HRA 021

HUMAN RESOURCE ACCOUNTING

MEASURING HUMAN RESOURCE CONTRIBUTION

PREPARED BY:
Stephine Opiyo Obong’o

Monday, July 27, 2020

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Topic 2 – Lesson 3 - Competitive benchmarking in human resource management.
Benchmarking is a process of measuring the performance of a company’s products, services, or
processes against those of another business considered to be the best in the industry. The aim of
benchmarking is to identify internal opportunities for improvement. Companies have used
benchmarking as an important vehicle for improving their internal processes while improving quality
and reducing costs. Despite the surge of interest in the process, few companies know what they are
doing when they undertake a benchmarking study.
Through benchmarks an organization gets a point of reference which it uses to evaluate quality or
performance. It helps in comparing programs with standards in the industry. Professional
organizations such as Deloitte & Touche, PWC among others publish information on training and
development. The salary review commission has data on salaries and benefits other areas include
data related to the state of the training industry, expenditures, and training program scope and
evaluation strategies. Benchmarking may be analyzed from the following focus areas:
Industry Data: this may be based on training activities from the industry in which a firm operates.
Human resource managers and professionals typically conduct comprehensive surveys to gather
data. Data analysis reveals the median or middle value, for a set of numerical data. This might include
budget information, number of instructors on staff or personnel trained annually. Industry
classifications typically include manufacturing, services and sales.
Expenditures: Strategic plans may also be validated through benchmarking expenditures, such as
budget allocation by department, to other companies. Metric such as the total cost of training as a
percentage of the company’s total revenue may then be computed to indicate the benefits and
compare with others in the industry. The expenditure may be analyzed per employee or per function
and related information provides directional benefit of the human resource activity such as training,
recruitment, reward among others.
Programs: Use of information to justify investment on own training programs may be done to show
how conducting comprehensive onboarding programs results in improved employee retention rates.
A simple 5-point benchmarking process should cover the following:
1. Choosing a product, service, or internal department to benchmark.
2. Identifying the best-in-class companies to benchmark against.
3. Gather information on their internal performance, or metrics.
4. Compare the data from both organizations to identify gaps in your company’s performance.
5. Adopt the processes and policies in place within the best-in-class performers.
By following the process outlined above, benchmarking enable the company identify what changes
will make the most difference and which ones to adopt to ensure optimal value to the organization.
Note that, in order to benchmark, you need to have quantitative data available for study. You must
therefore break down internal processes to calculate performance metrics. Quantify as much as
possible, because only quantifiable information can be accurately compared.
Value of Benchmarking
1. Encouraging team-building and cooperation in the interests of becoming more competitive

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 2. Enhancing familiarity with key performance metrics and opportunities for improvement.
3. Helps employees understand how one small piece of a company’s processes or products can
be the key to major success, just as one employee’s contributions can lead to a big win.
4. Improving employee understanding of cost structures and internal processes
5. It helps companies to be more efficient and profitable.

HR Effectiveness Index
Human resource effectiveness index are tools designed to measure the effectiveness of human
resource programs or activities. Depending on the nature, size, complexities of the services and
products, function among other activities, an human resource effectiveness index can be designed
to measure a range of human resource functions. Some of the index that have been used by various
companies include, Employee Relations Index (ERI) by General Electric which was based on eight
indicators selected from a detailed study of employee behavior. Among the indicators were
absenteeism, initial dispensary visits, terminations, grievances, and work stoppages. Human
Resource Performance Index (HRPX) that uses massive data banks made available by human
resource systems to evaluate functions such as selection, compensation, development, and
retention. Equally, Atlantic Richfield Company (ARCO) developed a comprehensive index composed
of eight items and used it to predict union activity, or in a unionized plant, to predict a strike. It had 8
categories established on a four-point scale. A score of 4 meant that the human resource problems
were pronounced.
Human Resource Management by Objective
The idea of management by objectives (MBO) was first coined by Peter Drucker in his book “The
Practice of Management”, published in 1954; Drucker outlined a number of priorities for the manager
of the future. He observed that managers must have clarity on where to go before they set out to get
to their destination. However, managers also risk being caught up in the activity trap where they get
so engrossed in current activities and may end up losing the purpose. MBO was clearly demonstrated
by Hewlett-Packard where managers were required to develop objectives and integrate them with
objectives of other managers and of the company as a whole. Written plans showing what people
needed to achieve if they were to reach those objectives had to be drawn. The plans were then shared
with others in the organization and properly coordinated to ensure results are achieved.
The objective-setting process uses the characteristics of all sound objectives and must be smart,
measurable, attainable, challenging, realistic, time bound and understood by all parties involved. The
objectives are based on what management wants to accomplish or what is perceived to be necessary
to achieve an adequate level of performance. Measures of turnover, absenteeism, job satisfaction,
employee health, and compensation expenses are quantifiable and could be potential objectives for
the HR function. However, these measures must be related to organization overall performance in
order to represent meaningful approaches to reflect the HR contribution. MBO then refers to a system
in which overall objectives are clearly stated and agreed upon, and gives people the flexibility to work
toward those goals in ways they determine best for their own areas of responsibility.
Other key features of MBO urged that planning process should be delegated to all members of the
organization. This ensures that the plan has the commitment of all members. At implementation, the
organization monitor a range of performance measures to help it stay on the right path towards

