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Accounting, Orgonizotions and Society, Vol. 1, No. 2-3, pp. 179-193. Pergamon Press, 1976. Printed in Great Britain ACCOUNTING FOR THE COSTS AND BENEFITS OF HUMAN RESOURCE DEVELOPMENT PROGRAMS: AN INTERDISCIPLINARY APPROACH

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Accounting, Orgonizotions and Society, Vol. 1, No. 2-3, pp. 179-193. Pergamon Press, 1976. Printed in Great Britain ACCOUNTING FOR THE COSTS AND BENEFITS OF HUMAN RESOURCE DEVELOPMENT PROGRAMS: AN INTERDISCIPLINARY APPROACH
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  Accounting, Orgonizotions and Society, Vol. 1, No. 2-3, pp. 179-193. Pergamon Press, 1976. Printed in Great Britain ACCOUNTING FOR THE COSTS AND BENEFITS OFHUMAN RESOURCE DEVELOPMENT PROGRAMS: ANINTERDISCIPLINARY APPROACH* PHILIP H. MIRVIS and BARRY A. MACY University of Michigan AbstractAn interdisciplinary approach to measuring the costs and social and financial benefits of humanresource development is presented. The approach includes three distinct components: a cost model, aneffectiveness model, and a cost-benefit comparison. The diverse interdisciplinary measures ofdevelopment progams are presented. A critical discussion of the role of human resource accountingand other accounting measures in evaluation is included. Examples from two organizations illustratethe measurement approach. An examination of program evaluation criteria highlights the effect ofcost-benefit analyses on the human resource development movement. Even the casual reader of the organizationalliterature has noted that working people havecome to be regarded as human resources. Thistransition is not simply a shift in terminology or arephrasing of traditional managerial values, rathera semantic reflection of the heightened awarenessof employees’ importance to the firm. Bakke(1961: p. 24) captured this philosophy by charac-terizing the human resource function as a distinctseries of managerial responsibilities and practicesdesigned to “‘achieve productive work and arrange for the maximumopportunity for expression of the full range of people’sabilities and capacities in that productive work.” Most recently, MiIIs (1975) employs humanresource development, HRD, as a acronymfor a wide range of behavioral science andmanagement technologies intended to improveboth the operating effectiveness of the firm andthe quality of working life experienced by itsemployees.Behavioral scientists have been the most active in this movement, designing tools for stimulatingand effecting organizational changes consistentwith those aims. They have experimented with jobenrichment, interpersonal training programs, parti-cipative management, and autonomous workgroups in a variety of organizations (see reviews inWork in America, 1972; Davis 8: Chems, 1975).Yet, as two recent reviews of the field report,there is a paucity of well documented assessmentsof these projects (Katzell et al, 1975; Srivastva et al., 1975). Instead, there are a series of casestudies, characterizing the experimental techno-logies and their implementation, but offering onlya minimal evaluation of their effects.Kahn (1974) and others have noted that, as aresult, there is little comparative evidence bywhich to evaluate the strength and generalizabilityof these various technologies. Moreoever, prac-ticing managers and decision makers, unguided bysystematic evaluations of past experiments, remainuninformed as to the cost and benefits of variousdevelopment programs when contemplatingexperimentation in their own organizations.Consequently, Ash (1973) and others havequestioned the current enthusiasm for humanresource development and quality of work. *This paper was prepared in connection with research being conducted in the Quality of Work Program, SurveyResearch Center. Institute for Social Research, University of Michigan and supported by the Ford Foundation (GrantNo. 7404430) and the United States Development Administration (Grant No. 99-06409377) and the NationalCommission on Productivity.179  180 PHILIP H. MIRVIS and BARRY A. MACY Accounting techniques are presently beingdeveloped which will test the merits of HRD.Alexander (197 1) has proposed cost -benefitanalyses of these programs. Pyle (1970) suggestsusing human resource accounting to compute areturn-on-investment in human resources. Cheek(1973) reports on cost-effectiveness evaluations ofpersonnel programs. This paper will examine thesetechniques and the more general role ofaccounting in HRD research. Admittedly, hccount-ing has a circumscribed role, for assessment ofthese projects has an interdisciplinary flavor,attracting the services of psychologists, socio-logists, and engineers, too. Nevertheless, somedistinct accounting contributions can be identi-fied, and this paper will report on the successesand limitations of the first applications.A FRAMEWORK FOR HRD RESEARCHHuman resource development efforts producemultiple effects: work settings may be altered,attitudes may be improved, behavior may bechanged, and financial benefits may accrue. Theresearch function is to measure and report theseeffects. Yet, Steele (1973) and others havecriticized research limited to program evaluation.They argue for research designed to generate andvalidate theory and principles. As such, theresearchers’responsibilities include not onlyidentifying