Merits. According to the authors of this approach, a bidding process, such as this, is a promising approach towards (a) more optimal allocation of personnel and (b) a quantitative base for planning, evaluating and developing human assets of the firm.
(i) It has narrowed down the concept of opportunity cost by restricting it to the next best use of the employee within the same organization.
(ii) It has specifically excluded from its purview those employees who are not scarce or are not being bid by other department. This is likely to result in lowering morale and productivity of the employees, who are not covered by the competitive bidding process.
(iii) The total valuation of human resources base on this method may be misleading and inaccurate. This is because a person may be an expert in a particular area and therefore may be useful for one department but useless for another department. Thus, he may be a valuable person for the department he is working and command a high value. However, he may have a lower price in the bid by the other department where his services are not at all required.
Standard Cost Approach
This approach has been suggested by David Watson. According to the is approach, standard costs of recruiting, hiring, training and developing per grade of employees are determined year after year. The standard cost so arrived at for all human beings employed in the organization is the value of human resources for accounting purposes.
The approach in easy to explain and can work as a suitable basis for control purposes through the technique of variance analysis. However, determination of the standard cost for each grade of employee is a ticklish process.
Present Value of Approach
According to this approach, the value of human resources of an organization is determined according to their present value to the organization. For determination of the present value, a number of valuation models have been developed. Some of the important models are as follows:
Present Value of future Earnings Model
This model had been developed by Lav and Schwartz (1971). According to this model, the value of human resources is ascertained as follows:
(i) All employees are classified in specific groups according to their age and skill.
(ii) Average annual earnings is determined for various ranges of age.
(iii) The total earnings which each group will get upto retirement age are calculated.
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(iv) The total earnings calculated as above are discounted at the rate of cost of capita. The value thus arrived at will be the value of human resources/assets.
(v) The following formula has been suggested for calculating the value of an employee according to this model.
Vr =
T r t r t R t I ) 1 ( ) (I(t) = the individual‟s annual earnings upto the
retirement.
t = retirement age
r = present age of the employee R = discount rate
Limitations. The method suffers from several limitations:
(1) A person‟s value to an organization is not entirely determined by the salary paid to him. A person may like to work at a salary which is less than what he actually deserves. Moreover, salary does not remain constant over a period of time. They tend to change in response to social, political and economic conditions. Hence, they cannot be predicted with precision and accuracy.
(2) The model ignores the possibility that an individual may leave the organisation for reasons other than death or retirement. Thus, it overstates an employee‟s expected service life and his future earnings.
(3) The model does not take into account the changes which people make during their career, from one role to another, at one or more times within the organization itself. This may result in the changes in their expected future earnings and ultimately the value of human resources.
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(4) The model also ignores other considerations such as seniority, bargaining capacity, skill experience, etc., which may result in payment of higher or lower salaries to employees. Thus, the salaries paid to employees may not really represent the employees real worth to the organization.
This model has been suggested by Flamholtz (1971). This is an improvement on „present value of future earnings model‟ since it takes into consideration the possibility or probability or an employee‟s movement form one role to another in his career and also of his leaving the firm earlier, than his death or retirement. According to this model, the ultimate measure of an individual‟s value to an organization is his expected realisable value. The realizable value is estimated on the basis of the present worth of the set of future services he is expected to provide during the period he is likely to remain with the organization. The model suggests a five step approach for this purpose.
1. Determination of the period for which a person is expected to serve the organization.
2. Identification of „service states‟ (i.e. roles or posts) that the employee might occupy during his service career including the possibility of his quitting the organization.
3. Estimation of the probable period for which a person will occupy each possible „service state‟ (posts or roles) in future in the organization.
4. Estimation of the value derived by the organization when a person occupies a particular position, i.e. a service state for the specific time period. Such value can be determined either by multiplying the price of the services (articles) with the quantity of the services (articles) to be rendered (produced) or the income expected to be derived from the services to be rendered.
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5. The total value of the services derived by the organization by different employees or group of employees is determined. The value
thus arrived is discounted at a pre-determined rate to get the present value of human resources.
Limitations. The model suffers from nearly all the drawbacks from
which the present value of future earnings model suffers. Moreover, it is difficult to obtain reliable data for determining the value derived by an organization during the period a person occupies a particular position. The model also ignores the fact that individuals operating in a group may have a higher value for the organization as compared to individuals working independently.
Net Benefit Model
This approach has been suggested by Morse (1973). According to this approach, the value of human resources is equivalent to the present value of net benefits derived by the organization from the service of its employees. The method involves the following steps.
1. The gross value of services to be rendered in future by the employees in their individual as well as their collective capacity is determined.
2. The value of future payments(both direct and indirect) to the employees is determined.
3. The excess of the value of future human resources (as per 1 above) over the value of future payments (as per 2 above) is ascertained. This, as a matter of fact, represents the net benefit to the organization on account of human resources. 4. The present value of the net benefit is determined by applying
This amount represents the value of human resources to the organization.
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