Human Resource Accounting: Advances in Concepts, Methods and Applications

392 Pages·1999·40.57 MB·English

by  Eric G. Flamholtz (auth.)

Human
Resource
Accounting
Advances in Concepts,
Methods and Applications
Third Edition
Human
Resource
Accounting
Advances in Concepts,
Methods and ApplicatioRS
Third EditioD
by
Eric G. Flamholtz
....
"
Springer Science+Business Media, LLC
Library of Congress Cataloging-in-Publieation Data
Flamholtz, Erie.
Human resouree aeeounting : advances in eoneepts, methods, and
applieations I Erie G. Flamholtz. - 3'd ed.
p. em.
lncludes bibliographieal references and index.
ISBN 978-1-4613-7940-9 ISBN 978-1-4615-6399-0 (eBook)
DOI 10.1007/978-1-4615-6399-0
1. Human eapital-Aeeounting. 1. Title.
HF5681,H8F55 1999
658.3-DC21 99-23037
CIP
Copyright CI 1999 by Springer Seience+Business Media New York
Originally published by Kluwer Academic Publishers, New York in 1999
Softcover reprint ofthe hardcover 3rd edition 1999
Ali rights xeserved. No part of this publieation may be reproduced, stored in a retrieval
system or transmitted in any form or by any means, mechanieal, photo-eopying, recording,
or otherwise, without the prior written pennission of the publisher,
Springer Seience+Business Media, LLC.
Printed on acid-free paper.
This bookisdedicatedtomyfamilyandone specialfriend:
~ PearlFlamho/tz
.¢. AlexanderFlamholtz(In memoriam)
.¢. YvonneRandle
~ LaurieFlamholtz
~ CarlFlamho/tz
~ RobertFlamholtz
~ WilliamRossien(Inmemoriam)
~ EdithRossien (Inmemoriam)
~ StanleyRossien
~ HildaRossien
And
~ DianaTroik
Contents
•••••••••••••••
TheAuthor ix
Preface xi
Introduction: The Developmentand State ofthe Art ofHumanResource
Accounting 1
PartI:RoleofHumanResourceAccounting 7
1. UsesforManagersandHumanResourceProfessionals 9
2. UsesinCorporateFinancialReporting 29
PartD:AccountingforBumanResourceCosts 53
3. MeasuringHumanResourceCosts: ConceptsandMethods 55
4. First-GenerationAccountingSystemsforHumanResourceCosts 79
5. Second-GenerationAccountingSystemsforHumanResource
Costs 119
Partill:AccountingforHumanResourceValue 157
6. DeterminingHumanResourceValue: ConceptsandTheol}' 159
7. MonetaryMeasurementMethods 179
8. NonmonetaryMeasurementMethods 219
9. First-GenerationAccountingSystemsforHumanResourceValue 231
10. Second and Third-Generation Accounting Systems for Human
ResourceValue 249
PartIV: ApplicationsandImplementations 283
11. Designing and Implementing Human Resource Accounting
Systems 285
12. ApplicationsforImprovingManagement,Training,andPersonnel
Decisions 299
13. DevelopinganIntegratedSystems 321
14. Recent Advancementand Future Directions in Human Resource
Accounting 349
AnnotatedBibliography 359
Notes 377
Index 385
The Author
•••••••••••••••
Eric G. Flamholtz is professor ofManagement the Anderson Graduate School of
Management, University of California, Los Angeles. He has also served as
Vice-Chainnanofthe Anderson Graduate School ofManagement, andDirectorof
the Accounting-Information SystemsResearchProgram, and Assistant Director of
the Institute for IndustrialRelations where he was head ofthe Centerfor Human
ResourceManagementFlamholtzhastaughtcoursesinavarietyofareas,including
accounting - information systems, human re~ource management, planning and
control systems, managerialdecisionmaking,andentrepreneurialmanagement He
isalsothePresidentofManagementSystemsConsultingCorporation,aLosAngeles
basedconsultingpracticewhichheco-foundedin1978.