program effects, but tracing theircausal lineage. Further, the researchers must assessthe costs and gains of these programs to guidefuture HRD decision making. This requires:1. An underlying theory of human resourcedevelopment which specifies the social andfinancial effects of HRD; 2. Broad measurement of the developmentprogram and a research design suited for causalinference; and3. A model of financial assessment for deter-mining the costs and benefits of HRD. A theory of human resource development The HRD research effort should not be left to aparticular researcher’s whim or convenience. Itmust be guided by an underlying theory ofprogram effectiveness and employee development.This enables the researcher to: (1) identifyvariables likely to be influenced by the HRDefforts, and (2) formulate and test hypothesesregarding the intervening processes that producethe effects. As such, assessment incorporates notonly the outcomes, but the process of HRD.HRD programs can concentrate on individualsand their work setting. Resources may be allocatedto produce structural changes in the nature ofemployee’s jobs, work assignments, supervision,and so on, creating a more challenging andstimulating work environment. These changes aresometimes coordinated with interpersonallyoriented programs,designed to facilitateemployee’s integration into the new workingenvironment. Both these activities are intended toalter employee’s perceptions of their jobs and theirexperienced work environment. They manifestthemselves through individual growth, setf-direction, satisfaction, physical and mental well-being. While this is a normative expectation,ignoring the quality and appropriateness of thedevelopment efforts and individual reactions toparticular programs, it underscores the contentionthat HRD can effect socially-oriented objectives.HRD can produce financial results, too.Employee’s behavior may be conceptualized as adecision making process. Employees make choicesabout being available to work (March & Simon,1958) and choices about how to perform at work(Lawler, 1973). Research indicates that employeeswill be more likely to come to work, rather thanbe absent or quit, if they obtain satisfaction fromtheir jobs (Porter & Steers, 1973). They are likelyto give more effort and better utilize new workingmethods if they expect to be rewarded for theirefforts (Vroom, 1964). Thus. as HRD programsalter working environmentsand influenceemployee’s perceptions of their jobs and theirsatisfaction, they should also effect employee’sdecisions with respect to job-related behavior.Resulting changes in absenteeism, turnover,accidents, and performance, in turn, will effect theoperating effectiveness of the firm. Again, this is anormative view, but illustrates how HRD canimpact financial objectives.The purpose of HRD assessment is to measurethe accomplishment of these social and financialaims. By incorporating and validating the under-lying theory, however, researchers can come todocument how these effects are produced andunder what conditions. Toward this end, longitu-dinal assessment must be undertaken within thecontext of a research design and expansivemeasurement approach.  HUMAN RESOURCE DEVELOPMENT PROGRAMS181 HRD research design and measurement To document that changes in interveningprocesses and outcomes are due to HRD activities,behavioral scientists have begun utilizing quasi- experimental designs in the field. Frequently, theyemploy comparison groups to assess the relativeeffects of the projects (see discussion bySherwood, Morris & Sherwood, 1975). In practice,however, a myriad of exogenous events oftencloud parallels between experimental and com-parison groups and it becomes difficult to tracechanges in employee’s attitudes and behavior toparticular development activities (see discussion byWeiss & Rein, 1970).In response, Lawler (1975) calls for inter-disciplinary assessment of these HRD projects overtime. By evaluating these projects using measuresfrom different disciplines, the researchers seekconvergent validity between multiple measures ofprogram effects (see discussion by Edwards,Guttentag & Snapper, 1975). This argues forformation of an interdisciplinary research team todocument both the process and outcomes of HRD.The immediate effects of the human resourcedevelopment project can be captured via on-siteobservation. Sociologists can assess changes in theformal structures of the organization such asdecision making and communication patterns.Engineers can evaluate improved work methodsand estimate their effects on the costs of goodsand services. Psychologists can document changesin employee’sattitudes and behavior. Theaccountant’s function, where possible, is to assessthe project in financial terms. A model of inancial assessment Ideally, the accountant can report the costs andbenefits of these projects. Figure 1 presents acost-benefit approach for assessing HRD projects.The figure depicts several different development HRD programsXX2X3X‘I4XsEffectiveness model programs, x1 -xs . There are three distinctaccounting activities (King, 1970) necessary forevaluating these programs: (1) a cost model needed for identifying the firm’s direct costs andlosses in productive time traced to the develop-ment effort ; (2) an effectiveness model used formeasuring and validating the effects of a projecton the work environment