Finance can help companies invest in their workforce in a way that achieves strategic business objectives.

IF YOU CAN'T MEASURE IT, YOU CAN'T MANAGE IT. Until recently, that corporate finance axiom was rarely uttered in human resources departments. Today, however, it's increasingly familiar to HR executives, many of whom face growing pressure to manage the enterprise's largest asset with much greater financial rigor.

The finance and human resources functions typically view human capital management from different -- and often opposing -- perspectives. HR takes responsibility for investments that support recruiting; retention; and, to a certain degree, employee performance management. Finance scrutinizes overall costs.

"Finance tends to have a better handle on the true cost of human capital, while human resources tends to [focus on] related costs, such as the levels of compensation and benefits," explains Jim Kochanski, senior vice president of Sibson Consulting, the New York City-based human capital consulting pision of The Segal Co. "HR also influences some of the dynamics of human capital, such as turnover and rates of hiring."

At the same time, many finance executives and managers question whether HR can manage human capital in a financially disciplined manner. "Most human resources professionals lack the financial acumen to ensure that the company is receiving the best benefit for its investment in human capital," says Bert Hensley, chairman and CEO of Morgan Samuels Co., a Beverly Hills, Calif.-based management consulting firm that specializes in executive recruitment.

Finance must take part of the blame for that shortcoming because it has failed to provide HR with an adequate level of guidance and support. In Business Finance's annual executive career and compensation surveys, finance executives consistently rank "managing and developing people" in the middle of their pack of priorities.

In private conversations, however, many CFOs bemoan the fact that the more immediate demands of their job -- growing the business, boosting revenue and cutting costs, for example -- prevent them from giving workforce issues the attention they feel is warranted.

"Human resources and finance are finding out that we really need to merge our understanding of employees to develop a deeper understanding of the costs, benefits and risks associated with our people," says David Davis, director of finance and corporate controller for SAS Institute Inc. in Cary, N.C. "I know we can do a better job by blending our skills and strengths."

Kochanski agrees. "You need both parts of the picture to really manage human capital like an asset," he observes.

Hensley believes finance executives can help their organization's HR department by emphasizing overarching corporate goals and insisting that human capital management means much more than hiring people to fill positions. "CFOs should focus the organization on the company's strategy," he says, "and then emphasize the importance of analyzing the skill sets necessary to execute that strategy and finding the best talent to meet those needs."

Finance executives may need to offer their HR colleagues an introduction to basic financial principles and terminology (see Teaching Scorecard 101). But they can do much more than that. They can partner with HR executives to help them increase returns from pension, benefit and compensation investments; manage the impact of new regulations; and address a looming labor crunch.

Driving HR Improvements

Corporate finance departments' "measure to manage" mantra has helped most areas of the organization -- including, belatedly, HR -- to understand the importance of tracking the costs and benefits that their processes, projects and investments generate. CFOs' efforts in these areas have leaned heavily on sophisticated information systems that enable companies to conduct concise and timely analyses. Human capital management software, for example, can show inpidual employees how their activities relate to high-level corporate objectives and, in cases where incentive compensation is applied, how their performance directly influences the size of their paycheck.

Michael Bileca, CFO and COO of Towncare Dental Partnership Inc., a dental care and service provider in Miami, views human capital management as a natural extension of his role. When his organization restructured its doctors' compensation plan two years ago, switching from a revenue-sharing model to a profit-sharing model, it invested substantial time, money and effort in new performance management and training processes and technology, including a workforce management application from Kronos.

"We needed to help develop our doctors' abilities to take on management responsibilities, which means cultivating entrepreneurial skills and a greater willingness to take business risks," Bileca explains. "Companies can build great skill sets, but they can still be the wrong skill sets. To avoid that pitfall, you need to place the training in a much larger enterprise context."

Towncare Dental uses the new system's balanced scorecard functionality to keep its doctors and their staff focused on business objectives and continually informed of their performance. The organization ties training, performance management, operational processes and enterprise strategy into its scorecard.

