Lev Schwartz Model
Lev Schwartz Model
Lev and Schw artz’s model is based on human capital theory. which recognizes
human capital as one of several forms of holding wealth for a business enterprise,
such as money, securities and physical capital. In this model of accounting, human
capital is treated like other forms of earning assets and thus is an important factor
explaining
and predicting the future economic growth of the company.
According to this model, the value of human capital embodied in a person who is ‘y’
years old, is the present value of his/her future earnings from employment and can
be calculated by using the following formula:
r = discount rate
The basic theme of Lev, Schwartz model is to compute the present value of the
future direct and indirect payments to their employees as a measure of their human
resource value. While doing so, the common assumptions set by the Indian
companies are the pattern of employee compensation, normal career growth, and
weightage for efficiency. Moreover, companies adapt this model to their practical
use different discount rates for ascertaining the present value of future cash flows.
HRA IN INFOSYS
In the financial year 1995-96, Infosys Technologies (Infosys) became the first
software company to value its human resources in India. The company used the Lev
& Schwartz Model and valued its human resources assets at Rs 1.86 billion. Infosys
had always given utmost importance to the role of employees in contributing to the
company's success. Analysts felt that human resources accounting (HRA) was a
step further in Infosys' focus on its employees. Narayana Murthy (Murthy), the then
chairman and managing director of Infosys, said: "Comparing this figure over the
years will tell us whether the value of our human resources is appreciating or not.
For a knowledge intensive company like ours, that is vital information."
•The additional earnings on the basis of age group were also taken into account.
The method is as follows.
•All the employees of Infosys were divided into five groups, based on their
average age .Each group’s average compensation was calculated.
•Finally the total compensation of each group was calculated. This value was
discounted at the rate percent per annum which was the cost of capital at
Infosys to arrive at the total human resources of Infosys.
2)The company could also use this information internally to compare the
performance and productivity of employees in various departments.
6)When human resources gets quantified it gave Infosys investors and other
clients true insights into the organization and its future potential. It
restored faith amongst shareholders.
1) Companies use various HRA models and comparing two companies using two
different models was difficult.
2)Companies could also misuse HRA to enhance their image .A company could
use this image to prop up its image in the investors mind, and change
assumption to keep the values positive.
4)The model was based on assumptions and was subjective. Hence figures
could be totally ambiguous.
5)Some employees may be underestimated since a numeric figure did not clearly
quantify whattheir true capabilities are