and employees’attitudes. behaviors, and performance and expres-sing these effects in financial terms; and (3) a synthesizing model needed to compare the costsand benefits of a program. Both social andfinancial goals can be contrasted with projectcosts. The synthesizing model is used to identifyeither the most cost-effective or most cost-beneficial HRD program. Both criteria can be usedwhen evaluating a number of HRD efforts.Armed with a theory of employee development,a broad array of measures, and a model offinancial assessment, researchers are prepared toevaluate a HRD program. The remainder of thispaper will consider the accounting tasks in thisendeavor,noting the particular measurementmethods and strategies and providing someillustrative examples.THE ACCOUNTING FUNCTIONS Identifying the costs of an HRD program It would seem evident that organizations wouldwant to know what they spend on human resourcedevelopment. Yet, in many organizations theirexpenditures are scattered in the budgetaryaccounts of various cost centers. Following theintroduction of human resource accountingd&aggregation guidelines (Brummet, Flamboltz &Pyle, 1968), however, an organization’s expense-per-employee can be computed.Human resource accounting, as envisioned byLikert (1961), treats these expenditures as an ~1 supervwon,cllmote. Employeebehawor benefltsSyntheslzlng model3 I Cost modelIFtxed,varlable,ond opportunity costsFig. 1. Cost-benefit model for HRD programs. I- voluatloncrlterco  182PHILIP H. MIRVIS and BARRY A. MACY investment in employees, indicative of their valueto the firm (Woodruff, 1970). The logic behindthis is straightforward, arguing that developmentcosts produce benefits beyond the currentaccounting period. However, a number ofresearchers have challenged the accuracy andutility of human asset valuation.Specifically, Lawler (1974) and others havequestioned the legal and ethical implications ofhuman asset valuation. In rejoinder, Flamholtz(1974) contends that employees’ services are theappropriate asset, and offers a stochastic modelvaluing predicted service time, a process analogousto valuation of capital investments. Mirvis & Macy(1976) note the absence of convergence betweendifferent valuation models. Flamholtz (1972)argues instead for surrogate measures of value andreports finding convergent validity betweenmeasures of replacement costs, performance, andcompensation and discriminant validity vs othervaluation methods. Nevertheless, these surrogatemeasures are hardly inviolate, failing to contendwith a non-interval salary structure and differencesbetween wages and marginal productivity.This is not to say that human resourceaccounting is not useful for HRD. Indeed, ifemployer’s expenses in these projects can becapitalized,it may help to stimulate futureexpenditures. Rather, it is the assignment of valueto individual’s services that raises problems forHRD research. To evaluate a specific HRDprogram,the researcher must distinguish theinvestment value-per-employee. If gross or netbook value is used, Rhode & Lawler (1973) notethere is no accounting for individual differences inskill acquisition and development. Beyond theseindividual differences, there is also the potentialfor group or situational variability. If economicvalue is used, there is a danger of circularity whencomparing the inve$ment with the financialreturn, for anticipated benefits are incorporated inthe initial valuation (see discussion by Dearden.1969). Given these troubling measurement issues,Macy & Mirvis (1976) argue that for research andassessment purposes, these expenditures should betreated as costs. As such, they can be contrastedwith future benefits using the cost-benefitcalculus.Notwithstanding these objections, many of thetools developed by human resource accountants canbe utilized in assessing the costs of human resourcedevelopment. Human resource accountants havedistinguished the fixed, variable. and opportunitycosts of HRD efforts. Variable costs include theconsultants’ fees and expenses associated withtheir activities. These costs vary depending on thetype of program and the intensity and duration ofthe development activities, and should be reportedin deflated dollar terms. The site incurs variablecosts, too, in the form of lost worker productivityand overtime. The project’s fixed costs includesalaries, wages, and benefits associated withemployees’ lost time, and the resulting unabsorbedburden. Opportunity costs reflect the profitcontribution of employees’ lost time. In addition,there is an estimable opportunity cost, the“opportunities foregone” (Rothenberg, 1975)which might have been realized had the HRDresources been directed toward other organiza-tional ends. Measuring the benejits of an HRD program As an HRD program takes effect, changesshould be observed in the work environment.Consequently, attitudes and, behaviors may bealtered and, as HRD theory proposes, social andfinancial benefits should result. Recently, severalaccounting methods have been advanced tomeasure these benefits in monetary terms. Financial benefits. Following an HRD program,major financial benefits could be realized inincreased productivity and cost savings associatedwith reduced absenteeism and turnover. Herrick(1975), recognizing this possibility, proposed agroup of nonproductive behaviors likely to beinfluenced by human resource