.. .
Journal of Management
Volume 23, 1994

Select Articles

The Jaggi-Lau Model of Human Resource Accounting Revisited
Dinesh K Gupta
Lecturer, Dept. of Commerce and Business Management
Punjab University, Chandigarh.

The concept of human resource accounting (HRA) has been enriched by the contribution of a number of academicians and practitioners.  A prominent contribution happens to be that of -Jaggi and Lau who valued the human resources on homogeneous group basis (defining homogeneity on the basis of rank) using the Markovian analysis to project the transition probabilities.  But they do not precisely determine the time horizon of valuation.  As a result, this paper highlights that the human resources get significantly over valued.  further, an alternative methodology of determining the valuation period to operationalise the Jaggi and Lau model is suggested.

Human Resource Accounting (HRA) as "the process of identifying and measuring data about human resources" (AAA, 1973) has engaged the minds of a number of academicians, and practitioners.  Though there have been early accounting theorists (Paton, 1922, Scott, 1925) who recognised human resources as an asset and commented that "in a business a well-organised and loyal personnel may be a more important 'asset' than a stock of merchandise" (Paton, 1922, pp 486-7), the fact remains, however, that it was Likert (1967) who first used the term "human asset accounting" (a term since replaced by "human resource accounting") while logically demonstrating the weakness of the traditional accounting framework for not bringing the human resources within its fold.  He made a strong case for the accounting of human resources by delving at length the sub optimal quality of decisions which the users of accounting information were forced to take on the basis of the traditional accounting numbers.  Since then, a number of researchers have attempted to enrich the thought both by building models to assign cost or value figures to the human resources and by establishing the usefulness of HRA data for various decision making situations.

A search of the available literature on HRA reveals that there are a number of models which can be classified under one of the two approaches - cost-based, and value-based.  The cost-based approach focuses on the cost parameters which may relate to historical cost (Brummet, Flamholtz, Pyle, 1968), replacement cost (Flamholtz, 1973), or opportunity cost (Hekimian, Curtis, 1967).  The value-based approach suggests that the value of human resources depends upon their capacity to generate revenue.  The value-based approach can be further sub-divided into two broad categories: non-monetary, and monetary.  The non-monetary approach is concerned with the organisational and behavioural variables which determine the human resource value.  The contributions of Likert (1967), Flamholtz (1972), Likert, Bowers (1973), and Ogan (1976) have shaped and strengthened this approach.  The monetary approach attempts to value the human resources on the basis of the prospective stream of contribution to be made by the human resources.  Hermanson (1963, 1964), Lev, Schwartz (1971), Flamholtz (1971), Sadan, Auerbach (1974), Jaggi, Lau (1974) are the prominent contributors to this approach.

The monetary value-based approach has found greater acceptability because of its inherent strengths.  A critical examination of the various contributions to this approach reveals that the approach has primarily been dominated by two schools of thought - the Hermanson school of thought, and the Flamholtz school of thought.  The Hermanson proposal suggests the use of compensation as a surrogate of human resource value.  It conceives the value of human resources as the sum total of the present value of future salaries accruable to them.  This school of thought has got strengthened with the pioneering contribution of Lev, Schwartz (1971).  The Flamholtz proposal attempts to measure the real life variables impacting human resource value, that is, the contribution of an employee towards the Organisation, his movements in the organisational hierarchy, and the possibility that he may leave the Organisation prior to retirement.  The Flamholtz model (1971) considerably improves upon the Hermanson proposal (and the Lev Schwartz model) by considering the important factors relating to the chances of an employee's movements in the organisational hierarchy and his leaving the Organisation prior to retirement through a stochastic process.  The seminal contribution of Flamholtz in proposing an individual based normative model of human resource valuation has found wide acceptance.  However, its focus on an individual as a basis of valuation makes the implementation of the model somewhat difficult.

The Flamholtz school of thought has been enriched by Jaggi, Lau who have proposed that the human resource valuation process should be a group-based one, as an individual based valuation process can result in statistically significant under or over-valuation (Jaggi, Lau 1974, p. 324).  Further, they suggest that the probability of movement in the organisational hierarchy and leaving the Organisation be assigned on the basis of Markovian analysis.  However, the basic philosophy of valuation remains the same as suggested by Flamholtz.

The major contribution of Jaggi, Lau has been their attempt to make the widely accepted Flamholtz philosophy of human resource valuation operational without much difficulty.  The individual based valuation process, suggested by Flamholtz (1971), has, by and large, been considered impracticable, though a couple of attempts have been made to value the human resources by following the suggested process.

A critical look at the Jaggi, Lau (1974) reveals that the model needs re-examination from the angle of time horizon over which the valuation process should extend as Jaggi, Lau do not precisely determine the valuation period.

