Human Resources

1 Introduction

This chapter and the next cover human resources (HR). The syllabus (E1E3) asks how the finance function interacts with HR: the main role of HR, the areas where the two functions touch, and the KPIs they share. The topic areas named are staff acquisition, staff development, performance management, and motivation and reward systems.

This chapter covers the whole E1 human-resources outcome: HR’s main role, workforce planning and staff acquisition, development, performance management, motivation and reward, the interface with finance, and shared KPIs.

2 The importance of human resource management (HRM)

2.1 The main role of HR

Human resource management is a strategic and coherent approach to managing an organisation's most valued assets: the people who work in it and who, individually and collectively, contribute to achieving its objectives. 'Strategic' is the key word – not firefighting each resignation or rush order as it happens, but planning long-term to have the right number of the right people, with the right skills, at the right cost, at the right time.

The HR function's main role breaks down into the four areas the syllabus names:

• Staff acquisition – workforce planning, recruitment and selection (this chapter).

• Staff development – training and developing people for current and future roles (covered later in this chapter).

• Performance management – appraising and improving individual performance (covered later in this chapter).

• Motivation and reward systems – pay, incentives and the design of motivating work (covered later in this chapter).

HRM views people as an asset to be developed for the benefit of both the organisation and the employees themselves – and it is as important as managing cash, materials or customers. It is also, for most service businesses, the management of the single largest cost in the business: payroll.

2.2 Why HRM is difficult

Some particular difficulties of managing the human resource:

• The environment keeps shifting. Ageing populations mean fewer young people entering the job market in many countries; jobs increasingly demand higher and more digital skills (remember the finance function's own shift from the triangle to the diamond in Chapter 1 – routine roles disappear while judgement roles grow); economies keep moving from manufacturing to services, where employees interact directly with customers; people change jobs more frequently than previous generations did; and expectations about work-life balance and remote or hybrid working have changed sharply – many candidates now expect flexibility, and organisations compete for talent partly on it.

• The asset walks out of the door every evening. There is no guarantee employees will come back – or that they won't relocate themselves to a competitor. Computer equipment does not behave like this.

• People are not machines. Performance varies with mood, health, and how people are managed and treated.

3 The HR cycle

The whole process of managing human resources can be summarised as a cycle:

Each stage feeds the next: what the appraisal reveals shapes development; how people are rewarded affects who stays; and who stays (and who leaves) feeds back into the next round of planning. The rest of this chapter deals with the first two stages – planning and staff acquisition. The remaining stages are covered later in this chapter.

4 Human resource planning

Human resource planning must be based on the strategic plan of the organisation. If the strategy is to open across Europe, people with the right language skills will be needed. If the organisation is moving up-market, it may need different people or different training. If the strategy involves automation, fewer transaction-processing staff but more analysts will be needed.

In essence, there has to be a budget for people, just as there is for cash or materials:

1. Assess the current position. What people are there now, and with what skills?

2. Estimate future requirements. Driven by strategy, growth, the trading environment and technological change.

3. Adjust the current position for estimated leavers and retirements, internal moves, and the aspirations and development of the people already employed.

4. Plan to fill the gap – through recruitment, training and development of existing staff, or both. (If the gap is negative, the plan is about redeployment and managed reduction instead.)

5 Staff acquisition: recruitment and selection

Staff acquisition covers a sequence of steps – each one narrowing the field:

5.1 Defining the job

• Job analysis establishes what the job actually entails. Will it involve customer contact, supervising a team, travel, budget responsibility, particular IT competencies?

• A job description is the output of the analysis: it sets out what the job-holder will be doing.

• A person specification then describes the kind of person who could do the job: skills, experience, qualifications, personality, and any necessary physical attributes.

5.2 Attracting candidates

The vacancy must then be advertised so as to attract a reasonable number of potentially suitable applicants. Recruitment today is overwhelmingly digital:

• The organisation's own careers site and online job boards

• Professional and social networks (such as LinkedIn), used both for advertising and for approaching candidates directly

• Recruitment agencies and executive search firms, which maintain candidate databases and can shortlist quickly

• Employee referral schemes – existing staff recommend candidates, often for a bonus

• Internal advertising, so existing employees can apply for promotion or transfer.

Larger employers manage the flow of applications with applicant tracking systems (ATS), which record every application and can screen CVs against the person specification. Automated screening saves time but needs care: screening rules and algorithms can unintentionally discriminate, and the organisation remains responsible for fair treatment of candidates (see the ethics of technology in Chapters 3 and 11). Applicants are shortlisted for the next stage.

5.3 Interviews

Interviewing well is a skilled process if it is to be any use in identifying good candidates; done badly, it fails to discover the better ones. Closed questions (answerable with yes or no) should be avoided – 'Can you work to deadlines?' will almost always produce 'Yes'. Ask open questions instead: 'How do you deal with work pressure and tight deadlines?'

First-round interviews are now commonly held by video call, which cuts cost and travel and widens the geographic pool – particularly for roles that will themselves be remote or hybrid. Later rounds are still usually face to face.

