5 Ways Human Resources Has a Huge Impact on Profitability

The current economic environment has forced CEOs to focus almost all of their attention on revenues and profitability. They must be very aware of what competitors are doing— and competitors can be anywhere in the world. Additionally, executives are watching the government for indications of changing regulations and tax issues.

In many ways, the recent economic troubles served to shine a spotlight on workforce management issues for many executives. Whether it was navigating layoffs, reducing labor costs, cross-training employees, or simply keeping the workforce morale up, many leaders found that their organizations were not as nimble or flexible as they would like.

Labor costs (compensation and benefits) account for nearly one-third of operating costs, so how HR manages the workforce has a direct impact on achieving profitability objectives. One of the best ways to set your HR strategy is to align workforce management goals with corporate objectives. That means keeping an eye on how your programs and decisions will impact the bottom line. Aligning labor costs with the quality of the workforce can dramatically improve financial performance. A 2009 study found leaders in talent management enjoyed superior financial results including 54% higher net profit margins and 18% better EBIDTA.

To add strategic value, HR leaders should step outside the human resources arena and truly understand the business. What does your company do? How much does it cost to deliver products? How does the competition do it? Who are your customers? Develop a workforce that supports the company’s goals and customers. Help the executive team stay ahead of HR issues by finding answers before they ask questions. Are HR departments fulfilling this mission today? According to HR professionals, the answer is still no.

Strategic executives avoid the nitty-gritty details of day-to-day human resources issues, preferring to take a broader perspective. Executive priorities include recruiting and staffing, turnover and succession, compensation, and benefits. These are the most expensive functions of HR and the organizational challenges having the greatest impact on company objectives. Finding and hiring the right employees is essential to business success. The right hire can bring a team together and deliver brilliant new ideas. The wrong hire can be a disaster, resulting in lower team morale and missed objectives. A CEO needs his or her company to be seen as an employer of choice by potential candidates.

The CEO needs to know the big picture of what is going on with recruiting. How many openings do we have? Is that creating any backlogs in production? What will it cost to fill the positions? A staffing report provides a nice overview without getting into the individual details of each hiring decision or new vacancy.

Most executives would like to minimize turnover. There are times when economic conditions necessitate losing employees to layoffs. Some companies make a policy of routinely turning over the lowest performing employees within the organization, in an attempt to create excellence. But as a general rule of thumb, turnover is very costly to an organization. Layoffs or resignations can disrupt team momentum, slow production, and lower morale. You risk losing some or all of the departing employees’ job knowledge. On average, it also costs between one-and-a-half to three times an employee’s annual salary to recruit, hire and train his or her replacement.

Executives need help from HR to plan for changes in the workforce. This includes modeling scenarios for changes in the organizational structure such as layoffs or promotions, identifying worst performers, creating career development and retention plans for top performers, and planning succession for mission-critical positions in the event of an unexpected departure.

Not all employees are created equally. Some workers perform average work, as expected. Some hardly contribute at all and need to be replaced. And a few employees are the driving force behind your company’s success. These top performers, usually about 20% of your workforce, are responsible for 80% of the work performed. They are your big idea people. They work hard and they work efficiently. Your CEO does not want to lose the high achievers, so HR needs to have a plan for retaining them. This involves making sure that top performers are given plenty of new challenges in their work, opportunities to move up in the company, and recognition and compensation that reflect their value to the organization.

Compensation is a critical part of any workforce strategy. You don’t want to discourage high-performing employees with low pay, or worse, lose them to your competitors. On the other hand, it’s harder to reach corporate profitability objectives if you are paying your workers too much. The CEO needs help from HR to determine how to compensate employees at a rate that is equal to their value to the organization.

Salaries can be one of the biggest headaches for a CEO. Every manager worries about turnover of their top performers and wants to pay them more. Your CEO wants to establish the company as an employer of choice, so you can recruit great talent and retain the best employees. But you need to achieve that status at the lowest possible cost. So it’s essential to gather information about how much your competitors pay for key positions, and how they incentivize performance with bonuses, stock options, or other perks.

Provide the C-Suite with comparative analyses for your industry, as well as your geographic location. How do your salaries compare with key competitors’ plans? For your business location, are you paying attractive wages compared to the cost of living? Are there creative programs that could enhance the “total compensation package” without adding much cost?

After compensation, benefits are the next most costly aspect of having a workforce. The cost of benefits, and especially healthcare, has been rising much more rapidly than the cost of wages for many years. Healthcare costs are rising much more quickly than inflation, too. With all of the current uncertainty surrounding healthcare reform and the Patient Protection and Affordable Care Act, benefits-related issues are receiving more attention from the C-Suite.

To plan for business growth and maintain profitability, the CEO needs to be able to project both revenues and costs as accurately as possible for one year, three years, or even five years into the future. In HR, the greatest uncertainty surrounds the future cost of benefits. Provide your CEO and CFO with projections for the cost of benefits next year as soon as open enrollment is completed. For further-out timeframes, provide the best projections you can, possibly with a range that models best-case/worst-case scenarios.

The new healthcare reform law has made projections even murkier, as it is difficult to tell how high insurance companies will raise premiums while they can in the next few years. Executives of smaller businesses who are not mandated to offer health insurance will need help weighing the pros and cons of dropping health insurance benefits. This includes the perceived value of health coverage by employees and the impact that dropping it would have on employee retention.

To read the whole whitepaper click here. To learn how an HRMS solution can help with each of the key areas presented in this article, contact Axis today.