The present paper thus endeavours to re-examine the Jaggi-Lau model from the perspective of the time span over which the human resource valuation process should extend; it demonstrates that significant variation in human resource value can be caused due to imprecise determination of the valuation period.

Jaggi-Lau Model

 [TV] is a k-element vector representing the   final values of each rank of employees. The aggregate of all the elements represents the human resource value   of the Organisation.

 [N] is the vector (N1, N2 . ..... Nk) representing the number of employees in rank  'i' at time 't0,' whose value is to be
 [V] is the vector depicting rank wise economic value of an employee.

[T]n represents the transition probabilities after 'n' time periods.  M matrix carries the values of the elements 'aij's'.  An 'aij' represents the probability of an employee occupying rank 'i' at the beginning of the period and attaining rank 'J' at the end of the period.

r is the discount rate for the calculation of the present value.

To operationalise the model, a rank transitional matrix is to be derived on the basis of historical data using the Markovian analysis.  The economic value of an employee of each rank is determined.  Further, the number of employees occupying each rank is to be ascertained as the model is based on the concept of group valuation.  And by carrying out matrix operations, the value of human resources is determined, using an appropriate discount rate, without taking specific valuation period.  The model suggests the extension of the valuation process till infinity and sidetracks an important aspect of valuation - the time horizon of the valuation exercise.  Jaggi, Lau (1974), p. 328) specifically suggest, while illustrating the model, that "the 40 year time horizon for valuation of human resources includes all pertinent information".  Further, they demonstrate that the extension of the valuation period from 40 years to 50 years or 60 years does not cause material change in the value, as the additional value is insignificant. (Jaggi, Lau, 1974, p. 328; 1975, p 34).

The imprecision of Jaggi, Lau regarding the time horizon of valuation period is explicit.  In order to inquire into their claim, the human resources of an Organisation were valued on the basis of the Jaggi-Lau Model (1974) for the periods of 30 years, 35 years, and 40 years.  Then, the Jaggi-Lau Model was operationalised for the same number of employees taking defined valuation period calculated after classifying the employees in nine age groups.  The time horizon of valuation was determined by reducing the average age of the group from the retirement age. 

Application of the Model
The experiment was conducted while valuing the human resources of a large engineering consultancy Organisation.

The employees were grouped on the basis of rank.  The organisational structure had sixteen ranks (called levels).  As the Organisation desired separate valuation of its headquarters employees and those posted at various sites (called field employees), so the level were distinguished as HQ Level - the headquarters level - and F level - the field level.  The final valuation exercise was catered to 31 levels (16 headquarters, and 15 field), and the 32nd level was taken as the exit level.

The value of each rank was determined by using the billing rate utilised by the Organisation and the service state values, as given in Table 1.

Table 1: Annual Seervice State Values

Service State {Level} Value of One year of Service {Service State Value}[Rupees]
LEVEL1 78267
LEVEL2 81753
LEVEL3 89629
LEVEL4 97763
LEVEL5 107835
LEVEL6 133277
LEVEL7 147706
LEVEL8 154249
LEVEL10 160016
LEVEL12 185155
LEVEL13 199071
LEVEL14 231140
LEVEL15 254134
LEVEL16 303557
LEVEL18 330099
LEVEL19 339360
LEVEL2 81883
LEVEL3 89901
LEVEL4 99044
LEVEL5 107885
LEVEL6 133401
LEVEL7 149130
LEVEL8 156185
LEVEL10 160079
LEVEL12 193112
LEVEL13 207028
LEVEL14 239982
LEVEL15 263859
LEVEL16 314167
LEVEL18 340709
LEVEL19 349974


The transition probability matrix (Table 2) was derived, by using the historical data concerning the movement of the employees through the organisational hierarchy, on the basis of Markovian analysis.

The output of the computer based HRA system was available in the form of rank specific human resource value data.  However, the aggregate figures have been presented for discussion in Table 3. The human resource values were generated, to start with, for the periods of 30 years, 35 years, and 40 years by using the process suggested by Jaggi, Lau, and 12 per cent discount rate.  These values turned out to be Rs 507.8 crores, Rs 517.3 crores, and Rs 522.8 crores.  The variation between the values at, say, 35 years and 40 years is insignificant 1.07 per cent) And this reinforces the claim of Jaggi, Lau.

The methodology of valuation was then changed, as explained earlier, and the tenure of the employees at each rank was estimated.  The employees of the organisation were rank-wise classified in nine age groups of 18-20, 20-25, 25-30, 30-35, 35-40, 40-45, 45-5b, 50-55, and 55-58 years.  The mean age of each age group turned out to be 19, 22.5, 27.5, 32.5, 37.5, 42.5, 47.5, 52.5, and 56.5 years, respectively.  To calculate the expected tenure, the mean age was reduced from the retirement age (58 years in this case).  Accordingly, the expected tenure of the employees, falling under the nine age groups turned out to be 39, 35.5, 30.5, 25.5, 20.5, 15.5, 10.5, 5.5 and 1.5 years, respectively.  For the final valuation, the expected tenure was taken as 39, 35, 30, 25, 20, 15, 10, 5, and I years.

