Why CFOs should reconsider their human capital strategies

As companies have tried to maintain a healthy financial position through constant economic instability over the past several years, they have asked more of their CFOs than ever before. 

Global economic volatility is persistent, and while the inflation rate has fallen, it remains stubbornly high. Despite a strong labor market, the threat of recession looks more ominous by the day. This is why CFOs are looking for ways to safely reduce their balance sheet liabilities without disrupting operations, reducing sales or negatively affecting the quality of customer service.

CFOs are strategic partners who can help companies deploy capital more efficiently and manage risk — a particularly important skill set right now. One area where the CFO's insights are becoming increasingly important is the management of human capital. A company's workforce is simultaneously its largest expense and most powerful engine of revenue, which is why CFOs are increasingly working in concert with chief human resources officers to ensure employees are as engaged and productive as possible.

Now is the time for CFOs to take a close look at their balance sheets and determine how well resources are being allocated. In many cases, CFOs will discover their human capital investments aren't being put to the best possible use, which is a costly mistake that leaves the company and its employees in a weaker financial position.

The role of human capital in your financial strategy

CFOs are working with CHROs to assess and respond to the fallout from the pandemic, high inflation and other forms of economic stress employees have been under. Ninety-six percent of companies say ensuring the well-being of employees is an organizational responsibility, and one of the top-ranked areas that are "most impacted by the level of employee well-being" is financial outcomes. From the success of sales teams to the quality of customer service, employee morale is a key driver of revenue and customer retention.

The health of your workforce is inextricably tied to the financial performance of your company. Gallup estimates that actively disengaged employees have cost companies $7.8 trillion in lost productivity around the world. Meanwhile, at a time when there's just one employee actively seeking work for every two open positions, keeping employees engaged and satisfied is a competitive necessity. It's clear that CFOs can't afford to ignore human capital management as a critical financial priority.

While many traditional aspects of the CFO's role (such as careful accounting and compliance with tax laws and regulations) are vital to maximize revenue and limit risk, there are many other ways to reduce costs and improve the health of the workforce.

Are investments in your workforce paying off?

As financial leaders carefully evaluate their balance sheets, they should consider whether the company's spending on human capital is generating sufficient ROI. For example, benefits are among the largest human capital expenditures, but too many companies are wasting money on benefits that employees don't use (at least not to the fullest extent). PTO is a repeat offender here, as it's often underused or used in ways that can actually increase stress and decrease morale in the workforce.

A 2022 survey found that employees had an average of 9.5 unused vacation days at the end of 2021, while almost a third of respondents said these days don't roll over into the next year. This means a huge number of vacation days that companies have budgeted for are being abandoned year after year. And even when employees take PTO, they remain tethered to the office: 49% say they work at least an hour per day on vacation, while 24% work at least three hours per day. At a time when 58% of employees say work is the most significant cause of their mental health challenges, it's a bad sign that they aren't taking the time off they've earned.

According to the U.S. Bureau of Labor Statistics, benefits account for almost one-third of total compensation costs (and a significantly higher proportion in sectors such as state and local government). CFOs need to make sure their organizations are spending this money wisely.

How CFOs can reduce balance sheet liabilities

While millions of vacation days go to waste every year, many states (such as California, Colorado and Illinois) require companies to account for unused PTO and compensate employees for the earned time they didn't take. This means unpaid PTO balances can accumulate over time and leave companies with significant financial liabilities when employees decide to cash out. CFOs should pay close attention to these liabilities and reduce them wherever possible.

Some employers have attempted to avoid this problem by offering what's disingenuously called "unlimited PTO." Many employees with unlimited PTO will tell you there are actually hard limits on how much vacation time they can take. Employees with unlimited PTO take around 10 days off per year, much less than the average of 17 days. When employees don't take enough time off, companies increase the risk of burnout and turnover. A more transparent and sustainable way to meet employees' demands for flexibility is to provide convertible benefits that automatically turn unused vacation time into other predesignated financial rewards, such as retirement or health savings account contributions.

Considering how much companies invest in benefits packages every year, more CFOs are going to be exploring innovative new ways to compensate employees and strengthen their balance sheets. This strategy is part of a broader shift toward more strategic responsibilities for CFOs, as well as greater collaboration across the C-suite in building healthy workforces.