David Klementz is another finance executive with a deep commitment to HR improvements. He's senior vice president and CFO of Progress Rail Services Corp., an Albertville, Ala.-based company that supplies rail and track-work components to the railroad industry. During the past two years, Klementz has invested much of his time in overhauling his $800 million organization's incentive compensation plan and extending it to all of Progress Rail Services' employees.

A central component of the initiative is a matrix Klementz designed that tracks how the corporation's top five goals trickle down to the facility level of the enterprise, where Progress Rail Services uses metrics such as productivity and injury rates to gauge its workers' performance.

Klementz does not see human capital management as a departure from his core priorities. "I view this as clarifying the links among our forecast, business plan, and the systems and rewards we have in place," he explains.

Beyond Benchmarked Compensation

Initiatives like Towncare Dental's and Progress Rail Services' illustrate the strengths that finance can bring to human capital issues. "CFOs are expected to provide a return analysis on just about every capital investment that a company makes, whether it is a piece of machinery, a new factory or new office equipment," notes Peter LeBlanc, senior vice president in the Raleigh, N.C., offices of Sibson Consulting. "That ROI analysis has never been applied to compensation."

A company may attach a much higher value to a given job than other organizations in its industry do, yet the majority of companies base their nonexecutive compensation programs on industry benchmarks. "Almost every job in the enterprise is being paid relative to the marketplace," LeBlanc says. Instead, he insists, "there should be jobs that are paid higher vis-à-vis their benchmark and lower vis-à-vis their benchmark."

Companies that are beginning to embrace this approach, such as Circuit City and Standard Register, separate jobs into three or four buckets based on their impact (low, moderate or high) on a handful of high-level corporate objectives such as revenue growth. Some of these organizations also rate their employees -- A player, B player or C player, for example -- based on their job performance. This dual-rating system can provide valuable insights into human capital deployment. For example, it can help companies ensure that they are optimizing deployment of their HR assets by assigning A players to high-impact positions.

Not surprisingly, LeBlanc says that he finds CFOs more receptive to this innovative approach to compensation than HR executives, few of whom give deep strategic thought to salary and benefits packages below the executive level. Yet "most of the money spent on compensation is spent below the executive level," he points out. "From the CFO perspective, there is an opportunity."

Klementz agrees. Companies should look beyond industry compensation benchmarks, he believes, if doing so helps them attract the skills they need to meet high-level objectives. Progress Rail Services now pays as much as 110 percent of the industry benchmark for some positions.

Before adopting that strategy, the company conducted a compensation planning exercise that was helpful in large part, Klementz says, because Progress Rail Services' senior management team actively participated and had a voice in how compensation levels would be stratified.

Vigilance in Pensions and Recruiting

CFOs and HR executives alike have been breathing a little easier in the past couple of years thanks to some good news in another critical area of employee rewards: retirement benefits. Pension plan funding levels have regained some of the ground they lost in a dramatic three-year dive that began in 1999. A recent Watson Wyatt Worldwide study of defined-benefit pension plans at more than 600 of the 1,000 largest U.S. companies found that the average plan's "funded status" -- the ratio of plan assets to the estimated cost of its accrued pension obligations -- increased from 82 percent in 2002 to 88 percent in 2003. Pension plan liabilities increased by nearly $125 billion (about 11 percent) in that period; however, assets rose by $172.4 billion, or about 18 percent.

"After three years of low interest rates and weak investment performance, last year's increase in funded status is a welcome change," notes Kevin Wagner, a consulting actuary in Watson Wyatt's Southfield, Mich., offices. "Many employers and participants should be heartened that their pension plans remain well-positioned to pay retirement benefits."

At the same time, few finance executives feel sufficiently reassured to relax their vigilance over this complex and critical area. As the equity markets' reaction to a more restrictive federal monetary policy unfolds, CFOs will continue to monitor their organization's pension plan assets and liabilities closely.

The financial acumen that companies have applied to compensation strategies and pension plans less frequently supports other areas of human capital management. However, the recruiting process also offers opportunities for efficiency improvements. For example, Morgan Samuels helps it clients streamline their hiring processes by improving metrics such as the amount of time they take to fill a position and the number of candidates they interview for a given job.