Flamholtz received his Ph.D. degree from the University ofMichigan, where he
servedonthestaffoftheInstitutefor SocialResearchunderthedirectionofRensis
Likert Hisdoctoral dissertation, 'TheTheoryandMeasurementofan Individual's
Value to an Organization," was co-winner of the McKinsey Foundation for
ManagementResearchDissertationAward. FlamholtzalsoreceivedanMB.Afrom
WashingtonUniversityinStLouis,andanundergraduatedegreeineconomicsand
accountingfromHunterCollege.
Flamholtz has also served on the faculties at Columbia University and the
UniversityofMichiganandhasbeenafacultyfellowatPriceWaterhouse&Co.He
has broad interests in management and has done research on a variety of
management topics, rangingfrom accountingand human resource management to
organizational development and strategic planning. Flamholtz has conducted
research projectsfor the National ScienceFoundation, the National Associationof
Accountants,andtheU.S. OfficeofNavalResearch.
The author of more than one hundred articles and chapters on a variety of
management topics, F1amholtz published the flI'st edition ofthis book, which is
consideredthe standard for the field, in 1974. Inaddition, Flamholtzhasauthored
several other books, including How to Make the Transition from an
Entrepreneurship to a ProfessionallyManaged Firm, Growing Pains, The Inner
Game of Management (co-authored), Effective Organizational Control, and
Changing the Game: Managing Organizational Transformations of the First,
Second, andThirdKinds(co-authored).
As a consultant, F1amholtz has extensive experience with firms ranging from
entrepreneurships to members ofthe New York Stock Exchange and the Fortune
500. He has also presented seminars and management development programs for
organizations in Europe, Mexico, Australia, Singapore, the Philippines, and the
People'sRepublicofChina,aswellasthroughouttheUnitedStates.
Preface
••••••••••••
The United States is currently undergoing a fundamental transfonnation from an
industrialtoaseIVice-basedeconomy.!Thistransfonnation,whichbeganaroundtheeOO
ofWorldWarII,hasledtochangesinthecompositionofthelaborforce, affectingthe
varioussectorsinwhichpeopleareemployedandalsothetypesandlevelsofskillsthat
areindemand.
At present ours is rapidly becoming amowledge, or infonnation based economy,
requiring"high-teclmologyservices"frompeoplewhoarehighly.trainedandeducatedas
well as experienced in their fields. Engineers, computer programmers, software
developers, medical technicians, lawyers, and university professors all qualify as
high-techselVicepersonnelThus,theeconomyisincreasinglycomposedofwhitecollar,
teclutical,professionalpersonnel
GrowingRecognitionoftheImportanceofHumanAssets
Whereas physical capital was ofutmost importance in the economy ofthe past, the
distinctivefeature ofthe emergingeconomy is an increasingemphasis on humanand
intellectualcapital-theknowledge,skills,andexperienceofpeople. Giventhegrowing
importance of human capital and intellectual property as detenninants of economic
successatboththemacroeconomicandenterpriselevels,itshouldalsobeclearthatthe
natureofinvestmentsmadebyfirmsneedstoshifttoreflecttheneweconomicrealities.
Specifically, if human caPital is a key detenninant of organizational success, then
investmentsintraininganddevelopmentofpeoplealsobecomecritical.
A related attribute is the relative costliness ofdeveloping human capital; significant
investments are required by individuals and the organizations that employ them
Organizationsspendmoneytorecruit,select,hire,andtrainemployees, andthismoney
representsaninvestmentin people. Organizations often spendmore on investmentsin
peoplethanoninvestmentsinequipment. Forexample, ifanorganizationpurchases a
microcomputer to use in word processing, it may spend $3,000 to $5,000. If the
organizationwishes to hire a seniorvice-president for manufacturing, it may have to
initiateanationwidesearchfortheindividual,advertisethepositioninnewspapers,incur
theexpenseofbringingpossiblecandidatestovisititsfacilitiesandbeintelViewed, and
evenpayanexecutivesearchfinn30percentofthemanager'sfirstyear'scompensation.