5.4 Testing

Tests are frequently used alongside interviews, usually administered online:

• Ability tests. If someone claims to type at 80 words per minute, it won't take long to check.

• Intelligence tests – sometimes used where candidates have few formal qualifications.

• Aptitude tests – testing potential rather than current skill; long used, for example, to select trainee programmers.

• Psychometric tests – assessing personality and working style: will the person show initiative, or work well in a group?

• Work sample tests – replicating the actual tools and environment of the vacancy to assess current skills as directly as possible, and to predict future performance in similar work.

Some employers use an assessment centre: an extended programme of interviews, tasks, group exercises and tests, sometimes lasting several days. It is expensive, so it is usually confined to candidates expected to progress quickly into management.

5.5 Appointment and induction

The favoured candidate is offered the job. There may be negotiation over terms, conditions and the starting date. After acceptance, references should be taken from the current employer to confirm job title, employment dates and salary.

Acquisition does not end with the contract. A structured induction (onboarding) – introductions, equipment and systems access, training in how the organisation works – gets the new joiner productive quickly and reduces the risk of early leaving. Induction needs particular care for remote and hybrid joiners, who cannot simply absorb how things work by sitting next to colleagues.

6 Finance and staff acquisition

The areas of interface between finance and HR on acquisition, and the KPIs they share:

The main acquisition KPIs – meaningful to both functions:

The remainder of this chapter completes the HR cycle: appraisal and continuous performance management, training and development, motivation and reward. It then brings together the HR KPIs and the full interface between finance and HR.

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7 Appraisal and performance management

7.1 Why appraise?

Employees' performance must be monitored to identify and evaluate:

• Inadequate standards of work

• Where training or additional experience might be needed

• Where promotion might be in order (progression)

• Pay and bonuses.

Managers must prepare properly for appraisal interviews: collect information about the employee's performance, and review previous appraisal records – including any areas where improvement was requested last time.

360° appraisal is increasingly common: employees are appraised not just by their manager but by their subordinates and colleagues too – and sometimes by customers.

7.2 Running appraisals well

Good two-way communication matters – the manager should not do all the talking. Employees may have legitimate explanations for apparently poor performance, and their preferences matter for development and progression.

Most appraisal processes use a form listing the important aspects of performance – technical ability, punctuality, ability to get on with customers – with scores allocated to each (say −5 to +5). The most effective approach is an open appraisal: the form starts blank and manager and employee agree each mark together, which forces real discussion. Far less successful is a pre-filled form the manager merely walks through – managers rarely change a score, whatever the employee says.

The appraisal approaches are sometimes described as:

• Tell – your manager tells you how you have got on, with little room for discussion or disagreement.

• Tell and sell – your manager tells you how you got on and tries to persuade you that the view is correct.

• Problem-solving – manager and employee co-operate in arriving at a fair appraisal and a plan.

7.3 From appraisal to performance management

Poorly executed appraisals do real damage. Some writers and practitioners dislike the very term 'performance appraisal' for its judgemental overtones, preferring performance management: a continuous emphasis on improving performance, to the benefit of employer and employee alike. In practice this means regular, informal check-ins through the year rather than one high-stakes annual ceremony – an approach many organisations have now adopted, with continuous feedback tools replacing or supplementing the yearly form.

Lockett suggested six barriers to effective appraisal:

• Confrontation – angry disagreement and emotion block useful communication; the employee feels persecuted.

• Judgement – one-sided criticism by the manager, with no employee input.

• Chat – too informal; no conclusions or targets result.

• Bureaucracy – form-filling so the manager can say the task is done, serving no other purpose.

• Event – a traditional annual ceremony, carried out with little thought about its purpose.

• Unfinished business – no follow-up: promises made in the meeting are forgotten.

8 Competency frameworks

A competency framework describes the values, skills and abilities required to perform a given role well. For each competency there is typically a general description, then the attitudes, behaviours and skills that indicate competence – and sometimes a closing negative statement describing behaviour the organisation actively discourages.

A framework entry might be structured like this:

Competency frameworks serve several purposes: they tell prospective recruits what is expected, tell staff which attitudes and skills the organisation encourages (and what they can expect of their managers), help shape the organisational culture around explicit standards of behaviour, guide development at every level, and link individual capability to the strategies that drive the organisation's objectives. For E1, treat them as background: the examinable angle is that they make development and appraisal systematic.

9 Training and development

9.1 Introduction

• Training is specific: it deals with current employees' needs for their current job.

• Development is less specific and more aimed at equipping employees for future jobs.

9.2 Delivering training and development

Training and development can be delivered by:

• Formal courses – in-house or external, face-to-face or (increasingly) live online

• E-learning: self-paced online modules and video libraries, often organised through a learning management system (LMS) that assigns courses and tracks completion; short 'microlearning' units fit training around the job

• Coaching – a junior is helped by a more senior employee while actually doing the job

• Shadowing – the trainee follows and observes a more senior person doing the job

• Mentoring – ongoing career guidance from a senior colleague outside the trainee's own reporting line

• Self-study of manuals and materials

• Sponsorship to undertake external qualifications – such as CIMA's own, or an MBA.

