What Are Human Resources Controls?

Human Resources Controls are controls that focus on employee behavior, employee
performance and developing and upholding policies and procedures. They are part of human
resource management, which serves to plan for, recruit and train employees to meet
organizational needs and respond to changes in the external environment.

There are several human resources controls used in human resources management to meet
organizational goals:

 Performance appraisals
 Discipline policies
 Employee observations
 Employee training

Let's look at how Mr. Sheckles, the manager of Dollar Bank, uses human resources controls to
hire, train and retain the right people. Employees perform many different jobs at the bank.
There are bankers, accountants, tellers, secretaries, mailroom clerks and janitors all working
together to meet organizational goals.

Performance Appraisals
The first Human Resource Control we will focus on is the performance appraisal. A
Performance Appraisal is the process that evaluates an employee's performance against the
standards set by the organization, documents the performance and yields measurable
information that can be used to provide valuable feedback to the employee.

There are several different types of performance appraisals, each with pros and cons. Let's
explore a few to see which system might work best for each department at Dollar Bank.

Rating Scales

Rating Scales are evaluation systems that assign the employee a rating or a score for
performance and behavior. This appraisal system is easy to understand and can be done
quickly. Mr. Sheckles utilizes rating scales for employees like bank janitors, money counters
and landscapers. This method works well for this level of employee because their positions
are task-oriented rather than people-oriented. He looks for specific behaviors, like attendance,
and performance on tasks like cleaning desks and counters.

However, there is a downside to this type of appraisal system. Since is it based on an absolute
ranking, it doesn't take situational factors into consideration. For example, an employee who
has been absent from work for a week due to an illness may receive a low ranking on
attendance but have a very good excuse for the absence.

Narrative Appraisal

The Narrative Appraisal is an essay-type assessment that offers positive and negative
comments about an employee. While this system of evaluation contains much information for
the employee to use to better do his job, it is also written by one person. This can make it very
subjective and open to bias. Also, this type of appraisal relies on the writer's ability to express
his appraisal facts clearly and fairly. However, it still tends to be well suited for top level
management because their work is not task-based in the same way as the work of a landscaper
or bank cleaner. Top-level managers are hired to think and strategize.

However, not all top-level managers will be pleased with their appraisal. An employee may
feel that it lacks specific details or a comprehensive list of appraised behaviors and
performances. Other managers may feel that the information isn't accurate or fair.

360 Degree Appraisal

The 360 Degree Appraisal is an appraisal done on an employee by people both inside and
outside the organization, like colleagues, customers, subordinates and supervisors. Because so
many people are involved in the employee appraisal, it can provide a diverse array of
feedback.

At Dollar Bank, the 360 Degree Appraisal is beneficial for tellers, customer service agents
and receptionists. Because the workers deal mostly with customers, Mr. Sheckles believes this
will give him a better assessment of employee performance because the evaluation includes
the opinions of customers, amongst others.

However, not all parties involved have the best interest of the company in mind. Even worse,
the appraiser may have the best interest of the employee at heart, but may not be aligned with
the company's interest. And the appraisal may not always be accurate because not everyone
involved understands the mission and vision of the organization.

Discipline Policy
Now, let's explore our second type of control, discipline policy. Discipline Policies are
policies that address employee behaviors and performance. Discipline policies involve
corrective action steps to redirect behavior or enhance the performance of employees who are
not meeting goals.

Type 'A' Offenses:

First Offense: Verbal warning; note in employee file

Second Offense: Written warning; note in employee file

Third Offense: Two-day suspension; note in employee file

Fourth Offense: Termination

It is important that each group or type of offense be clearly stated because different discipline
for different offenses is necessary and will vary by severity. For example, calling in sick the
day after a holiday is a Type 'A' offense at Dollar Bank. It should not carry the same penalty
as drinking on the job.

Mr. Sheckles did not always have a discipline policy. In the early days of Dollar Bank, Mr.
Sheckles allowed employees plenty of slack. One of his biggest issues then was employee
absences. They were out of control. In response, he put a progressive discipline policy into
place. Now, employees understand the offense and the corresponding punishment.