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realization of the objectives. The plan must be modified when the monitoring suggests that it is no
longer leading to the desired objective.
Critically then, what is the objective of MBO? The main objective of MBO is that it is a performance
management approach in which a balance is sought between the objectives of employees and the
objectives of an organization. The principle being to determine joint objectives and to provide
feedback on the results. Noting that, setting challenging but attainable objectives promotes motivation
and empowerment of employees and by ensuring that managers are committed gives the opportunity
to focus on new ideas and innovation that contribute to the development and objectives of
organizations. Peter Drucker in developing the principle of MBO sets a number of conditions to ensure
its success:
1. Objectives are determined with the employees;
2. Objectives are formulated at both quantitative and qualitative levels;
3. Objectives must be challenging and motivating;
4. Daily feedback on the state of affairs at the level of coaching and development instead of
static management reports;
5. Rewards (recognition, appreciation and/or performance-related pay) for achieving the
intended objectives is a requirement;
6. The basic principle is growth and development not punishments.

Human resource emphasizes MBO principles and has to work to ensure they are incorporated at
every step to realize the value to the organization. As such when formulating MBO with desired people
result the human resource must focus on the below conditions:
1. Organizational goals.
2. Employees' objectives.
3. Continuous Monitoring of Performance.
4. Review of Employees' performance is by superior.
5. Feedback to subordinates on a regular basis. This is satisfactory and timely feedback,
honest, fair, direct, and objective.
6. Evaluation of Performance.
7. Reward performance for reinforcement or negative reinforcement to deter poor performance.

On the basis of the conditions, Peter Drucker set out a five step practice framework for MBO.
1. Determine or revise the organizational objectives: Strategic organizational objectives are the
starting points of management by objectives. These objectives stem from the organizations mission
and vision.
2. Translating the organizational objectives to employees: the next important step is to translate
them to employees and ensure they are SMART (Specific, Measurable, Acceptable, Realistic and
Time-bound). Besides, the objectives should be clear and communicated well at all levels in the
organization.
3. Stimulate the participation of employees in the determination of objectives: Employees
should be allowed to determine personal objectives that should be in line with the objectives of the
organization. Organizations objectives should be discussed at all levels so that everyone is clear on
why things should be done in a certain way. It increases involvement and commitment. Further it

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ensures that people are motivated to solve problems by being allowed flexibility. By being part of the
objective setting they will also loath failure on their own set objectives.
4. Monitoring of progress: the process also allows for ease of monitoring as the objectives are
SMART that is, they are measurable. Detection must be timely so that problems can be prevented
before impact is beyond repair or costly to repair. Agreed objectives should not cause abnormal
behavior of employees. Caution, In Management by Objectives, employees is not supported by their
management through annual performance reviews. Management by Objectives is about growth and
development. Every objective comprises smaller objectives and it is about supporting these in small
steps in the form of coaching by managers or executives.
5. Evaluate and reward achievements: MBO was designed to improve performance at all levels
within an organization. Employees are evaluated and rewarded for their achievements in relation to
the set goals and objectives.
Note** MBO is not a one off exercise, it is a continuous cycle that takes the organizational objectives
as the starting point and need to be translated to an individual level and back. MBO emphasize a joint
process of determining and achieving of objectives and being rewarded for these achievements.
MBO and Human Resource Management: (MBO) is a concept in human resource management
that aims at the establishment of a management information system to measure actual performance
against defined objectives. The merits of MBO are that it improves employee morale and employee
commitment to work, and builds a better communication between management and employees. The
MBO theory suggests that having a say in employee goal setting, will ensure better participation and
commitment from employees.
HR Profit Centre
Traditional organizations were divided in two clear categories as either cost centers or revenue
centers. Many organizations even went ahead to give more prominence to the revenue Centre as
they were seen as being the source of cash to the organization. This misnomer created apathy and
friction between organizational departments with some functions being seen as more superior than
others. The truth however is that all organizational functions are interdependent and are as important
as the other. Unfortunately, human resource falls among organizational functions that have
traditionally been seen as cost centers. They had very little or no power in critical strategic decision
making in organizations. Coupled with the fact that traditional human resource practices espoused
little evidence of quantitative measures of performance, their impact was by and large felt less and
less in organizations boardrooms.
Modern day business framework has changed and many executives know that human resource have
significant contribution to the organizations bottom-line. These executives however want significant
proof that human resource is not just a cost center but a profit making division in the organization.
Human resource therefore is faced with a critical challenge of designing initiatives and presenting
human resources information to clearly demonstrate its contribution to the bottom-line.
Some attempts to design human resource into a profit-center framework have been to operate as a
profit center and charges the organization for the services and programs it offers. It establishes
competitive rates for services provided to users within the organization.

