Human Resource Accounting: Are we ready for it?

by Philip Dewe

How often have you read or heard a Chief Executive say that ‘people are our best assets!’  While this undoubtedly recognises that the future of all organizations rests on the competencies of its people human resource accounting is something more than simply putting people on the balance sheet.  So, why human resource accounting and why now? Well, first of all we are in the midst of considerable economic and social change where, according to many management writers, most organizations, if they are to be successful, must compete through people. Competing through people - resource based strategies – is the new competitive advantage that organizations should aspire towards if they wish to achieve any competitive edge.  The true source of competitive advantage for organizations, therefore, is embedded in the skills and capabilities of their employees. Retaining, rewarding and motivating these employees requires a new approach to human resource management. Human Resource Accounting (HRA) provides the means through which the rhetoric can be turned into the reality and the intellectual and social worth, value, and capital of an organization can be identified, developed and recognized. 

Human Resource Accounting has a number of roles; it provides organizations with information not just about the cost of human resources but more importantly about their value and worth. In this way it introduces what may well be a whole new perspective for many when taking decisions about human resources. It is through this framework of worth and value versus cost that strategic decision can be made that enhance the one competitive advantage that may be left to most organizations. Human Resource Accounting is all about developing a way of measuring and valuing that captures the very essence of a business  - its people  - and reports this worth in such a way that not only shows the added worth that they make to the organization but allows for the continued development of this worth as well.

Do organizations share these views about Human Resource Accounting? In order to explore what organizations saw as the important reasons for engaging in Human Resource accounting we carried out a survey – collecting information from a range of organizations in both the public and private sectors and from retail, manufacturing and knowledge intensive industries.  From those who returned the survey a number of reasons why it was important for organization to measure Human Resources stood out. These included for example, ‘human resources should be accountable, just like any other function,’ ‘the knowledge and skills of our people are our most important source of sustained competitive advantage,’ ‘ measurement of human resources gives management needed information about the people resources in the organization and whether the resources are there to support business strategies,’ ‘measurement helps with strategic planning,’ and ‘understanding the value of our people focuses on our future human resource needs, which is crucial for both setting long-term strategies and achieving them.’

At the same time as recognizing the importance of measuring Human Resources those responding to the survey could also identify a number of reasons which could prevent the measurement of human resources from going forward. These were: ‘uncertainty as to what information should be reported,’ ‘current human resource measures lack precision,’ and ‘a lack of understanding of the measures by others in the organization.’ Respondents also thought that current human resource policies may not facilitate the use of human resource measures, that trying to measure human resources may be to complex and that such measures in trying to overcome the complexity issue may simply not have credibility.  Nevertheless most respondents thought that measuring human resources was regarded as important by senior levels in the organization including the Chief executive Officer and the Board of Directors.  When asked about future plans then almost half the sample (40%) of respondents said that their organization planned to introduce human resource measures in the next year with another 22% indicating that their plans for introducing measures would come in the next 2 to 5 years.

What Human Resource measures were currently being used by those who responded to the survey? They included for example, training and development costs, turnover rates, satisfaction surveys, competency measurement, healthcare costs, job satisfaction levels and revenue per employee. On the other hand from those who responded human resource priorities were to develop and retain sufficient staff to enable the organization to meet its obligations, to improve employee efficiency and productivity significantly, and to ensure full utilization of high quality staff as a basis for ensuring high quality of performance of the organization.

It is clear that measuring human resources is regarded as important. It is also clear that while there may be support for measurement barriers still exist and overcoming these will require considerable discussions between human resource professionals and their counterparts in finance and accounting. This may represent something of a paradox. The paradox lies in the fact that to show that measurement is worth it human resource managers need measures to do this but in order to attract the help and attention of their accounting colleagues they need their help to produce the very measures that are going to convince them that measuring human resources is important. What perhaps is more important is for all concerned to recognise that Human Resource Accounting is as much a strategic decision-making tool as it is a financial reporting tool. It is as much about worth and value as it is about investment, development and empowerment. Any measurement strategy should be balanced promoting a new wave in thinking at all levels of the organization about how best to invest in, develop and report on the worth of what is an organizations most powerful and potent force – its people.

The research reported here was carried out by Dr Shraddha Verma from the Department of Management Studies at the University of York and Professor Philip Dewe from the Department of Organizational Psychology at Birkbeck, University of London. The research was supported by a grant from the Association of Chartered certified Accountants (ACCA) and the full report is published by the Certified Accountants Educational Trust for the Association of Chartered Certified Accountants, 29 Lincoln’s Inn Fields, London WC2A 3EE.