Why HR Should Never Report to Finance

Man with an organization chart showing HR reporting to the CEO
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As businesses grow and begin to add employees, the first HR-type activity needed is recruiting, of course. But, additionally, employers must pay people and people need benefits. So, often, the first person holding part of a Human Resources role is the person who pays the staff. This may be an administrative assistant or a member of the finance or accounting departments.

No matter what this individual's title or job is, this person generally reports to finance and accounting. Just because this is how a small business usually grows, doesn’t make it the right path for your business to travel. It’s most likely not.

Issuing paychecks is dramatically different from understanding what goes into calculating an appropriate pay rate. Knowing how to do proper deductions so that taxes and other deductions are done correctly is completely different from knowing how to evaluate which insurance program is best for your growing company.

So, the skill set of the financial person who pays the staff is generally not up to speed for even the financial aspects of their HR job. The chances of this person knowing and understanding the other facets of the HR role in an organization are nil.

Checks and Balances Between Functions

Every organization needs checks and balances. When HR reports to finance, the hands of the people most likely to advocate for effective people policies and organization development—your HR staff, are tied. When HR reports to finance, your HR person is moved one step further away from where organizational decision making occurs—at the executive table.

When HR reports to finance, policy decisions are primarily finance driven and are often not employee friendly. They need to consider people for your organization to succeed. 

The primary role of HR is to support the business by recruiting, retaining, and developing the best employees. This often costs money and the hard return on investment is difficult to explain to finance. When HR says, “We need to run this executive development program so that we can make sure we have a solid talent pipeline,” finance is likely to say, “That costs $10,000. No way.”

It's absolutely critical that HR speak the language of finance—HR staff members have to put things in terms the financial staff can understand. But, when the direct boss of HR is finance, there is no one else to advocate for people-related programs. Business leaders need to understand the importance of happy staff and the relationship between employee satisfaction and productivity and contribution.

Of course, it's also critical that a return on that investment is demonstrated. If your business does spend $10,000 on an executive training program, but your company culture is toxic, all of that money is wasted.

So, while it's tempting to blame finance for lack of program and recruiting funding, it's also critical that HR does its job and does it well. Are good employees praised and bad employees reprimanded? Are bullies allowed to run rampant throughout the company?

Are pay raises done haphazardly? Are employees asked to fill out multiple forms? Are mandatory sexual harassment training meetings incredibly boring and counterproductive?

If any of this is the case, finance is right to disagree with and doubt HR when they say this next program will fix the organization's problems. When, however, HR is doing its job, it needs an advocate who understands the value of spending money now to make more money later.

For example, giving a valued employee a needed raise today makes them less likely to quit their job, which saves the organization higher turnover and training costs.

Where Should HR Report?

In an ideal world, the head of HR should report directly to the CEO. This reporting relationship makes HR part of that senior leadership team that helps guide and direct company policy. All aspects of employment should be considered as checks and balances.

Finance serves a critical role in a company. It's their job to keep costs down and income high, but having the best people, who are treated well, and paid a competitive salary, is the way to do that. 

You need to strike down any barriers that stand in the way of your people so that the business can succeed. When HR reports to finance, rather than being equal to them, that is an extremely difficult reporting relationship.

Keep your checks and balances in place. HR should never report to finance and accounting.