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.
Lev and Schwartz (1971) proposed an economic valuation of employees based on

the
 present value of future earnings
 probability of employees’ death/separation/retirement
This method helps in determining what an employee’s future contribution is worth

today.
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:
E(Vy) = Σ Py(t+1) Σ I(T)/(I+R)t-y

Where:
E (Vy) = expected value of a ‘y’ year old person’s human capital
T = the person’s retirement age
Py (t) = probability of the person leaving the organisation
I(t) = expected earnings of the person in period
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
requirements by making necessary alterations. For instance, different organisations
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."
Infosys used the Lev and Schwartzmethod to value Human Resource
According to this model the present value of future earning capacity of an

employee, from the time of joining the organization till retirement was estimated.
Infosys used this model based on the following assumption
•An employee’s salary package included all benefits, whether direct or

otherwise, earned both in India and in a foreign Nation.
•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.
•Infosys also calculated the compensation of each employee at retirement by

using an average rate of increment.
•The increments were based on industry standards, and the employee’s

performance and productivity.
•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.
Benefit experienced By Infosys by valuing its human

resources.
1)Infosys could determine whether its human asset was appreciating overthe years
or not. This information was important for the company as itssuccess depended
solely on the knowledge of the employees.
2)The company could also use this information internally to compare the
performance and productivity of employees in various departments.
3)HRA also helped Infosys to decide the compensation of employees. The

company ensured that it compensated each employee according to his /her net
worth.
4)HRA also helped Infosys in indentifying and retaining valuable employees.
5)It helped organization to take managerial decisions based on theavailability and

the necessity of human resources.
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.
7)BY adopting HRS the following information could be obtained

•Cost per employee
•Human capital investment ratio
•The amount of wealth created by each employee
•The profit created by each employee.
•The ratio of salary paid to the total revenue generated.
To sum up HRA in Infosys helped in identifying the right person for the right job,
based on theperson’s specialized skills, knowledge, capabilities experience, etc.
Disadvantages for the evaluation of human capital.
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.
3)There could be a concern of the creditability of the numbers reported
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

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Lev & Schwartz Model

Lev and Schwartz (1971) proposed an economic valuation of employees based on

This method helps in determining what an employee’s future contribution is worth

E(Vy) = Σ Py(t+1) Σ I(T)/(I+R)t-y

E (Vy) = expected value of a ‘y’ year old person’s human capital

T = the person’s retirement age

Py (t) = probability of the person leaving the organisation

I(t) = expected earnings of the person in period

requirements by making necessary alterations. For instance, different organisations

Infosys used the Lev and Schwartzmethod to value Human Resource

According to this model the present value of future earning capacity of an

•An employee’s salary package included all benefits, whether direct or

•Infosys also calculated the compensation of each employee at retirement by

•The increments were based on industry standards, and the employee’s

Benefit experienced By Infosys by valuing its human

3)HRA also helped Infosys to decide the compensation of employees. The

4)HRA also helped Infosys in indentifying and retaining valuable employees.

5)It helped organization to take managerial decisions based on theavailability and

7)BY adopting HRS the following information could be obtained

Disadvantages for the evaluation of human capital.

3)There could be a concern of the creditability of the numbers reported

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