developmentprograms. He further suggested reporting the costsavingsassociated with reductions in thesebehaviors.The expression of behavior in financial- terms isnot a novel idea. A classic article by Brogden &Taylor (1950) addressed the potential fordeveloping on-the-job performance criteria in costaccounting terms. Rather, it is the intention tosystematically identify, define, measure, andfinancially quantify the behavioral and perfor-mance outcomes of employees that represents anew undertaking. This shifts the emphasis fromassigning a value to employees, to assessing theeconomic consequences of their behavior.Macy & Mirvis (1976) developed thebehavioraleconomic methodology for defining,measuring, and costing the behaviors likely to beinfluenced by humanresdurce development  HUMANRESOURCEDEVELOPMENTPROGRAMS183 efforts. They provide three criteria for inclusion ofa behavior:1. It had to be defined so that it wassignificantly affected by the work structure;2. It had to be measurable and convertible tosignificant costs to the organization:3. The measures and costs of the behaviors hadto be mutually exclusive.Consistent with these criteria, behavioral defini-tions were devised, distinguishing behaviors such asabsence because of jury duty, funerals, maternity,and so on from those related to the workenvironment. Behaviors like alcohol consumptionwere omitted, for though potentially related toworking conditions, they manifest themselves inthe costly behaviors of absenteeism and tardiness.The research identified ten behavioral variablesin two broad categories: Participation membership. Absenteeism -Turnover - Strikes - Tardiness. Performance-on-the-job. Productionunderstandard - Qua&y under standard - Grievances -Accidents - Unscheduled downtime and machinerepair -Material utilization and inventoryshrinkage.Coupling behavioral definitions with standardmeasures developed from governmental reportingrequirements and accepted organizational andaccounting practices provided the behavioralindices from which to allocate the costs to a firm.The costs were conceptualized in two fashions.The first provided a distinction between outlayand time costs, the second between fixed, variable,and opportunity costs. These reflect direct andindirect costs and lost profit potential. Anexample of a variable cost would be paid overtimetraced to absenteeism; a fixed cost would besalaries plus benefits of personnel involved inreplacing the absent worker, while an opportunitycost would be the profit lost during thereplacement process. These distinctions are impor-tant as only variable costs are directly related toincidents of nonproductive behavior. Fixed andopportunity costs will probably vary only withincremental changes in those incidence levels.Using this methodology, a researcher canidentify the financial outcomes of a humanresource development project. Variable savingsmight include improved marginal productivitythrough increased product quality and quantity,limited overtime, reduced supply and materialconsumption, and less unscheduled maintenance.Further, wages and other expenses due toabsenteeism, accidents, and grievances could bedecreased. These would include the expense ofmaintaining a replacement work force. Potentialfixed savings could be realized if some of theservice demands placed on the personnel, indus-trial relations, safety, and quality control depart-ments were reduced. Opportunity savings might berealized if supervisor’s time, formerly spent inreplacing absent employees or turnovers, could beput to more productive use. Behavioral-economicmeasurement provides the methods for high-lighting these cost savings.However, this approach, like human assetaccounting, has inherent measurement difficulties.While thereturn-on-employee-investment islimited to assessing changes in the expected servicelife of personnel,the behavioral-economicmeasures include a more complete accounting.offinancial results. Moreover, while individual andsituational differences in skill acquisition anddevelopment following a project cannot beaccurately assessed using a singular retum-on-investment measure, a series of benefit measurescan reflect that development through behavioralchanges. Nevertheless, like asset models, thismethod incorporates estimations of lost produc-tivity, learning curve costs, supervisory trainingtime, etc. While the accuracy of these costs can bechecked through time-sampled observation, someestimation is always included. Further, some ofthe dollar components are averaged across personsor incidents of behavior, blurring some of theuniqueness of individual actions. While thismethodology can be used for identifying thefinancial effects of HRD, social benefits can beproduced, too. Accounting methods have recentlybeen proposed to estimate the financial gainassociated with these social benefits.Social benefits. The effects of an HRD programcan be assessed using traditional psychological andsocial indicators. For example, improvements inthe working environment can be assessed using jobobservations (Jenkins et al., 1975). Some firmshave conducted medical examinations to assess theeffects of HRD on employees’ health. Most often,however, these social effects are measured usingattitude questionnaires. Myers & Flowers (1974)propose to financially assess employees’ attitudes
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