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It is ironic that the importance of human capital has never been more widely recognized, yet the organizational function with the greatest expertise on the topic—Human Resources—has not been so insecure for decades. It has become commonplace to argue that human capital is today’s most important battleground for competitive advantage, as other sources of competitive advantage have receded in significance. Capital, raw materials and even technology are cheap and easily acquired. Sustained competitive advantage is most likely to come from the ingenuity and motivation of employees. Yet HR executives are increasingly worried about the status and impact of their function, despite its importance. Recent studies* suggest that HR executives wish to play a more strategic role in the company, but cast doubt on whether that is happening. HR leaders face intense demands to show a return on investment for the function. Some companies have abandoned hope that HR will play a strategic role, and simply seek cost savings by outsourcing virtually the entire HR function to a growing collection of capable vendors.

HR executives must meet two primary challenges if they wish to get and keep “a seat at the table” when business decisions are made. The first is to support the organization’s business strategy more effectively. This requires bringing expertise to bear on how best to acquire, motivate, develop and organize people. The second is to provide HR services more efficiently. This is a test that all support functions must meet if they wish to be business partners, and is essential for HR credibility.

We are less pessimistic than many observers that HR leaders will adapt to these demands. Our client experiences have convinced us that many companies are grappling effectively with these challenges, and that much innovation is going unnoticed.
Sibson Consulting is conducting a study to better understand how HR executives adapt HR policies and practices to support the strategic needs of their businesses. We have recently collected interview and questionnaire data from the top HR officers of 40 American and British companies. This article summarizes our findings so far. When appropriate, we will contrast the results from a set of eight of the most “strategic players” with the other cases. These eight cases met three criteria: the HR head reports directly to the CEO; the HR organization is directly involved in addressing major business challenges; and the HR organization clearly has influence, credibility and business leader support.

We have organized the findings around several puzzles posed by the data. We will describe each puzzle, indicate why it is important, present relevant data and draw some conclusions.

1. Firms with the most severe business challenges attract the most strategic HR leaders.
2. The most strategic HR organizations are more in tune with business challenges.

Our interviews suggest that both of these factors contribute to getting a seat at the table. For example, in several participating companies, severe business needs led the company to go outside for a new HR head who could behave more strategically than the available insiders. Even while still new to the organization, these HR leaders were very articulate about the business challenges and the ways in which HR solutions and priorities line up against them. These companies had a business need for strategic HR, and the HR leaders understood it.

Forging HR priorities in the context of changing business imperatives is critical to getting or using a seat at the table. For example, the senior vice president of HR in a company created in a spin-off shifted HR's priorities several times in a few years as the business imperatives changed from getting the cost structure and infrastructure right, to growing organically, and then growing through acquisition. Business leaders initially were skeptical about the strategic value HR could contribute, but they came to see the value. Rather than trying to be heroic by “hitting their own home runs”, HR focused on meeting the business’ imperatives. At the same time HR has been driving its own agenda to upgrade talent. The senior vice president reminded us that getting to the table and remaining there involves more than just doing the right things for the business—it is also about having the right kinds of relationships with other business leaders. In this company, HR leaders maintain close one-on-one relationships with other leaders who have their own priorities. By adding value for these leaders, HR builds its own credibility.

• How can HR leaders get business leaders to care about talent when there is no immediate shortage inside and outside the organization? The availability of talent during the past three years—a time of higher unemployment—has led many companies to relax their guard about talent issues.
• How is HR leading the alignment of the organization’s talent strategy with the business strategy?
• Does the HR organization know enough to help business leaders determine whether to buy talent (hire from the outside) or build talent (train and develop)? Few firms appear to have a good understanding of the economics of build versus buy talent approaches.
• How does HR take accountability for talent without removing the responsibility for line management?

1. Helping the business translate the human capital implications of their strategy into skill sets that are more or less critical, enabling the organization to understand the business impact of different talent segments
2. Accurately forecasting future talent needs in terms of type (skill sets) and number (headcount) for longer periods. Strategic players indicated that their forecasts normally look two to five years into the future. They said this is especially important as their businesses begin to rebound from the economic downturn of recent years and prepare to take advantage of an improved economy
3. Calculating critical talent gaps in terms of size and importance. This enables executives to make critical investment choices about buying external talent and building internal talent.
4. Sourcing and acquiring the right talent in a timely manner to ensure the right people are in the right place at the right time.
5. Developing talent by moving people through key assignments identified as being most critical to skill development.

By doing these five things well, strategic partners create a strong sense of line ownership for talent management in their organizations. At the same time, they reinforce the need for HR to have a seat at the table by presenting insightful information that enables executives to make more informed decisions about running the business. The top HR officer of a leading financial services organization argued that unless HR can effectively illuminate the impact talent management has on top- and bottom-line results, it will remain a second-class function.

Puzzle 3: How Can Compensation Be Leveraged for Competitive Advantage?
Compensation program design is one of the main opportunities for HR to influence the performance and focus of the organization. Those HR organizations that can refine compensation program design according to changing business needs have a place at the table. Compensation design goes beyond managing cost, competitiveness and internal equity. Strategic compensation design helps employees to focus on the right measures, giving their best effort and cooperating with other individuals and groups.
The emphasis on cost and competitiveness of the 1990s led companies to simplify compensation structures and focus much more on the external labor market than on internal equity as the primary basis for pricing jobs. These changes simplified compensation administration and made it cheaper. Companies also increased the use of variable pay, to tie changes in compensation to the firm’s ability to pay and provide incentives for individual or collective performance.

