Valuation of Human Resources

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Valuation of Human Resources:

An organization's human assets are very important for its progress. There are four methods used:

Historical or actual cost method:

This method adds and capitalizes the amount spent to recruit, train, orient and develop an employee to the opening value of cost of that employee. Furthermore, only the expenditure beyond the current accounting period is capitalized. Expenditure not beyond the current accounting period is considered as expenses.

If expenditure on training, development and familiarization is increased, the value of employee investment increases. The expenditures for acquiring and integrating new management employees are paid off during the company tenure of these employees. Historical or actual cost method clearly shows the effects of human resource accounting on conventional performance balance sheet, and profit and loss account.

Multiplier Method:

This method is based on the fact that there is no relation between expenditures levied upon an employee and his/her value to an organization. This method assumes that factors such as motivation, attitude and work environment will affect the emloyee's value.

The multiplier method divides organizational employees into four categories: senior management, middle management, supervisor, and clerical and operative employees. Salary totals for each of these groups are collected and appropriate multipliers are applied to get a total figure for the asset value of the employee. Understanding the nature of the multiplier is imperative before its application. Employee multipliers reflect these factors:

1. Qualifications and technical experience.

2. Experience required for the job.

3. Personal attitudes and qualities.

4. Loyalty and expectations of future service.

The highest multiplier is attached to senior management, while the lowest multiplier is attached to clerical and operative employees. If the value of human assets is different from the one calculated, the multipliers used are inaccurate.

Replacement Cost Method:

This method places value on human assets in terms of the total cost required to replace the organizations existing human resources. This is the cost of recruiting, training, and job orientation, together with the opportunity cost from lost revenue during training period.

This method may be inconsistent with the historical cost principle, but this can be eliminated if all assets are valued at replacement costs.

Economic Value Method:

This method reduces the proportion of the company's future earnings directly attributable to the human resources of the firm, to a present value. This method is faced with two problems:

1. The discount rate used is not accurate, and,

2. The method used by the company to divide and distribute its profits to all production factors.

Additional Readings:

1. Personnel Administration and Personnel Staff
2. Duties of Personnel Managers
3. Manpower Planning
4. Valuation of Human Resources
5. Career Planning
6. Advantages of Diversifying Managerial Training
7. Causes of Failure of Training Programs
8. Promotion Procedures of an Organization
9. Calculation of Minimum Wages according to Indian Labor Conference 1957
10. Wage Influencing Variables and Bonus Schemes
11. Salary Administration Procedures
12. Classification of Fringe Benefits
13. Importance of Good Communication in Business
14. Job Analysis
15. Recruitment Checklist

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