Companies spend an estimated 36% of their revenues on human capital – pay, benefits, training, and other expenses related to their workforces. Yet just 16% of 180 financial executive respondents say they significantly understand the return they are getting on this investment, according to a survey by CFO Research Services in collaboration with Mercer Human Resource Consulting.
The reason for the heightened interest from finance is not difficult to discern. Nearly half (49%) of the financial executives surveyed say investors are beginning to ask about human capital issues, at least to a moderate extent (though analysts tend to focus on the company’s senior management team and succession plans). Another quarter (23%) say their boards currently are involved in human capital issues to a considerable or great extent – and 36% predict that their boards will be involved at this level in two years. Still, 61% say the current level of investment in human capital is adequate for executing their business strategy.
“CFOs are in a difficult situation,” says Rick Guzzo, PhD, a human capital strategy consultant with Mercer. “Most see the importance of human capital to business success, yet they are unable to apply ordinary financial discipline to managing what is often their company’s largest investment. Their predicament is getting tougher. Financial executives are feeling increasing pressure from boards, investors, and analysts to show how human capital is being managed in their companies.”
A major sticking point among CFOs – HR technology. Just 20% say that investments in technology allow them to track and measure human capital to a considerable extent. Roughly half (56%) say they are able to track and measure operational performance to a considerable extent, but the only activity where a large number are satisfied (47%) is in the tracking of employee turnover.
Financial executives want to be more involved in human capital decisions – and not just in setting and allocating HR budgets, according to the report. Nearly two-thirds (62%) of those surveyed say they should have an “important” or “leadership” role in human capital decisions, but just 38% currently play such a role, which would include designing HR metrics, adding a financial perspective to HR decisions, and helping link HR policy to corporate strategy. .
While CFOs have traditionally viewed HR as a non-strategic cost-center, 39% now say they view HR as more of a partner, and 33% see it both as a cost center and as a strategic partner.
Still, despite a growing recognition that human capital is a source of value for the firm, just 38% make a serious attempt to weigh the value of skills and knowledge lost against payroll savings when making layoff decisions, according to the report. Nearly all (92%) say that human capital has a great effect on the company’s ability to achieve customers, while:
- 82% cite its impact on profitability,
- 72% note a great effect on innovation/new product development,
- 71% noted the high impact in integrating acquisitions, and
- 64% say it has a great effect on growth.
Top human capital priorities cited by survey respondents were :
- 59% – building leadership capabilities
- 58% – increasing productivity
- 47% – acquiring key talent
- 38% – retaining key talent
- 28% – measuring human capital’s contribution to the bottom line
The study’s authors note that 40% of companies with more than $1 billion in annual revenues want to measure the influence of human capital on attaining business objectives.
The survey was conducted in the fall of 2002, and included 180 responses; 51% of those from CFOs or SVPs of finance, 11% VPs of finance, and the rest had other titles, including director of finance and controller, according to Mercer.