Theinvestmentinthisexecutivecanamountto$20,000to$50,000ormore. YetWIder
presentaccountingconventions,themicrocomputerwouldbetreatedasanassetwhilethe
investmentmadeinacquiringtheexecutivewouldbetreatedasanexpenseandcharged
againstthecurrentperiod'srevenues.1bisisclearlyadistortionofincomemeasurement
becausenofinnwouldmakesuchsubstantialinvestmentsinapersonwtIess he or she
represented''humancapital"-anassetwithexpectedfuturebenefits.
xii HumanResourceAccounting
ImpetusforDevelopmentofHumanResourceAccounting
Sincethe 1960sagrowingbodyofresearch, experiment, andtheory hasattempted
todevelopmethodsofaccountingforanorganization'shumanassets. Thisresearch
istheoutgrowthofrecognitionthathumanassetsandhumancapitalplayagreater
roleinoureconomytodaythaninthepast.
Underttaditionalagriculturalandindustrialeconomicstructureswheretheextentof
humancapital was significantly less than it is today, the theories and methods of
accountingdid not treat eitherpeopleorinvestments in people as assets (with the
exception ofslaves, who were viewed as property). However, with the increasing
importance ofhuman capital to the economy as a whole, as well as to individual
firms, a great deal ofresearch has beer. directed toward developing concepts and
methodsofaccountingforpeopleasassets.Thisfield,describedbelow,hascometo
beknownashumanresourceaccounting.
Humanresource accounting (HRA) hasbeendefmedby the American Accounting
Association's Committee on Human Resource Accounting as "the process of
identifying and measuring data about human resources and communicating this
information to interested parties.,,2 It involves measuring the costs incurred by
business firms and other organizations to recruit, select, hire, train, and develop
human assets. It also involves measuring the economic value of people to
organizations. In brief, it involves accounting for people as organizational
resources,formanagerialaswellasfmancialaccountingpurposes.
HRAis,atleastinpart,arecognitionthattheskills,experience,andknowledgethat
people possess are assets that can be termed "human capital." This concept is the
basis ofthe economic theory ofhumancapital. Theodore Schultz, who received a
Nobel Prize for his work on this theory, stated that "laborers have become
capitalistsnot from a diffusion ofthe ownership ofcorporation stocks as folklore
wouldhave it, butfrom theacquisitionofknowledge and skillthathaveeconomic
value."3 In a review ofthe history ofthe development ofthe economic theory of
human capital, Kiker indicated that early economists who recognized that human
capital exists included Petty, Say, Senior, List, Von ThunOD, Roscher, Walras,
Fischer,andAdamSmith.4Thetwomethodsusedbyeconomiststomeasurehuman
capitalwerebasedoncost-of-productionandcapitalized-eamingsprocedures.
Human resource accounting has also developed from a parallel ttadition in
personnelmanagementknown as the "humanresources school," whichisbased on
the premisethatpeoplearevaluable organizational resources and, therefore, ought
to be managed as such. Personnel theorists such as Odiorne and organizational
psychologists such as Likert have treated people as valuable organizational
s
resources in their work. For example, in his book The Human Organization: Its
Management andvalue, the late noted organizational theorist Rensis Likert stated
that"everyaspectofafirm'sactivitiesisdeterminedbythecompetence,motivation
andgeneraleffectivenessofitshumanorganization."6
Preface xiii
There is also support among some ofthe early accounting theorists for treating
people as assets and accounting for their value. even before the nature of our
economic structure changed and human capital increased in importance. For
example.DR Scottnoted that "atrainedforce ofteclutical operatives is always a
valuable asset."? Similarly. W. A Paton stated that "in a business enterprise a
weU-organized and loyal personnel may be a much more important asset than a
stockofmerchandise."8
In addition to academic theorists, practicing managers have also recognized the
importance of human assets for quite some time. For example, the 1966 annual
reportofUniroyal statedthat"ourprimeresource ispeople. [We are] essentially a
collectionofskills-thevariedexpertiseofour68,000employees. ,.Uniroyalbas
plantsandhascapital,butmostofall,ithaspeople.,,9
Taken together, these various streams ofthought all lead to the conclusion that
organizationspossessvaluableassets in the people who are in theiremploy-that
thepeoplethemselvesareaform ofcapital, humancapital. Duringthe 1960s, this
recognition led to academic research and business development ofconcepts and
methodsofmeasuringthe costandvalue ofpeople as organizational assets. to the
developmentofthefieldknownashumanresourceaccounting.