Davis notes that the growing financial complexity of internal recruiting calls for greater involvement of finance in HR. As SAS's global presence has grown, he says, the financial aspects of its internal recruiting processes have become increasingly intricate. They now include fair value analyses, which help ensure that pisions losing managers are appropriately compensated; currency ramifications associated with country-to-country personnel transfers; transfer pricing calculations; and tax evaluations.

HR's Compliance Dimension

Finance executives who remain chary of involvement in human capital management might want to reconsider that attitude in light of the HR-related issues raised by Sarbanes-Oxley compliance initiatives.

"CFOs are quickly realizing that there are several business processes residing in the HR department that have a direct and material impact on their financial statements," notes a paper published by Pleasanton, Calif.-based risk consulting and internal audit firm Protiviti Inc. titled "The Impact of Sarbanes-Oxley on Human Capital Management." For example, employees' fringe benefits are a potential compliance risk, according to the report, and these rewards should be tracked carefully. Companies should also conduct periodic reviews to ensure that their calculations of tax liabilities and accruals for pensions, vacations and bonuses are correct.

Payroll and benefits account for 35 percent to 40 percent of companies' operating costs on average, according to PricewaterhouseCoopers, so errors by external payroll and benefits administrators can have a material impact on an organization's balance sheet. Not surprisingly, many Sarbanes-Oxley Section 404 initiatives have identified outsourced payroll and benefits administration as significant risks.

Many organizations are asking their outsourcing partners to provide audits that conform to the American Institute of Certified Public Accountants' Statement on Auditing Standards (SAS) No. 70, Type II, which requires that a public accounting firm attest to the quality of the provider's internal controls environment. But some outsourcing providers are balking at the cost and scope of these audits. As a result, many businesses face difficult sourcing decisions with complex cost and compliance ramifications.

What's more, companies' HR and training functions will play a key role in determining the effectiveness and cost-efficiency of Sarbanes-Oxley compliance efforts over the long haul. If ongoing compliance monitoring is to succeed, inpidual process owners throughout a company -- most of whom have scant finance and accounting experience -- must be trained to anticipate changes which may affect the internal controls that support their process.

Building Bench Strength

A broader partnership between finance and HR can also help companies strengthen their executive pipeline -- an aspect of human resources planning that too many organizations neglect. CFOs are particularly at risk of being stung by weak succession planning. "People who tend to gravitate toward a financial career don't necessarily have in their own skill set the expertise of developing leadership talent," says Guy Beaudin, Toronto-based managing director of management consulting firm RHR International.

Although few, if any, human capital consultants predict a return to the tight labor market of the late 1990s and the inflated compensation packages that accompanied it, most believe a demographically fueled labor crunch will occur as large numbers of baby boomers enter retirement between 2010 and 2015. And that will have serious repercussions for executive teams. In RHR International's most recent executive bench study, half of the 115 companies that participated said that they expect to lose 50 percent or more of their senior management team by 2010.

Developing leadership talent internally is much easier and more cost-effective than integrating executives hired from another organization, Beaudin points out. Yet most of the surveyed companies that formally identify high-potential talent report that they have been doing so for three years or less.

Beaudin sees a bright spot in this area of widespread neglect. "Organizations that take this seriously and develop formal bench-development programs will be able to develop a competitive advantage that will certainly emerge by 2010 -- and probably sooner than that," he says.

Given the fact that CFOs historically have neglected HR issues, proactive finance executives may be able to exploit a range of opportunities in human capital management. CFOs who help their organization's HR executives master the language of finance and strengthen the financial management of human capital will better position their company to handle the regulatory and competitive challenges that lie ahead.

But the chance to pull ahead of competitors on the strength of human capital management sophistication may disappear before long. Terms like Balanced Scorecard, metrics, alignment and portfolio of talent are already slipping into the HR vernacular.

And some organizations -- Towncare Dental, for example --have a head start. "It may sound like a cliché," Bileca says, "but in the service business, people are our greatest asset. We need to invest in our workforce in a way that will help us achieve the results we want to achieve. It's really a matter of pinpointing how well our investment in human capital is performing."