The CFO says to the CEO: “What if we spend all this money on training and they leave?”
The CEO says to the CFO: “What if we don’t and they stay!”
Nearly every CEO and business owner will say that their people are the most important asset, why then do they first strip the HR budget when looking for cost savings?
If employees are truly the most important asset, why is this even happening?
I believe there are a couple of underlying reasons for this disconnect between what senior executives say and what they do:
- The first reason is that people capital, and therefore employee engagement, is not on the P&L or Balance Sheet. Therefore, it is not a focus for Boards and Senior Management Teams. The ludicrous part of this is that if someone removed your boardroom table, because it is on the asset register, the actual value of the company would be reduced. However, if your best employee leaves there is absolutely no change to the value of the company. But which one will have an immediate and potentially long-term detrimental effect? Certainly not having a fancy boardroom table!
#1 Reason – A lack of focus on what is most important for future organisational success - The second reason is that HR is not always good at mounting a defence against budget cuts. For example, if a CEO goes to IT and says they need to cut spending, IT’s response will be something like this “We can cut spending but that would mean that we would not be able to guarantee data security or processing orders in the required timeframes”. The CEO response is to not cut, so they go to sales and the Sales Manager’s response would be “We can cut costs but that would mean that we will most likely not achieve the budget revenue which will also translate into overall lower GP and Profit”. The CEO response is to not cut, so they go to HR with a demand to cut costs and HR’s response is “Okay”. They rarely fight for their people capital budget. HR’s response should be “If you cut my HR budget you are undermining your greatest asset, your people. If we do not invest in hiring, developing and retaining the best talent then we will have up to a 25% reduction in organisational performance, let alone the medium and long-term effects of reducing leadership capability. Are you really sure that you want to be the CEO that killed any chance of this organisation reaching its full potential?”
#2 Reason – HR do not hold senior executives accountable for investing in talent
So, what can be done to fix this long-standing perennial issue?
1. Board Members need to hold CEOs accountable for developing top talent
Firstly, perhaps Board Members should attribute most of the “Intangible Assets” on the Balance Sheet to “Human Capital” and this would then provide them with a real measure of what their employees have contributed. This can then be used to determine the financial upside of investing in the leadership development and functional capability at all levels of the organisation. When you consider that there is a potential 25% uplift in productivity when organisations develop all employees, the upside to revenue, profitability and customer service levels is substantial.
2. CEOs need to accept that they cannot have it both ways
You cannot publicly state that your employees are your most important asset if HR is your first port of call when you want to cut costs. You should consider that every dollar you spend on your people is an “investment”, not a “cost”. You cannot just restrict investment to your executive team when 80% of your employees actually report to team leads, supervisors and mid-managers. I agree that in the past it was financially challenging to provide leadership development to all people managers, but this is not the case. For less than $500/yr per team lead/supervisor/manager, you can now increase leadership capability at every level of your organisation (for example: MyMentor).
3. HR need to provide all people managers with leadership development
We all know that if you have strong leadership, not just at the executive level, there is a very high probability that you will outperform all of your competitors. The challenge for HR professionals is that nearly all HR tertiary courses focus on compliance, not on leadership. Plus, developing the ability to provide leadership coaching and mentoring is not something you learn at school, it is learnt through hard-won experience, and it is learnt through real-life people management experience. But if modern HR professionals want to transition from Traditional HR to Strategic HR, then they either need to obtain this knowledge and experience or recognise that they will need external resources and assistance.
4. HR need to measure employee performance and accept more responsibility
I am a firm believer that operational managers must take 100% responsibility for their direct reports, they should not abrogate their responsibility to HR. However, HR professionals need to actively accept the responsibility for overall employee performance and engagement (just as a CEO accepts the performance responsibility of every business unit). To do this, HR need to implement commercially relevant metrics and take accountability for achieving these metrics. For example, measuring employee retention means nothing unless all employees are held accountable for their performance (otherwise, you can have very high retention due to poor performers never being held accountable and exited due to persistent poor performance or attitude).
5. HR need to be accountable to all employees and the organisation as a whole
HR should be the ones that provide all managers, supervisors, and team leads with the advice, resources and support so that they can improve the way they attract, select, retain and develop high-performing talent. In short, HR need to be a service provider to all people managers and all employees, they need to be the voice of reason and the moral compass when senior executives want to take the easy route and slash and burn.
The challenge for HR is transitioning from a Traditional to a Strategic mindset. A Strategic mindset centres on maximising the potential of your people. It is about training operational people managers to better attract, select, retain and lead high-performing talent; and not doing everything for them. A strategic mindset is about being highly proactive and taking risks, and it recognises that one of its priorities is to coach, mentor and train the operational people managers to be better leaders; not just better managers, but better leaders.
In summary, this is an exciting time for HR professionals but only if they are willing to hold others, and themselves, accountable for the selection, development and retention of high-performing talent. If HR can step up to the fight and successfully argue for increased resources so that they can improve organisational leadership capabilities, then they will establish themselves as the most important business unit. This would be fair considering they are responsible for each organisation’s most important asset – their people!
Written by Mark Purbrick