Employee Observation
The third type of control is employee observation. An Employee Observation is a physical
observation of employee performance. Observations occur while the employee is performing
his or her work tasks. The manager may observe the employee throughout the workday or
observe only certain tasks to determine whether the employee is proficient in performing the
job. At Dollar Bank, this can be done by shadowing a banker while he assists a customer with
opening a new checking account. By observing the actual work while it is being performed,
Mr. Sheckles will be able to provide feedback on positive and negative performance based on
his observations.

While employee observations are useful to determine whether performance is up to par, it can
also be very stressful for the employee being observed. The employee may not know exactly
what the observer is looking for. It is also nerve-racking because employees may feel that
their every move is being documented. One small mistake could prove disastrous to their
evaluation.

Training
The final type of Human Resource control is training. Training is a process of identifying
needed skills to perform a job or task and then developing a plan to teach the skills to
employees. Training can be in the form of skills training and professional development.

Skills Training is training employees to perform a certain task by teaching them the
necessary skills. For example, tellers at Dollar Bank may learn how to use a new computer
system or a new telephone system.

Professional Development Training is a series of learning opportunities for professionals to

enhance their ability to perform at their jobs. To gain professional development, bankers at
Dollar Bank may attend a seminar to learn a new tax law.

Training can be done in a few ways. The most common ways are:

 On-the-job training
 Self-study training
 Classroom training

On-the-Job Training involves teaching an employee how to perform a specific task,

allowing the employee to practice the task and assessing the outcome, all within the work
environment. This is a good way to train tellers on how to count their cash drawers or to teach
cleaners how to clean the bank. However, it is time-consuming and takes employees away
from their jobs to train others. It can also temporarily affect customer service.

Self-Study Training involves providing employees with training materials and allowing the
employee to learn on their own. This is a time-saver and is less costly than using a more
senior employee for training. It also allows the new employee to learn at his or her own pace.
However, the employee may not interpret the training materials correctly, and an
inexperienced employee may not be able to apply the learning to their specific job.

Classroom Training involves assembling employees in a classroom environment with an

inside or outside trainer. This is a good way to gather many employees in one place to learn a
new skill. However, it can disrupt the workflow due to their absence from the job. Also, the
trainer may not be available after the training to monitor and control outcomes.

Lesson Summary
In summary, there are various Human Resource Controls used as part of the management
process. We focused on employee appraisals, discipline, observations and types of training.

Performance Appraisals involve a process that evaluates an employee's performance against

the standards set by the organization, documents the performance and yields measurable
information that can be used to provide valuable feedback to the4 employee. Common types
of performance appraisals include rating scales, narrative appraisals and 360 degree
appraisals.

Discipline policies are policies that address employee behaviors and performance.
Progressive discipline is a common discipline policy that involves a gradual system of
punishment intended to redirect employee behavior.

Employee Observations are physical observations of employee performance. Observations

may occur throughout the day or while the employee is performing specific work tasks.

Finally, training is a process of identifying needed skills to perform a job or task and then
developing a plan to teach the skills to employees. Training can be done on-the-job, in a self-
study program or in a classroom environment.
Financial Accounting
In order to understand financial controls, it is important to first understand the role of
financial accounting in an organization.

Financial accounting keeps track of and reports an organization's financial transactions.

There are standard guidelines used to record, summarize and present financial reports or
statements. The GAAP, or generally accepted accounting principles, are one such set of
guidelines accountants follow.

Financial accounting focuses on providing information for people outside the organization
like shareholders, investors and creditors.

Financial Controls
Financial controls ask the question, 'So, how are we doing financially?' Financial controls
are controls over financial activity to ensure that the desired return on investment will occur.
There are several financial controls that are used to determine how well an organization
controls its financial transactions:

 Income Statement
 Balance Sheet
 Financial Audit
 Financial Ratio Analyses
o Liquidity Ratio
o Profitability Ratio
o Debt Ratio
o Operating Performance Ratio
o Cash Flow Indicator Ratio
o Investment Valuation Ratio

Financial Statements
Financial statements are mainly used to understand current and future business conditions. It
all begins with the accounting cycle. The accounting cycle involves tracking, organizing and
recording financial transactions. These financial transactions are used to create different
financial statements. Each financial statement serves a different purpose. Let's explore several
different financial statements and examples to gain a better understanding of the purpose of
each.

