Do Finance Practices Hinder Optimal Hiring?

Corporate-performance and accounting systems don't take into account everything that's important about some hiring initiatives.
John BoudreauAugust 2, 2011

Consider how your organization would react to the following situation: You are recovering from the economic downturn, and your strategic forecasts suggest growing demand for your products and services in the long run, but cost control remains important.

Your strategic planning includes both financial and human-capital issues, and that plan suggests you will need additional technical professionals (such as engineers, software designers, R&D scientists, etc.) to design future products or services. Let’s use engineers in this example, but this applies to most technical professions. During the strategic-planning process, everyone agrees that more engineers will be needed in the future, and also that it takes time to develop newly hired engineers into fully productive designers.

Now, one of your business leaders has two goals this year: complete 10 projects and hire six design engineers. At the end of the year, they report that they completed all their projects, and they did it while hiring only three engineers. How would your performance system evaluate this result? In my work with organization leaders, I virtually always get the answer that this leader would be rewarded. The traditional performance system would reflect the value of projects completed, and the accounting system would reflect a positive budget variance because the leader achieved the results at half the budgeted labor costs for engineers.

In the short term, all seems well, but in a year or two, as the new projects materialize, the organization “suddenly” realizes that there aren’t enough engineers to meet customer demand. All those individual decisions — that were rewarded based on labor cost savings — have left you unprepared. Yet, you identified the need for more engineers in every planning cycle!

How do organizations eventually cope with this problem? The fact is that the work generally gets done. The realization that there are not enough engineers leads to demands that the human-resources department or recruiting function go out and find project-ready engineers immediately. The HR professionals manage to make this happen, but only with much greater hiring expense and talent-system disruption than if you had hired engineers a year or two early, with the time to develop them.

Is this a good outcome for the organization? Of course, it depends on the relative costs and benefits of preparing engineers early, versus waiting until the shortage is imminent. What is striking to me is how little is known about these costs and benefits when it comes to talent, compared to other resources. For example, if a manager had a goal to introduce six new product initiatives, but chose to save money by introducing only three of them, would they be as quickly rewarded for the budget savings? Probably not.

The financial system treats R&D spending differently than spending to prepare future talent. Yet, the same principles of risk, return, and optimization apply equally as well to the question of investing in future engineers as they do to the question of investing in future R&D. The fact that talent measurement and decision-making is treated less rigorously by the accounting and finance systems probably means that more mistakes are made with talent than with R&D, and evidence suggests those mistakes can cost millions.

What to do about this? This is my inaugural column in a planned series that will draw your attention to what I call the “Human Capital Decision Science.” It will draw your attention to evidence from decades of research on employment and worker behavior — evidence that is often overlooked, but equally as often can enhance your decisions about your talent. It will show you examples of how organizations approach talent decisions in a more rigorous and scientific way.

As financial leaders, you are the stewards of the most important and influential decision systems for your organization. Yet that same financial system may have vital blind spots when it comes to talent. I hope this column will challenge you to demand more of yourself, and more of your colleagues in human-resource management.

John Boudreau is a professor and research director at the University of Southern California’s Marshall School of Business and Center for Effective Organizations. His more than 60 books and articles include Retooling HR, Beyond HR, and Transformative HR.

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