The companies in the At the Table study reflect these trends. Fully 93 percent agreed that top company executives see “using limited compensation dollars more effectively” as a high priority for the HR function in the next year. Three-fourths reported experiencing “severe pressure in containing compensation costs.” Two-thirds reported that differentiating more among employees in delivering compensation dollars is “important” or “very important” to business success. Three-quarters positioned base pay (wages or salaries) at the average market level, while only 21 percent set base pay above average market levels. Reflecting the heavy use of variable pay, however, half positioned total compensation above market levels, with the remainder positioning total compensation at market level. Only one firm in our sample favored internal equity over market levels to price jobs, while one-third relied primarily on market levels in pricing jobs. Overall, nearly six of 10 indicated they relied more on market level than internal equity in pricing jobs.

Some of these trends were even more prominent for the strategic players, who were even stronger in agreeing that using compensation dollars more effectively was a top HR priority. Although the strategic players made heavy use of incentives, they were also much less likely to position total compensation above the market. A fourth of the strategic players, compared to 60 percent of the others, priced total compensation above market. This indicates that variable pay did not create a high payout risk for most strategic players.

The interviews confirmed that the primary differences between the strategic players and the others involved the use of variable pay to gain competitive advantage. We found that most strategic players cover most or all employees with incentive plans, while almost none of the other firms do so. One financial services firm covered 100 percent of employees with more than 350 incentive plans that are customized to the needs of local businesses. A large multidivisional firm adopted a company-wide incentive plan for most non-management employees, who can receive a maximum bonus of 10 to 15 percent based on a combination of corporate performance and operating company performance. This formula has focused attention on overall corporate results, but also on the business unit, for which there is greater line of sight. A retail-oriented financial services firm offered several hundred different sales incentive plans to more than 80 percent of its workers. That company explicitly ensures that total compensation is in line with market levels so it does not lose competitiveness through the plans.

We suspect there are unrealized opportunities to rethink base pay. In particular, we believe that the pendulum has swung too far toward external market pricing when valuing jobs. In many cases, it would be better to balance internal and external factors to take into account the strategic value of jobs to the firm, thus tying HR’s work in compensation more to the company strategy than solely to external benchmarks.

Puzzle 4: How Does HR Demonstrate Business Success?
We heard a painful HR joke in one of our interviews. How do you tell the HR leader in a business meeting? Answer: That’s the person without any data. We do not believe that the HR function will be seen as a business partner in most companies until its insights on human capital are based on good data and business-based metrics. Yet in no area did we see less evidence of progress than in HR metrics.

The problem is not that HR lacks information and performance measures. Indeed, HR leaders were easily able to identify three to five key measures for the function, and the cumulative list runs for pages. Analysis indicates that companies are using three broad types of measures: traditional HR measures, transactional measures and business metrics. Traditional metrics assess either HR activity (for example, number of hires, training hours delivered) or employee outcomes (for example, employee satisfaction or morale, employee turnover). Transactional metrics are somewhat newer, and assess the efficiency and cost-effectiveness of the HR function in delivering services. Examples include cost per hire, the time it takes to fill open positions, the ratio of HR staff to employees, and HR operating costs per employee served. The third type of measure is an HR business metric, typically a ratio that ties a standard business metric to HR investments. Examples include gross margin per employee, revenue per employee, ratio of total employment cost to total revenue, and EBITDA per full-time employee.

The clear majority of companies in our sample used both traditional and transactional HR measures. However, only 10 percent of our sample used HR business metrics, and their use was still a work in progress even at those companies. Interestingly, the strategic players were not more likely to use HR business metrics than the other companies in the study.
This creates a particularly perplexing puzzle: Can HR ever gain a real seat at the table without being able to demonstrate its success and the return on human capital? Is the problem that, despite years of large expenditures on upgrading HR technology and systems, the relevant data is still not available? Or is there more to this puzzle?

As we pondered these findings and asked ourselves these questions, we developed an intriguing hypothesis: Perhaps HR efficiency measures have become more strategic. If HR organizations have been transformed into lean, strategic engines and if employees and managers are doing the transactions for themselves, then traditional HR efficiency measures are no longer applicable only to HR, but to overall people management. For example, if we posit the unquestionable strategic importance of human capital, could it be that achieving an employee turnover rate below that of industry peers has become an acknowledged measure of organizational success, not just HR success?

If this is the case, it does not preclude our asking whether HR’s work can or should be evaluated using broader company-wide measures. Should HR use measures such as revenue and income growth or improved customer satisfaction when so many other areas in the organization have at least an equal responsibility in those areas? For now, at least, many of the study participants do not seem to think so. We would point out, however, that no one finds it unusual for a function such as Finance to track company-wide metrics.

We will continue to test our hypothesis as we conclude the study.

Conclusion: Transforming the HR Function
A seat at the table implies HR leaders working with business leaders, but the study participants told us that it really requires transformation of the whole HR function. They also said the transformation is difficult to achieve. More than half of the participants said that:

• They do not have enough HR talent capable of meeting the needs of the changing HR.
• They are having difficulty evolving beyond the HR of the past.