Training is expensive: trainers must be paid, and trainees give up productive time. Badly pitched training leaves people no more able to do their job than before. So training must be designed deliberately, and the following steps are typical:

1. Establish and analyse the training and development needs of each person (the appraisal is a key input)

2. Set training objectives – what should the person be able to do afterwards that they could not do before?

3. Plan the training, and arrange time for trainees to undertake it

4. Deliver the training

5. Review the success of the training and update training records.

10 Motivation of employees

Identifying how employees can be motivated is of great importance to employers. Motivation was once described as getting employees to run towards a target rather than amble towards it: a motivated employee is fired up to try hard and to do better.

There are many theories of motivation. One famous and intuitive one is Herzberg's two-factor theory.

Herzberg used the word 'hygiene' as an analogy with hospitals. A hospital must be hygienic – clean – or patients get worse; but hygiene by itself does not make anyone well. It is just the necessary starting point.

• Hygiene factors must be in place before any motivation is possible; if one is missing, people become dissatisfied and nothing else the organisation tries will work. Examples: enough money to live on, reasonable relations with colleagues and superiors, reasonable working conditions, a feeling of being fairly treated.

• Motivating factors are what actually drive better performance once the hygiene factors are in place: recognition and praise, a sense of advancement and growing skills, worthwhile and interesting work, and responsibility.

In Herzberg's first version of the theory, money was only a hygiene factor; later versions treated it as both a hygiene factor and a motivator (think of performance-related pay, where money doubles as recognition).

11 Job design

11.1 Introduction

Most theories of motivation suggest that there is more to a successful work environment than requiring people to repeat simple tasks unthinkingly: challenge, variety, initiative, recognition and teamwork all contribute to motivation and productivity. A traditional production line where each person performs one repetitive task may minimise the marginal cost of production – but that calculation ignores:

• The recruitment and training costs caused by high staff turnover when employees dislike their jobs

• The costs of staff shortages

• Poor quality, because employees do not identify with what they are producing

• The disengagement of employees from improving production methods.

These considerations gave rise to the job design movement, which aims to deliberately design 'better' jobs producing high intrinsic motivation (and so high productivity), high-quality performance, high employee satisfaction, low absenteeism and low employee turnover. Notice that absenteeism and turnover are measurable – they reappear below as HR KPIs.

11.2 Job design in practice

There are three classic approaches:

• Job enlargement – more tasks at the same level. The car assembly worker fits front and rear wheels and the bumpers instead of just the front wheels. The job cycle is longer and less boring, but every task is still basic, repetitive assembly.

• Job rotation – employees move round, perhaps daily, from one simple task to another: wheels and bumpers one day, windows the next. Some extra skills (still at the same level), less boredom, and the beginnings of task identity: building a car.

• Job enrichment – a vertical change: the employee takes on responsibility, discretion and authority previously exercised by supervisors – performing quality checks, say, or being responsible for reporting production problems. This adds challenge, autonomy and significance, and feedback becomes more meaningful.

Modern flexible-working practices – including remote and hybrid arrangements and flexible hours – can be seen as job design too: autonomy over where and when work is done has become part of what makes a job attractive, and for many roles it costs the employer little.

12 Reward systems

Rewards can be:

• Extrinsic – rewards that arise outside the employee: pay, praise from a manager, promotion.

• Intrinsic – rewards that arise from psychological enjoyment: the satisfaction of challenge and a feeling of having done well.

This section deals with extrinsic rewards arising from the pay structure. Pay divides into three parts:

• Base pay – a monthly salary or a rate per hour.

• Performance pay – pay that varies with performance, such as a sales representative's commission.

• Indirect pay – benefits such as pension contributions, life assurance, private health cover.

Performance pay can take several forms:

For performance pay to motivate, the qualifying objectives must be SMART:

• Specific – precise achievements and targets that are easy to understand.

• Measurable – 'be a better employee' is useless; 'increase sales volume by x' or 'cut the reject rate to y' can be measured. Without measurement, pay becomes arbitrary.

• Agreed and achievable – employees must believe the target can be reached with effort; set an impossible target and the sensible employee simply stops trying.

• Relevant – within the employee's control and aligned with what the organisation actually needs.

• Time-limited – achieved within six months, a year: people must know the timetable they are working to.

13 Finance, HR and the KPIs

The syllabus asks for the main role of HR, the areas of interface with finance, and KPIs. The interface, across everything in this chapter:

13.1 HR KPIs

(The acquisition KPIs – time to hire, cost per hire, offer acceptance, early-leaver rate – are covered earlier in this chapter.) As with marketing, alignment is the point: HR and finance should work from shared numbers, so that reward schemes are affordable, targets are measurable, and the true cost of turnover and absence is visible to both functions.

14 Test your knowledge

Two quick checks before you move on: work through the flashcards to fix this chapter’s key terms and definitions, then sit the objective questions for exam-style practice. Both mark themselves and explain the answers as you go.