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In some cases, outside firms may also compete with internal HR services. Typical examples of
programs or services “sold” to user organizations are training and development programs, benefits
administration, recruiting, safety and health programs, relocation programs, administration of
compensation programs, and the implementation of union avoidance programs. Many studies have
been able to demonstrate remarkable correlation between human resource practices and
organizational performance, profitability, and shareholders return. Many companies have also been
able to demonstrate the contribution of human resource to profitability. Such research studies and
individual companies’ activities have provided significant insight on how human resource should be
operated to drive more value to the organization and it’s bottom-line. In modern day organizations,
human resource is uniquely situated to help organizations achieve bottom-line results. There is more
proof in the investment in human resource and its value to the organization.
A number of human resource initiatives such as employee-involvement, information sharing, skills
training, rewards programs, empowerment efforts, engagement practices, and recruitment among
others have shown a significant bottom-line return. The challenge that human resource may face is
that it does not go out directly to source for revenues neither does it engage in new business
identification. However, it improves the organizations effectiveness through undertaking of correct
recruitment, training, reward, and culture change among others which are the key pillars to employee
engagement, loyalty, commitment, attitude among others which allows the company to find new
businesses, open new markets, and improve business efficiency thereby directly impacting on the
organizations bottom-line.
Organizations are beginning to appreciate that human resource practices such as effective
onboarding processes, helping new hires to assimilate and socialize, employee engagement and
letting employees know what is expected of them, effective discipline and capability management and
regularly pruning low performers will help the organization contribute towards higher total shareholder
return over time. Like many other functions in the organization human resource has to make choices
on how it invests it money in the various practices to optimize the value to the organization. Clearly,
not all human resource practices afford the same value or generate the same benefits to the
organization. It’s therefore important that the organization make choices on where to invest its money,
whether on training, reward programs, recruitment, retention, employee development practices
among others.
The most common approach for human resource contribution like in any other department is to make
a decision on its contribution on whether to:
1. Cut cost or
2. Help generate more revenues.
Even though cost cutting may appear to be easier way to boost profitability, it must be approached
with caution. Some of the common ways of cost cutting in human resource include utilizing technology
to provide employee self-service. Some of the self-service technology enables employees and their
managers accomplish certain tasks faster, efficiently and with a wider coverage such as to pursue e-
learning, change benefit options, get answers to stock and compensation questions, and manage
performance without the help of line managers and expensive handbooks. The initial cost may be
high but in the long run this may have higher benefits to the organization. The most competitive way
for human resource to demonstrate sustainable contribution to organizations is through building value

