Human Resources and Finance are often perceived as complete opposites. HR deals primarily with softer skills, relationships, and human interaction. Finance is focused on the numbers, and team members are known for analytical thinking. High performing organizations have strong collaboration between HR and Finance. Why?
HR and Finance must work well together because they steward the primary components of every company’s ability to do business—people and money.
Finance has an excellent grasp of the costs/benefits and financial implications of certain risks. Risks are inherent with benefit and insurance programs, which are typically administered by HR. Finance needs to be involved when considering benefit risks and the financial implications. HR decides which program to use and Finance must understand costs, interest, policies, and processes for various providers. Likewise, HR must understand the financial implications before the right choices can be made.
Self-insurance is an old concept, yet providers sometimes encourage companies to self-insure. In the short-term, self-insurance could save money since a certain amount is simply set aside for employee coverage. Unfortunately, the true savings are less than insurance providers would admit.
Self-insurance causes a high amount of risk when considering the economy, employee demographics, and claim fluctuations. A large amount of cash is tied up in self-insurance funds and companies have less wiggle room when the economy goes bad. If more than 50% of Company A's employees are females between 25-35 years old, statistics say most will start families relatively soon. Demographics could result in very high amounts of short-term healthcare spending. If several employees require major care in a short time frame, employers can have a difficult time funding self-insurance programs. HR and Finance must communicate to assess qualitative human risk factors with potential quantitative cash impacts.
Wages are always considered when evaluating the cost of doing business. Factors such as geographic location, government regulation, and market demand all have impact on competitive wages. HR compensation groups typically work closely with legal to keep up with labor laws and industry trends, yet Finance must be involved when wages—both salaried and hourly—are determined and set. Compensation and profitability are closely tied since labor is usually a large part of the company cost structure.
Project-based companies, for example, rely heavily on wage information when generating project bids. Finance and commercial groups often work together to calculate optimal bid structures to remain profitable. Payroll costs play a large part. Building a new manufacturing plant tends to be costly, not because all materials are particularly expensive, but because of the highly skilled labor required to ensure quality. Highly educated and experienced engineers are needed to design the facilities and plant layout, taking into account the most efficient flow of operations and integration of shop floor automation systems. The lion’s share of the price tag is in skilled labor required to successfully finish the project, pay the employees, support the back office, and profit from the venture. The Finance department is instrumental in projecting the costs and how projects should be priced accordingly. HR provides the compensation guidelines and benchmarks used in the calculations to Finance.
When it comes to retirement, Finance and HR departments should agree on company contribution amounts. Is offering a pension feasible? If so, at what rate should contributions be made? Does employer 401K matching begin to vest on day one, or after a year of employment? HR must consider that beginning contributions after a year could help with employee retention but also may turn people away from job offers. Finance would be a proponent of a wait period since delaying certain vesting of benefits improves cash flow. It’s a delicate balance between taking care of employees and managing costs.
A small manufacturing company acquired a much larger company, resulting in a headcount jump from 4,000 to 14,000. Prior to integration, the smaller of the two companies contributed 3% to its employees’ 401Ks regardless of whether or not the employee contributed. If the acquired company only contributed 1.5%, a decision had to be made when the two companies became one. Prior to the integration, HR and Finance must work closely together to evaluate both contribution strategies and determine the optimal path forward. Increasing contributions for 10,000 new employees from 1.5% to 3% could have a significant financial impact. Not changing either plan could cause employee attrition. To come to the right conclusion, HR should provide Finance with headcount information, start dates, and other necessary information. Finance will run several scenarios, and ultimately, leadership from both departments should sit down to hash out the best course of action. Once a choice is made, Finance will be responsible for projecting financial impacts of the changes and HR will manage employee communications and relations.
In the above scenario, an intelligent, well-informed decision could not be made by HR or Finance alone. The two departments must be closely aligned on major decisions impacting both people and money if positive results for both employee and company are to be realized.
Many organizational KPIs are people-related, such as employee turnover, cost/FTE, and performance ratings. They contribute to LTIs, stock options, and other performance-based incentives, all of which have a financial impact. HR manages distribution of incentives yet must work with Finance to understand implications of bonus plans on the bottom line. HR and Finance should collaborate to ensure LTIs are used correctly on the balance sheet and match up with EBITDA targets. Reporting KPIs is often performed by both departments, but the reports often contain different sets of data. Finance naturally excels at numbers and can perform the calculations based on assumptions and metrics provided by HR. HR should administer performance rewards and Finance should help to ensure the calculations are correct and perform accruals and booking. Collaborating ensures each department utilizes their strengths to provide the most benefit to the organization as a whole.
HR is charged with managing employee relations and tracking performance management. Finance is good at measuring KPIs, managing data, and identifying financial impact. A close combination of the two is critical to understanding and optimizing performance.
Trenegy has helped many HR and Finance organizations become more strategic and ultimately drive business value. Contact us for a free consultation at [email protected].