Table 3: Human Resource Values

[Figures are in Rs.Crores] 

1. As per the process suggested by Jaggi, Lau
30 Years 35Years 40Years
Rs.507.8 Rs.517.3 Rs.522.8
2. As per the process suggested by the authour     Rs.335.1

The human resource value generated as per this process turned out to be Rs. 335.1 crores.  The value is significantly different even from the value (Rs. 507.8 crores) calculated taking 30 years valuation period as per the Jaggi-Lau process.  The overvaluation is to the tune of 51.52 per cent. ...ae variation gets spread to 56 per cent against the value of 40 year valuation period.

The results generated as per the Jaggi Lau process (and presented in Table 3) seem to be unrealistic because the projections have been made for, say, 40 years for all the employees.  This assumes that the mean age of all the employees is 18 years since only then the benefit will accrue to the Organisation for the next 40 years (the retirement age being 58 years).  Jaggi, Lau define the homogeneity of a group of employees on the basis of the service state occupied by the employees at the time of valuation and argue that it did not make any material difference in the final value whether the projection was made for 40 years or 50 years.  However, the fallacy of the argument is that unless the mean age of the group of employees is 18 years or 8 years, respectively (or below), the assumption is not correct.

The Jaggi-Lau model of HRA is a group based valuation model which belongs to the Flamholtz school of thought.  It involves the determination of the economic value of an employee of each rank (service state), the ascertainment of the number of employees who fall under each homogeneous group (defined on the basis of rank), the determination of transition probability matrix using the Markovian analysis and using an appropriate discount rate without taking specific valuation period.  The model suggests that the projection of the expected service stream can be made for any period sufficient to cover the service life of the employees. The re-examination of the model from this perspective reveals that a fallacy e2dsts in this argument, and hence a logical methodology needs to be adopted regarding the valuation period.  The suggested methodology demonstrates significant difference in human resource value when compared with the value generated as per the daggi-Lau methodology.  The latter value was found to be significantly overvalued.  Thus, the operationalisation of the Jaggi-Lau model, as demonstrated, would go a long way in projecting the correct HRA.

The author is indebted to his doctoral research supervisors, Dr Kamal Gupta, Technical Director, the Institute of Chartered Accountants of India, New Delhi, and Dr B L Bansal, Prof..Accounting, Panjab University, Chandigarh, for providing critical insights in the area of human resource accounting.  Also, grateful for the referees' comments.

American Acounting Association Committee on Human Resource Accounting - AAA (1973): Report of the Committee on Human Resource Accounting.  Supplement to The Acounting Review 1973, 169.

Brummet R L, Flamholtz E G, Pyle W C (1 968): Human resource measurement: A challenge for accountants. nw Accounting Review April, 217-24.

Flaniholtz E G (1971): A model for human resource valuation: A stochastic process with service rewards. 7he Accounting Review Aprfl, 253-67.

--(1972): Towards a theory of human resource value in formal Organisation.  The Accounting Review oct, 666-78.

--(1973): Human resource accounting: Measuring positional replacement cost.  Human Resource Management Spring, 8-16.

Hekimian J S, Curtis J (1967): Put people on your balance sheet.  Harvard Business Review Jan-Feb, 105-13.

Hermanson R H (1 963): A Method for Recording All Assets And The Resulting Acounting And Economic Implications [Ph D Dissertation].  East Lansing, Michigan State University.

--(1964): Accounting for Human Assets.  Occasional Paper No 14, East Lansing, Bureau of Business and Economic Research, Graduate School of Business Administration, Michigan State University, 1-69.

Jaggi B, Hon-Shiang Lau (1974): Towards a model for human resource valuation.  The Accounting Review April, 321-9.

--(1975): Valuation of human resources: A practical model.  Cost and Management July-Aug, 29-34.

Lev B, Aba Schwartz (1971): On the use of economic concept of human capital in financial statements. 7he Accounting Review Jan, 103-12.

Likert R (1967): nw Human Organisation: Its Management and Value.  New York, McGraw Hill.

Bowers D G (1973): Improving the accuracy of P/L reports by estimating the changes in dollar value of the human Organisation.  Michigan Business Review March, 15-24.

Ogan P (1976): A human resource value model for professional service organisations.  The Accounting Review April, 306-20.

Paton W A (1922): Accounting Theory.  New York, Ronald Press.

Sadan S, Auerbach B (1974): A Stochastic model for human rsource valuation.  Califomia Management Review Summer, 24-3 1.

Scott D R (1925): Theory of Accounts.  Vol 1. New York, Holt, Rinehart and Winston.