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over time. Value-adding efforts such as transformational human resource, strategic human resource,
and cultural support represent the ability of human resource to select and retain the right employees
and help them do their work in the most optimal way. This focus is where the real profit gains are to
be found from human resource initiatives.
The main focus of human resource should be a move from looking at human resource as a cost to
be minimized but an approach to enhance capacity of human resource in form of investment in human
capital with significant contribution to organizations bottom-line and maximization of shareholders’
value. An important caution is that human resource activities must work together to create an overall
culture that is conducive to profit-making. Effective recruitment must be supported by proper
onboarding, good and continuous training and manpower development, fair rewarding system,
effective performance management among others. Some common initiatives in human resource
include but are not limited to the following for effective contribution to the bottom-line.
Common initiatives in human resource to improve bottom-line
Effective communication: the organizations vision, mission, values, goals, objectives, and
programs must be regularly communicated to employees. Success as well as failure should be
properly communicated and set as learning point for future actions. Open communication must be
taken seriously at all levels in the organization. The extent to which expectations are communicated
will determine the extent of effectiveness of execution by the parties responsible.
1. Employees involvement in setting goals: this approach will enhance buy in, promote ownership
and accountability. All the stakeholders will also feel responsible for the actions for which they are
the ones who planned for. It will also encourage employees to identify the business drivers, create
strategic plan, devise leadership principles, set accountability measures, and roll out the
communications surrounding the new strategy.
2. Ensure that all employees understand how their jobs affect the bottom line and how the
bottom line affects their paychecks: every activity of the organization should be linked to the
bottom-line. Every effort should be made to ensure a clear demonstration of employee’s action to
the organizations bottom-line. When employees understand the impact of their work, they are
able to control their action better.
3. Ensure that human resource function is not solely responsible for human resource
activities: Employees and executives should jointly carry the responsibility and be accountable
for culture and vision of the organization. Human resource should be accountable to all the
activities and initiatives.
4. Understand that cost-savings are important, but not sole focus: Saving money is an ongoing
concern for human resource, but it should not be the primary focus of human resource
professionals who want to generate value for their companies. Focus should be on maintaining a
culture that can ensure the business grows and that employees are creative and innovative
enough to get the job done.
5. Employees should be given what they need to be productive: Employees in profitable
companies should have the tools they need to get the job done. The tools may however be
encompassing. They may also extend to training and work/family initiatives to competitive
compensation and corporate ethics programs.

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References
Armstrong, C., Flood, P. C., Guthrie, J. P., Liu, W., Mac-Curtain, S., & Mkamwa, T. (2010), Beyond High
Performance Work Systems: The Impact of Including Diversity and Equality Management on Firm
Performance. Journal of Human Resource Management, 49: 977-998.
Coote, L. V., Price, E. & Ackfeldt, A. L. (2004), “An investiga- Coote, L. V., Price, E. & Ackfeldt, A. L. (2004),
“An investigation into the antecedents of goal congruence in retail service settings”, The Journal of
Services Marketing, Vol. 18, No. 6/7. 12.
Dev, T. (2009). Managing Human Resources and Industrial Relations. New Delhi, India: Excel Books. 13.
Drucker, P. (1954), The Practice of Management. New York: Harper & Row
Flamholtz, E. (1999), Human Resource Accounting: Advances in Concepts, Methods, and Applications.
Norwell, Massachusetts: Kluwer Academic Publishers
Huselid, M. (1995) The Impact of HRM Practices on Turnover, Productivity, and Corporate Financial
Performance, Academy of Management Journal, 38(3): 635– 72. J
Jack. J. P. (1999), Accountability in Human Resource Management. Houston TX. Butterworth-Heinemann,
United States of America
Obongo, S. O. and Kiruja, E. K. (2019), Human Resource Accounting Practice, Catholic University of Eastern
Africa (CUEA) press, Nairobi Kenya
Sharma, D. K., & Goyal, R. C. (2013), Hospital Administration and Human Resource Management (6th ed.).
Noida, India: PHI Learning Pvt. Ltd.
Stevenson, B. E. (1988), The Home Book of Quotations: Classical and Modern. New York: Dodd, Mead.
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Ulrich, D. (1997), Human Resource Champions. Boston: Harvard Business School Press.

Suggested further Readings available at the college Library

1. Obongo, S. O. and Kiruja, E. K. (2019), Human Resource Accounting Practice, Catholic

University of Eastern Africa (CUEA) press, Nairobi Kenya.
2. Human Resource Management Issues in Accounting and Audit Firms A research perspective
by John A. Brierley
3. Compensation and benefit design: applying finance and accounting principles to global
human resource management systems / Bashker D. Biswas.
4. Human resource accounting: 3rd ed advances in concepts, methods, and applications / by
Eric G. Flamholtz.
5. Advanced Accounting Theory and Practice Wang'ombe David by Wang'ombe David.
6. Accountability in human resource management: 2nd ed connecting HR to business results /
Jack J. Phillips, Patricia Pulliam Phillips and Kirk Smith.
7. Strategic Human Resource Management A Balance Approach Paul Boselie by Boselie, Paul.
8. Principles of Accounts for East Africa Wood Frank By: Wood Frank