HR should report to the CEO

In about 13 percent of companies (for smaller companies the number is 22 percent), the head of HR reports to the CFO (CFO Research Services, 2003).

Per job description, the CFO represents a primarily financial orientation and creates value by saving money or cutting costs. In such an arrangement, it is easy for HR to simply become an extension of accounting with HR programs and processes being implemented for their cost-effectiveness and ease of administration.

Reporting to a CFO is reasonable when HR is focused on transactions, strives to cut costs, and/or works well with metrics. But, the first two conditions are losing relevance since HR has automated and outsourced the majority of transactional processes to various vendors thereby improving efficiency and lowering costs. In fact, HR function expenditures currently account for less than 1 percent of the company’s total operating costs (BNA/SHRM Survey and analyses of 740 publicly held firms).

Instead, HR should focus on maximizing the strategic value of the workforce. After all, total payroll expenses equal between 60 to 70 percent of operating costs.

Thus, the best firms separate the HR function from Finance and require the HR Director to report to the CEO, who, per job description, seeks to generate money by investing in high ROI resources.