The foundation for this new field was laidbetween 1967 and the early 1970s. ht
1974,Ipublishedthefirst bookdealing withthis emergingarea, Human Resource
Accounting. Itwasintendedtopresentthestateoftheartofthefield. Theexistence
ofthatbookas well as the research on which itwas basedevidenced the growing
recognitionoftheimportanceofhumanresources, and, inturn,theneedtodevelop
methodsofhumanresourceaccounting.
ExtentofChangeinThisEdition
The present edition, which is a descendant ofthe original 1974 edition and the
secondedition,whichfollowed in 1985,hasbeensubstantiallyrevised andupdated
to reflect the current state of development in the field of human resource
accounting. The foIlowing paragraphs highlight major changes to the current
edition:
• Chapter 10 has been revised and expanded to include both second and third
generationaccountingsystemsforhumanresourcevalue.andpresentstwocase
studiestoillustratethematerial.
• Chapter 13 includes some new cases, which are intended for illustrative
purposesasweIlasforuseinclassroomsettings.
• Chapter 14 presents recent progress in the theoretical and practical
developmentofHRA-relatedconcepts.theories,andmethods.
• The annotated bibliography has been updated and expanded to reflect
developments and activity within HRA since the publication of the second
xiv Preface
edition. Thus, the annotated bibliography now provides a comprehensive
reviewofliteraturerelatedtothefield
The purpose of these changes has been to emphasize the usefulness of lIRA,
especially for human resource professionals, and to improve the overall structure
andpresentationoftheentirebook.
PurposeofThisBookandOveniewoftheContents
This book presents the current state ofthe art of human resource accounting. Its
goals are (I) to examine the concepts and methods ofaccounting for people as
humanresources; (2)toexplainthepresentandpotentialusesofHRAasatoolfor
human resource professionals, line managers, and investors; (3) to describe the
research, experiments, and applications of human resource accounting in
organizations; (4) to considerthe steps involved in developing a human resource
accountingsystem; and(5)to identify some ofthe remainingaspects ofHRA that
requirefutureresearch.
PartOneprovidesan introductionand overviewofhuman resource accountingfor
professionalsinthefield, managers,andexternalusers. ChapterOneexaminesways
humanresourceprofessionalsaswellas linemanagerscanuseHRA. Itincludesan
example that illustrates how a human resource accounting system can work for
human resource professionals and line managers. The chapter examines the dual
roleofHRAasaparadigmtoguidethinkingabouthumanresourcemanagementas
wellasatechnologyfor measuringhumanresourcecostandvaluesothattheycan
be used as components in decisions to acquire, develop, allocate, conserve, and
utilizepeopleasorganizationalresources.
ChapterTwodealswiththeusesofhumanresourceaccountingbyexternalusers
stakeholderswhoarenotmembersofanorganization.Forexample,itexaminesthe
role ofhumanresource accountingfor investors inpublicly held corporations. The
chapteraddressesthefundamental issuesinvolvedinaccountingforhumanassetsin
corporate financial reports, including the limitations of conventional financial
statementsthatdonotincludehumanassets,andhowhumanassetscanbereported
infinancialreports.
PartTwo deals with accountingfor human resource costs. ChapterThree presents
the concepts and methods for measuring human resource costs and examines the
foundation of human resource cost accounting. It explains the basic accounting
conceptsofcostsandintroducesthehuman resource accountingconceptofhuman
resource costs. Itpresentsmodelsfor measuring the original and replacementcost
ofhumanresources.
ChaptersFourandFiveexaminetheactualsystemsofmeasuringandaccountingfor
human resource costs that have been developed by organizations. Chapter Four
presentsthefirstgenerationofhumanresourcecostaccountingsystems,whichwere
developedpriorto 1974,includingsystemsbyaprofessionalathleticorganization,a