David F. Larcker
Two decades ago McKinsey advanced the idea that large U.S. companies are engaged in “war for talent” and that to remain competitive they need to make a strategic effort to attract, retain, and develop the highest-performing executives. Since that time, some companies have pursued this objective by elevating the importance of the human resources department and broadening its responsibilities beyond workforce administration to include
strategic talent and organizational issues.
Studies have examined whether human resource (HR) departments have succeeded in this transition. For the most part, the results are negative, suggesting that significant gaps remain between the potential and actual contribution of HR to corporate outcomes. For example, research by The Conference Board and McKinsey fids that “business unit leaders view HR as lagging in strategic performance relative to transactional duties,” such as payroll, benefits, and recordkeeping. A 2016 study by Development Dimensions International fids that human resources leaders score below their peers on a variety of dimensions, including business savvy, financial acumen, and global acumen. KPMG fids that only a third (35 percent) of executives believes that HR excels in contributing to the company’s people
strategy; only 17 percent believe HR demonstrates the value it provides to the business; and only 15 percent see HR as able to provide insightful and predictive workforce analytics. A piece in Harvard Business Review claims that “CEOs worldwide … rank HR as only the eighth or ninth most important function in a company.”
This assessment is reflected in compensation figures. According to Equilar, chief human resource offers are paid significantly below their peers in the C-suite, earning on average a third less in total compensation than chief marketing offers and general counsel, and half the amounts paid to chief financial offers.
The problem, if it exists, might originate at the top of organizations. A 2013 survey by The Miles Group and the Rock Center for Corporate Governance at Stanford University fids that talent development and workplace issues play a very insignificant part in the performance evaluation and bonus calculations for CEOs, suggesting that boards do not place the same weight on human capital as they do on other strategic and financial objectives.
Strategic Human Resources
To understand the contribution of the human resources department to company strategy, we surveyed 85 CEOs and chief human resources offers (CHRO) at Fortune 1000 companies. Unlike prior research, we find significant positive assessments of the role that human resources departments and CHROs play in strategic planning, workforce development, and company culture.
Of note, we find no discernable difference in the perception that CEOs and CHROs have in the value of HR to the organization’s success, which are equally positive. Ninety-six percent of respondents strongly agree or agree that the human resources department is vitally important to the strategic success of their company (see Exhibit 1). Respondents believe that HR plays a lead role in actively managing company culture and values (4.6 on a scale of 1 to 5, with 5 indicating “to a great extent” and 1 indicating “not at all”). They give a similar assessment (4.6) of the extent to which HR is highly attuned to employee sentiment, including workplace satisfaction and
negative chatter. To a lesser degree, they believe that HR directly contributes to the financial performance of the company (4.0). CEOs and CHROs share a positive assessment of the important role that the chief human resources offer plays in the senior management and strategic planning of the organization. Ninety-four percent of respondents say that the CHRO meets very frequently or frequently one-on-one or in small groups with the CEO. Ninety-one percent of respondents say that the CHRO very frequently or frequently discusses strategic, long-range personnel issues with the CEO. CEOs and CHROs widely believe that the CEO relies on the CHRO as a confidant or sounding board to discuss strategic, cultural, or organizational issues (4.4 on a scale of 1 to 5).
One issue where we found significant disagreement between the CEO and CHRO is over the role that the human resources department plays in senior-level discussions about company culture: 71 percent of CHROs claim that they lead the discussion on culture, whereas only 36 percent of CEOs believe that the CHRO leads the discussion. Instead, CEOs say that the chief human resources offer contributes to the discussion but does not lead it.
Respondents state that the chief human resources offer plays an important role in communicating management’s human capital issues to the board of directors. Eighty-seven percent say that the CHRO presents succession planning issues to the board, 80 percent say the CHRO presents on the company’s talent development efforts, and 78 percent say this executive presents on the company’s compensation and benefits programs.
Other human capital issues presented to the board include talent recruitment (60 percent), workplace programs (54 percent), internal workplace issues (35 percent), and workplace policies (29 percent). That said, the CHRO rarely participates in a company’s analyst or investor day conferences: only 3 percent of companies with an analyst or investor day invite the CHRO to present. Sixty percent of companies in our sample have a formal talent development program for senior executives. Among those, the CHRO plays a prominent role in the program, with 84 percent of respondents saying that the CHRO leads this program, 9 percent saying that the CHRO participates in but does not lead the program, and 7 percent saying that the CHRO plays no role in the management of the program.
CEOs and CHROs report a variety of challenges around talent development and recruitment at their companies. The most prominent of these are an insufficient leadership pipeline (24 percent), difficulty in finding talent (20 percent), and too much competition for talent (17 percent). Difficulty in developing talent (11 percent), lack of leadership attention to talent issues (10 percent), lack of resources for development and recruitment (6 percent), and difficulty in retaining talent (2 percent) are also referenced. CEOs and CHROs are confident in the contribution that the human resources department makes to the strategic success of their companies; however, there is some indication of room for improvement. Only 18 percent rate their company a 5 on a scale of 1 to 5 when asked to what extent their HR department does an outstanding job contributing to the strategic success of the organization. Sixty percent rate the company a 4, and a sizeable minority assign their companies ratings of 3 (15 percent) and 2 (5 percent). These numbers suggest that while respondents might be
highly favorable of the contribution that the CHRO makes to the organization and its strategic management, the contribution that
this individual makes might not cascade down through the HR department as a whole.
Overall, these survey results are surprising in their optimism, particularly in contrast to the studies cited in the introduction. While those studies rely on the opinions of a broad set of senior executives, the survey results here exclusively reflect those of the CEO and CHRO, suggesting a potentially wide disconnect between the viewpoints of those expected to lead human capital management efforts and the rest of the company. This raises the question of how (and whether) the leaders of a company—CEO, the senior management team, and the board of directors—validate the quality and effectiveness of its human capital strategy.
In a general sense, approving HR strategy is analogous to approving corporate strategy, including the establishment of overall objectives for the organization, identifying the steps necessary to achieving those objectives, establishing targets and metrics to track progress, and developing the supporting budget.
The CEO and CHRO cannot drive HR strategy alone; each leader throughout the organization must be aligned and accountable for prioritizing and delivering against the HR strategy (as they would corporate strategy). To further reinforce the concept that human capital is central to the success of corporate strategy, specific targets should be included in compensation contracts and bonus targets.
Furthermore, the board of directors plays an important role in assessing the acceptability of the human capital strategy. This includes not only advising senior management in HR strategy development but also challenging the CEO and CHRO to defend situations where their assessment differs from those of division heads and the broad base of employees. To facilitate the
discussion, the board should request that management develop reliable metrics and demonstrate the success or potential areas to improve its efforts through data pulled from human resource management systems (HRMS).
For HR strategy to succeed, it needs to be treated more like
corporate strategy, as opposed to an addendum to the board book.