Income Statement
Income statement - also known as a profit and loss statement - is a financial report of an
organization's revenues and expenses over a given period of time, generally a month, a quarter
or a year. The income statement is calculated by using the formulas:

Revenue - Cost of Goods Sold = Gross Profit/Loss

Gross Profit - Expenses = Net Profit/Loss

Let's look at a working example of an income statement for P & L Pie Shoppe for the period
of one year, starting January 1, 2011, and ending on December 31, 2011.

Sales: dollar amount of sales for a given period.

Cost of goods sold: how much it costs to make the above sales.

Beginning inventory: how much money is invested in the inventory or products needed to
make the pies.

Add: purchases: the amount of money spent on additional inventory purchased.

Total: the total value of inventory.

Less: Ending inventory: the value of inventory left at the end of the recording period.

Cost of goods sold: total dollar amount it costs to make the sales after adding inventory and
deducted what's left in inventory.

Gross profit: total profit before business expenses are deducted.

Expenses: fixed and variable expenses or costs to run the pie shop (for example, marketing,
depreciation, insurance, taxes, rent and wages).

Total expenses: total amount of expenses to run the pie shop.

Net income: the bottom line or gross profit minus expenses.

In this example, P & L Pie Shoppe made a net income of $400 for the recording period.
Simply stated, we started with revenue from total pie sales, deducted the costs involved in
making the pies. This is the gross profit. Then, we deducted the fixed and variable expenses
from the gross profit to reveal the net profit. This means, we took all expenses incurred in
making the pies and subtracted it from the sales revenue from selling the pies. At the end of
the year, $400 profit was made in the pie shop.

Balance Sheet
A balance sheet is a statement of the overall financial status of an organization at a fixed
point in time. The balance sheet contains financial data as it relates to assets, liabilities and
shareholders' equity. Assets are things an organization owns like equipment, inventory and
cash, investments, money markets and government securities. Liabilities are what an
organization owes like current short-term debt and long-term debt. Current short-term debt
may be monies owed to vendors for supplies. Long-term debt may be a mortgage on a
building or a loan on equipment. Shareholders' equity is a shareholder's claim to assets after
debts have been paid. Shareholders' equity may be common stocks or preferred stocks. The
balance sheet is calculated using the following formula:

Assets = Liabilities + Shareholders' Equity

The balance sheet lists everything the organization owns, owes and the value of the owners'
stake in the company.

Let's look at a working example of a balance sheet for P & L Pie Shoppe for the period of one
month, starting on December 1, 2011, and ending on December 31, 2011.

Assets:

 Non-current assets: things the organization owns or long term investments (land and
building, equipment, investments).
 Current assets: assets that can be converted to cash, like accounts receivable and
inventory (inventory, accounts receivable - monies owed to the organization - cash).

Total assets: Non-current assets plus current assets

Equity and Liabilities:

 Shareholders' equity
o Capital
 Non-current liabilities: like a loan with 5% interest.
o Bank loan
 Current liabilities: monies owed to creditors by the organization.
o Accounts payable

Total equity and liabilities: shareholders' equity, non-current liabilities, current liabilities.

Financial Audits
A financial audit is a verification of the financial statements of an organization. An audit is
an opinion by an auditor that expresses whether the organization is accurately reporting its
financial data in accordance with financial reporting procedures.

The financial audit is done in four steps:

1. Planning and risk assessment

2. Testing of internal controls
3. Substantive procedures
4. Finalization

Planning and risk assessment is done during the fiscal year, or a 12-month business period,
and involves the auditors gathering data. The more data the auditor has in the industry and
regulations governing the accounting practices of the organization, the more thorough the
audit will be.

Testing of internal controls involves analyzing the internal controls an organization has in
place. This means the auditor will investigate the process for all transactions like deposits,
posting of financial information, accounts receivable and payable. This step is used to track
the activity within the organization's accounting department. The best way to do this is to take
a random sampling of the various documents for analyses.
Substantive procedures involves verifying the actual financial transactions by verifying the
actual documents. This step takes the most time because it requires the auditor to review large
amounts of documents of all types.

Finalization involves creating a report for management that includes the auditing procedures,
the audit process and the support for the findings.

Financial Findings
Financial ratios compare financial statement items with other financial statement items to
reveal a relationship between the two. There are several financial ratios. We will focus on the
following six categories of ratios.

