ADMS 4420 York University Human Resources Research Methods Human Resource Audit

4420: HR Research Methods
12: Financial Evaluation of Human Resources
James Chowhan, PhD
Assistant Professor
School of Human Resource Management
York University
chowhan@yorku.ca
This material is designed for use as part of 4420 Human Resources Research Methods at York University and is the property of the James Chowhan unless
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Course Organization
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Learning Objectives
• Discuss the relevance, reasons, and importance of
evaluating human resources in terms of costs and
benefits
• Explain the application and approaches of human
resource accounting, and why this approach has not
been used on a larger scale by organizations
• Know how to calculate the return on investment and
utility analysis of human resource programs
• Understand the research issues and concerns that
have been expressed about utility analyses
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Human Resources and the Language of Business
• Costs and benefits analysis (CBA)
• Empirical claims versus “assertions” of experts
• Organizations should strive to have a common
“business language” with regard to terms,
definitions and metrics
• A common business language across functional
areas avoids confusion and promotes
• Transparency, accountability, and collaboration
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Human Resources Accounting (HRA)
• Owners and managers widely recognize
employees are the real value of an organization
• Key to the success or failure
• However, organizing, identifying, measuring
directly and controlling employees can still
remain a challenge
• HRA is an approach that enables the
relationship between HR cost and value to be
measured and reported to management
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Human Resource Accounting (HRA)
• Using accounting practices to report on human
assets
• Uses an Asset Model approach
• Costs are considered investments
• Managers focus on:
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•
•
•
Recruitment (attract)
Selection (hire)
Training (formal and informal)
Develop (talent management)
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Human Resource Accounting (HRA)
• Key characteristics and features of HRA:
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•
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Common business language—define HRA concept, and agree
to measures and valuation of human resources
Recording of measures in reports
Transparency–disclose information in the financial reports
Accountability—communicate information, use for decisionmaking support and for understanding the resulting
consequences
Use to plan investments in human resources
On-going uses: planning, controlling and monitoring
operational changes and HR value
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Human Resource Accounting (HRA)
• Why use HRA?
• Numerical information about the cost and value
of people—quantify activity
• Framework to aid decision-making (valuable
tool and process)
• As management “buys-in” it motivates them to
adopt (or at least understand) the human
resource perspective in decisions
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Human Resource Accounting (HRA)
• Financial reporting includes:
• Revenues and expenditures for goods and services
• And an accounting of liabilities and assets such as
plants machinery, buildings etc…
• Goodwill may include intellectual assets that are
reflected on the balance sheet (e.g. patents,
trademarks, copyrights, and potentially trade secrets
or unique ideas obtained through acquisition)
• Acquisitions can reveal the “hidden” value of
human capital in an organization
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Human Resource Accounting (HRA)
• Reporting HR assets usually includes:
• Profile of human assets (knowledge and
competence, skills and training, innovation and
capabilities, attitudes and skills, learning ability
and motivation);
• Human asset value; human asset productivity;
• Compensation pattern; training and
development events and policies;
• Total wealth of the organization (including HR
assets)
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Human Resource Accounting (HRA)
• HR annual reports:
• Canadian Corporate:
Let me know if you find any HR focused Annual Reports??
https://www.bce.ca/responsibility/corporate-responsibility/2018-cr-report/2018-csr-report.pdf
• International Corporate:
https://hr-report.db.com/2017/en/index.html
https://www.db.com/ir/en/download/Deutsche_Bank_Human_Resources_Report_2015.pdf
• Canada, Municipal:
https://guelph.ca/wp-content/uploads/HumanResourcesAnnualReport2015.pdf
http://guelph.ca/wp-content/uploads/2012AnnualReport_HumanResources.pdf
https://www.toronto.ca/city-government/accountability-operations-customer-service/cityadministration/staff-directory-divisions-and-customer-service/human-resources/
• Canada, Federal:
https://www.canada.ca/en/treasury-board-secretariat/services/innovation/human-resources-statistics.html
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Human Resource Accounting (HRA)
• Guelph’s “People Practices Strategy” (PPS)
Source: http://guelph.ca/wp-content/uploads/2012AnnualReport_HumanResources.pdf
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Human Resource Accounting (HRA)
Example Microsoft Power BI, Video:

• Canada Municipal:
http://guelph.ca/wp-content/uploads/2012AnnualReport_HumanResources.pdf
Career development
Health and Safety
Labour Relations
Performance Discussion Process
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Human Resource Accounting Critiques
• Empirical challenges
• Lack of integration of HRIS with each other and with
operational systems
• Measurement feasibility and reliability
• Measurement not a “first” priority
• Not enough resources (e.g. time, budget, KSA,…)
• Effectiveness of implementation
• Sensitive data, concerns with sharing externally
• Lack of universal practices or clear guidance for
practitioners to follow
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Human Resource Accounting Critiques
• HRA is rooted in an economist approach where
labour is an asset in the production function
• In practice, organizations say:
• “Employees are a company’s greatest asset”
• “Our people are our most important asset”
• Should people be considered an asset?
• People are not equipment and machinery
• People are not a commodity
•
GIS Video: https://www.youtube.com/watch?v=m0v2HVnysP0
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Human Resource Accounting
• Intangible assets are separable and arise
from contractual or other legal rights
1. Research and Development (R&D)
expenditures (intellectual property (IP))
2. Advertising, brands and related IP
• Human Resources (human capital) is not the
only intangible “asset”:
1. Customer loyalty
2. Competitive advantage
3. Goodwill
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Value of Human Resources
• Approaches to measurement:
• Cost, benefits and return on investment (ROI)
• Utility analysis
• Selection
• Training
• Performance evaluation
• Research on utility analysis
• Human resource practices and strategy example
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Cost, benefits and return on investment (ROI)
• Value to the business
• ROI = (Net Benefits) / (Program Costs)
• where Net Benefits = Benefits – Program Costs
• Program costs are, for example …
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Cost Consequences of Turnover
Adapted:
Model for Measuring
Human Resource
Replacement Costs
Total Cost
Difference in
Performance
Appelbaum, S.H. and Hood, J. (1993),
“Accounting for the Firm’s Human
Resources”, Managerial Auditing Journal,
Vol. 8 No. 2, available at:
https://doi.org/10.1108/02686909310026440.
Page 19
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Cost, benefits and return on investment (ROI)
• Turnover example:
• Reasons for turnover, some examples:
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Low job satisfaction
Poor supervision
Workload
Job mismatch (e.g. selection issue)
Perceptions of fairness (e.g. compensation and/or
procedures)
• Advancement opportunities
• Etc…
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Cost, benefits and return on investment (ROI)
• Turnover example:
• HR programs that reduce turnover can include:
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Realistic job previews (RJP)
Testing (psychological and performance)
Pre-hire payback agreements
Changes in compensation
Improved training options and opportunity
Job enrichment
• When should an intervention be considered?
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Cost, benefits and return on investment (ROI)
• Turnover example:
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11% total average turnover in Canada in 2012-2013
7.3% voluntary and 3.7% involuntary turnover
Voluntary Turnover Rates (average percentage of employees):
LFS 2020:
January 2020
7.65% turnover
3.33% involuntary
4.32% voluntary
May 2020
9.49% turnover
8.62% involuntary
0.86% voluntary
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Turnover Example: Use of Recruitment Methods
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