add to a users understanding of the OFR itself or of the underlying corporate performance being described.

than 70% of respondents. These are shown in Box 3. Only four measures were identified by less than 25% of the respondents as being important with the other 19 measures having the support of between 30% and 70% of the respondents. Measures such as intellectual capital and economic value added were identified as being important by 30% of the respondents. Having such a wide range of measures considered either of moderate or high importance indicates that there is no consensus as to what should be measured, and may also indicate that a prescriptive approach is neither feasible nor desirable. Instead, a more flexible approach with organisations being able to use those measures most appropriate to their circumstances may be the way forward. Also, complex measures such as intellectual capital are not identified as being important and this may, in part, be due to the perceived difficulty and complexity in calculating these, lack of agreement on how they should be calculated and concerns about quantifying people. The main barriers to the valuation of human resources were identified to be: lack of time and resources to progress the area lack of understanding of the area by others in the organisation uncertainty as to who the information should be reported to, and lack of interest in this area by senior management. Other moderate concerns in relation to the valuation of human resources included: lack of reliable and valid measures which are not overly complex and difficult the lack of widely accepted measures and models concerns as to quantifying people, and lack of expertise by the human resource function in relation to valuation of human resources. Very few respondents had detailed plans in relation to implementing the valuation of human resources, but 70% of the respondents did state that they did have plans to introduce some measures relating to human resources over the next five years. However, when asked how much progress in the valuation of human PAGE 48
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Box 3: most important human resource measures

Job satisfaction Leadership Absenteeism rates Client satisfaction surveys Turnover rate, competencies Cost of people Learning Organisational commitment Return on training

Shraddha Verma and Philip Dewe are based at the School of Management and Organizational Psychology, Birkbeck College, London.