 Liquidity measurement ratio

 Profitability ratio
 Debt ratio
 Operating performance ratio
 Cash flow indicator ratio
 Investment valuation ratio

Liquidity measurement ratio is the measurement of an organization's ability to pay off

short-term debt. It measures whether an organization has enough liquid assets to pay for the
debts it incurred.

Profitability ratio is the measurement of how well an organization utilizes its resources to
turn a profit and return shareholders equity. It measures how profitable an organization is
when all resources are factored in.

Debt ratio is the measurement of the amount of debt an organization has compared to its
assets. It measures how much money an organization has as it relates to its profits. This is
very much like a debt to income ratio in personal finance.

Operating performance ratio is the measurement of how an organization turns its assets into
revenue. It measures how efficiently an organization's systems are in turning what they have
to use into a profit like converting sales to cash.

Cash flow indicator ratio is the measurement of how much cash flows through an
organization and the origin of the cash. It measures how much cash is generated from
different areas of the business. This ratio provides insight into the financial health of the
organization.

Investment valuation ratio is the measurement of the value of an organization to a potential

shareholder or stock buyer. It measures stock performance and earnings. This information is
important to an investor who wants to invest in the organization.

Lesson Summary
In summary, financial controls are controls over financial activity to ensure that the desired
return on investment will occur. There are several financial controls managers use to analyze
an organization's financial health.

The income statement is a financial report of an organization's revenues and expenses over a
given period of time, generally a month, a quarter or a year. Its purpose is to show how
revenue is converted into a net profit or a bottom line. The balance sheet is a statement of the
overall financial status of an organization at a fixed point in time. Its purpose is to provide a
clear snapshot of an organization's financial health as it relates to assets and liabilities.

The financial audit verifies the accuracy of all financial reporting in an organization as it
relates to regulations and shareholder equity. Its purpose is to analyze and verify all financial
data.

The financial ratios compare financial statement items with other financial statement items to
reveal a relationship between the two. Its purpose is to determine whether information being
compared has an interrelationship. Financial controls are important and must always be in
check. By always keeping financial controls in check through continual evaluation, the
financial health of the organization will always be strong.
The Evolution Of Classical Management Theory

The Industrial Revolution was a time where innovation really began to change the way that products
were produced and sold. The invention of machines to produce goods in the 19th century drastically
improved productivity, which in turn lowered the cost to the consumer. The lower price resulted in a
greater demand for products and thus a greater need for more factories and workers.

As factories increased in number, managers continued to search for ways to improve productivity,
lower cost, increase quality of their products, improve employee/manager relationships and increase
efficiency. The focus shifted from using machines to increase productivity to how they could increase
employee productivity and efficiency. When they did this, they began to notice some new problems
inside their factory systems. Employees were dissatisfied with their current working conditions, and
many lacked the necessary training for how to do their work efficiently. Managers then began to
formulate and test possible solutions, one of which was to find the best possible way for workers to
perform and manage their tasks. The research resulted in the development of classical management
theory.

The Classical Manager

To better understand classical management theory, let's take a peek into this 19th century factory
and see what's going on. Ahh, there he is: Calvin the Classical Manager. Let's look a bit closer and see
what he's up to. It looks like Calvin is working on a work-flow chart. It seems he's trying to figure out
the best possible way to complete work at his factory.

As a classical manager, Calvin must have a good understanding of business functions at his factory so
that he can structure the organization according to task and assign workers in view of that. For
example, I can see that Calvin has broken down the process for producing the product this factory
makes into three stages. In each stage, he has listed out what work needs to be completed and the
type of skills a worker will need to complete that work. Now all Calvin has left to do is assess his
current workforce for the appropriate individuals and place them in the suitable job role. If training is
needed, Calvin will need to identify that so that he can ensure his workers understand the manner in
which the work should be completed.

Expansion Of Classical Management Theory

Classical Management theory expanded throughout the first half of the 20th century as managers
continued to look for ways to deal with issues surrounding industrial management. During this time,
three separate branches emerged - bureaucratic management, classical scientific
management andclassical administrative management - each unique in its approach towards finding
the best possible way. These three branches will be explained in more detail in the following lessons.
Even though several management theories have emerged since the development of classical
management theory, many contemporary organizations rely on the classical management approach
today with great success.

