Finance Is from Mars, HR Is from Venus

One of the dangers of having HR get too close to finance, of course, is that there may be no one left to advocate for employees. One large company recently made a decision to cut retiree medical benefits in order to meet short-term bonus targets on the strength of the CFO's argument that it would save millions of dollars, says Johnny C. Taylor Jr., chairman of the Society for Human Resource Management (SHRM) and senior vice president, human resources, for LendingTree.com. "The HR executive was trying to say, 'It's legal, but it's the wrong thing to do, and it sends the wrong message to current employees,' but she wasn't strong enough," says Taylor.

And even though about 60 percent of HR chiefs report to the CEO while only about 12 percent report to the CFO, according to a recent online survey by SHRM, "the CFO is often deemed to be right when it comes to costs, no matter where those costs come from," Taylor says.

On the flip side, many experts say that CFOs are becoming more broad-minded. "Particularly in those orgs that have been hit by high turnover, CFOs know they have to rein in costs, but they generally recognize that they can't do that irrespective of employee morale issues," says Sibson's Kochanski.

Martha Boudos, who was head of HR for Chicago-based Morningstar before becoming the firm's CFO, agrees: "I don't think that good CFOs can really divorce the numbers side from the people side." In the end, "the hit to employee morale may be worth the other benefits you stand to gain," she adds, but "you have to at least be aware of what you're giving up."

What Do Employees Want?
One of the benefits of good collaboration between finance and HR is the opportunity to better target spending at what employees actually want, rather than what other companies are offering. Many companies are taking a harder look at employee satisfaction versus the cost of the benefit to the company, with the goal of finding cheap but effective substitutes.

"We're constantly asking, 'What is the best way to increase shareholder return while maintaining employee value?'" says First Horizon's Meyerrose. For example, the company has experimented with several day-care benefits for employees, based on the widely perceived popularity of such programs. However, Meyerrose's research revealed that employees didn't value on-site day care very much, or the backup care for sick children the company tried to provide through a local hospital. Now, the bank has dropped day-care provisions altogether and instead allows employees to work flexible hours, including four 10-hour days per week.

Consultants say that as companies get more sophisticated about analyzing their internal data, they are more likely to move away from benchmarking and look more closely at the unique needs of their workforce. "More companies are asking, 'What's low cost and critical to the employees we need that we can provide?' versus saying, 'We'll do what the market is doing,'" says Kochanski.

As for return on investment, even finance executives say you can only take the analysis so far. Dennis Hernreich, executive vice president, COO, and CFO of Casual Male Retail Group Inc., considers the ROI of HR "an oxymoron." "If sales increase in a store, it's very difficult to isolate whether that related to a new sales manager, or a new product, or something else," he says. Instead, the growing retail chain looks at about 10 operating metrics at a store that give it a more dimensional view of managerial effectiveness.

"We measure a lot of things, but I don't try to create an answer that says my human capital is worth $500 million," agrees Unilever's Wilhelm. "To actually discern how much of the intangible value is attributable to people is a fruitless exercise. If I knew the answer, I don't know what I would do differently."

Alix Nyberg Stuart is senior writer at CFO.

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Intangible Worth

UK Companies Must Now Assess the Value of Their Employees.

Considering the difficulties of measuring the value added by employees, most CFOs are glad to avoid the issue altogether. As of last April, however, firms listed in the United Kingdom must provide more information about their workforces (and other intangible assets) in the new "operating and financial review" (OFR) sections of their annual reports. That means in the next round of filings, regulators expect to see metrics around areas like employee recruitment, retention, safety, training, development, and morale, according to recent guidance by the UK's Accounting Standards Board.

Regulators have so far said that each business must determine its own most relevant metrics rather than prescribe specific ones. But that may be easier said than done. A survey of 295 senior managers by the UK's Chartered Management Institute in Oxford found that only 20 percent were able to state what their plans were for reporting on human capital under the new OFR regime. What's more, many companies admitted they lacked metrics for assessing the value, rather than the cost, of their staff. Less than half of the managers surveyed said their companies were able to measure the contribution employees make.

Will U.S. companies be required to account for human capital? Not anytime soon: the issue was removed last year from the current research agenda of the Financial Accounting Standards Board. — Alix Nyberg Stuart and Trevor Clawson

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