The relationship between finance and HR is vital to effective human capital management.
Our finance leader was struggling, as many executives do, to comprehend the incredible costs associated with aligning financial support to strategic human capital management. Providing a budget that responsibly supports the business and accounts for the increasing costs of human capital can be daunting.
Angry and exasperated gasps resonated throughout the conference room. An exhausting review of the benefits program for the upcoming year was coming to a heated end. "Our finance leaders should own it," expressed the executives of this $1 billion renewable energy organization. "How much more are we spending this year on benefits?"
There was no way we were going to convince the executive team to spend another dime without having a better understanding of why we shouldn't provide "much less."
The HR team was losing the human capital management strategy battle. We were facing a 20 percent increase in these costs and were on the way to the final topic of the afternoon — our annual bonus program. This multimillion dollar program could be on the chopping block next. We'd approved a modest merit pool for the organization reflecting the recent decline in operational and financial performance. It was surprising that had made it through at all.
Stepping out of the discussion for a breath of air and to check in with a regional executive, I received news that made my blood boil even more. Our top plant manager on the succession plan (and highly regarded in the industry) had just accepted an offer with a competitor. The reasons for the notice — high turnover in the market made it difficult to sustain operational performance, a higher salary, benefits that were "so much better," and the lead engineer that left us a few months ago "raves" about his role there. Our competition had figured it out and was winning the human capital battle.
Recently, all of our top talent had been targeted, recruited and, for the most part, hired away. Our human capital had declined dramatically. The cost implications had to be outlined. We were hemorrhaging talent. The value of these engineers was not just the monthly pay they received; it was also the years of technical training, retaining their knowledge in junior staff and the best practices they shared across the organization. In the past month we had lost more than 200 years of knowledge. The human capital loss was hard to measure.
Pulling the finance leader aside, I expressed my concern over the high turnover and desire to dig into the data. We needed to understand the problem differently. My role as the CHRO was to help this team realize the implications of strong programs that could retain our talent. The loss of these skilled professionals meant a loss of efficient operations and increased cost to meet the same standards. "Let's take another pass at this review when we can demonstrate rewards we would gain by partnering on a strong total rewards program," I said.
Strategic Human Capital Management
In the review of the organization's employee data, we focused on turnover and the impact that it had on the organization. As a finance leader, you may be inclined to look at the bottom line number and not take into account what the cost of turning over human capital means to the organization. At this organization, we found we had an average cost of $5,000 for each employee that left the business. With the high percentage of turnover and the increased number of tenured staff leaving, we calculated that it cost our business more than a $1 million in human capital. The increase in benefit costs that year paled in comparison.
A strong relationship with your CHRO can help build the case for effective human capital strategy. With an organization of just 1,200 employees, we needed that $1 million to be spent in more effective ways, and the direct impact from increasing our spend on benefits was recognized by our team. The CFO-CHRO relationship is vital and, when it's working well, the organization will benefit.
Learn more about the benefits of human capital management.