Lesson Review

Let's review. Classical management theory was introduced in the late 19th century during the
Industrial Revolution. At the time, managers were interested in findings ways to improve
productivity, lower cost, increase quality of their products, improve employee/manager relationships
and increase efficiency at their factories. The main concern for classical management theorists is
finding the best possible way for workers to perform and manage their tasks. Classical management
theory is comprised of three separate branches - bureaucratic management, classical scientific
management and classical administrative management - each unique in its approach towards
finding the best possible way. Many of today's organizations continue to rely on the classical
management approach.
At a time when organizations were run like families, Max Weber looked for ways to bring a more
formalized structure to organizations. Weber created the idea of bureaucratic management where
organizations are more authoritative, rigid and structured. This lesson will describe the development
of bureaucracy and common characteristics of bureaucratic organizations.

Note: for the purposes of this video, the instructor has chosen to use the American pronunciation of
Max Weber's name.

The Development Of Bureaucracy

In the late 1800s, Max Weber criticized organizations for running their businesses like a family, or
what some of us might refer to as 'mom and pop'. Weber believed this informal organization of
supervisors and employees inhibited the potential success of a company because power was
misplaced. He felt that employees were loyal to their bosses and not to the organization.

Weber believed in
a more formalized,
rigid structure of
organization
known as
abureaucracy. This
Max Weber believed in a more formalized, rigid structure of organization.
non-personal view
of organizations followed a formal structure where rules, formal legitimate authority and
competence were characteristics of appropriate management practices. He believed that a
supervisor's power should be based on an individual's position within the organization, his or her
level of professional competence and the supervisor's adherence to explicit rules and regulations.
To better understand the idea of bureaucracy, let's look at some of its characteristics.

Characteristics Of Bureaucratic Organizations

A well-defined formal hierarchy and chain of command distinguishes the level of authority within
an organization. Individuals who hold higher positions will supervise and direct lower positions
within the hierarchy. For example, Megan the Manager supervises a team of four sales
representatives. Megan's position within the organization as a supervisor gives her authority over
those four sales representatives to direct and control their actions to ensure organizational goals
are met.

Management by rules and regulations provides a set of standard operating procedures that
facilitate consistency in both organizational and management practices. For example, when an
employee is sick and cannot make it into work that day, he or she must call out to their direct
supervisor. If one of Megan's sales reps is sick, they are expected to call her directly to inform her
of their absence. Any employee who fails to do this will be subject to termination. All of Megan's
employees are expected to follow this rule, and Megan is expected to enforce this rule equally
among her employees.
Division of labor and work specialization are used to align employees with their organizational
tasks. This way, an employee will work on things with which he or she has experience and knows
how to do well. For example, let's say two of Megan's sales reps are experienced in selling
products to vendors in the western region of the state due to their extensive experience working
in that area. Megan would then put those two employees in charge of that specific region and
would place the other two sales reps in the eastern region.

Managers should maintain an impersonal relationship with employees to promote fair and equal
treatment of all employees so that unbiased decisions can be made. This is not to say that Megan
should not be friendly with her employees; rather, Megan should be professionally friendly with
her employees and work to maintain a clear separation between business and pleasure. For
example, Megan should refrain from spending time outside of work with her employees. While it is
acceptable for the four sales reps to meet up after work for happy hour and have a drink, Megan
should excuse herself from participating in such an occasion.

Competence, not personality, is the basis for job appointment. An employee should be chosen,
placed and promoted within an organization based on his or her level of experience and
competency to perform the job. For example, if Megan found room for a fifth sale rep on her
team, she should look to recruit and place a new sales rep based on a person's ability to
successfully perform the duties of the position. Hiring someone she is friends with, for example,
would be a poor decision by Megan, as there is no guarantee her friend is a competent sales rep.
Formal written records are used to document all rules, regulations, procedures, decisions and
actions taken by the organization and its members to preserve consistency and accountability. A
policy and procedures manual is a good example of formal records.

Lesson Summary

To review, Max Weber disliked the idea of managing an organization informally. He believed in a
much more rigid, formalized structure known as a bureaucracy. The characteristics of a
bureaucracy include: 1) A well-defined formal hierarchy and chain of command; 2) Management
by rules and regulations; 3) Division of labor and work specialization; 4) Managers should maintain
an impersonal relationship with employees; 5) Competence, not personality, is the basis for job
appointment and 6) Formal written records.