Compensation’s Role In The Rise Of Strategic Finance

Finance


Written by Enrique Esclusa, Co-Founder & Co-CEO, Assemble

We’re witnessing the Finance function reinventing itself as “Strategic Finance” in real-time, shifting from a supporting function focused on analyzing the past to driving decisions that play a central role in shaping their company’s future.

Finance teams are tasked with planning, analyzing, and supporting the allocation of a company’s financial resources. Naturally, this has always involved compensation, as it typically represents the largest operating expense for a company. But in this new era, merely overseeing compensation will not suffice — Strategic Finance teams must be deeply involved in understanding compensation, helping drive strategic decisions over their company’s most important investment: their people.

The rise of the Strategic Finance function is now upon us, and compensation is playing a key role in the story.

My Path to Strategic Finance

For a long time I envisioned myself as a future CFO. For more than a decade I made deliberate decisions that would position me to accomplish that.

I began my career at an investment bank in New York, and later moved to San Francisco to work at a private equity firm. I spent countless hours dissecting financial statements and building financial models. (So many hours that, to this day, I often dream of spreadsheets.) Eventually, I decided it was time to move on from an investing to an operating role, to get the operating experience I lacked in my journey to CFO.

In 2016 I joined a high-growth cybersecurity tech company, where I spent the next four years managing the Strategic Finance team. It wasn’t until I actually sat in an operating seat that I realized what a Strategic Finance function entailed, where it was heading, and the crucial role that compensation played.

A Hard and Early Lesson: The Importance of Compensation

I was committed to excelling in my role as head of Strategic Finance. Our job was to develop a complete and accurate operating picture of where we were investing our financial resources to ensure we were making sound capital allocations. It’s obvious in hindsight, but one of my earliest lessons was that employee compensation was our single biggest operating expense, and something of which I needed to have a clear grasp.

Compensation rightly falls under the HR or People department, not Finance. This makes sense, as compensation is not just the major financial investment most companies make, it is also deeply personal to every employee, has legal and compliance implications, and requires a nuanced perspective to be properly managed.

For the Finance team, looking and dissecting numbers in a spreadsheet came naturally, but compensation had downstream impacts that were critical to understand. It wasn’t about conducting and maintaining analyses during planning cycles and reporting on them monthly. Compensation was always “on” and changing, as our team continued to expand and change. Furthermore, there are cultural and human elements to compensation that you don’t see when dissecting other expenses, which came less naturally to our Finance team and required a crash course on the nuances of compensation, which had to come directly from the People function.

More than a Number — and Becoming More Complex

Compensation is not just a number, it is a reflection of how a company values its employees. Compensation represents most employees’ livelihoods and has a material impact on employees’ productivity and retention. At my previous company, we needed to get compensation right not just to develop and adhere to budgets, but to attract and retain the human capital required to deliver on our goals and objectives. As a Strategic Finance leader, this meant I needed to understand our compensation philosophy, our compensation bands, and how compensation decisions would be made.

Complicating matters, our business and the market were both rapidly evolving. We were dealing with these challenges in a pre-COVID world. This was before the subsequent rise of remote and unprecedented leaps in compensation. Before the highest inflation we’ve seen in decades. Before we entered a recessionary environment and saw the rise of layoffs in tech and other industries. Before the role of the Finance function dramatically changed and financial planning became much more complicated.

The Strategic Finance Era: Compensation at the Forefront

Compensation decisions are more costly, complex, competitive, and dynamic than ever. Yet businesses are stuck paying tomorrow’s workforce using yesterday’s tools. This tectonic shift makes the role of the Strategic Finance team much more difficult.

When compensation is your biggest expense as a business, and what fuels the livelihood of your employees, getting compensation wrong can be one of your most expensive mistakes.

There are some obvious financial costs of mismanaging compensation. Among them: driving expenses up when overpaying for employees, and seeing greater attrition when underpaying employees, which can directly impact top line growth, product velocity, or customer retention. But there are also hidden and emerging costs and risks.

There is the often-forgotten loss of productivity involved in replacing an employee — significant time invested by recruiters and hiring managers to source, recruit, and train new employees, which can take months if not quarters, as well as delaying teams’ ability to deliver on initiatives due to being short-staffed.

There is also the increased reputational risk associated with pay inequity. Unjustified disparities in pay can impact a company’s employer brand, making it more difficult to hire and retain employees, and can expose employers to litigation risk and hefty fines. You need not look further than the emerging pay transparency laws in places like California, New York (both city and state), and Washington, which not only increase the complexity of managing compensation, but can also trigger fines of up to $250,000 for repeat violations.

The modern Strategic Finance department must account for all of these costs. These are not just potential costs and risks — they can have a material impact on a company during an economic time where the margin of error is lower than it has been in decades. These are now Board-level discussions, with regulatory bodies getting more heavily involved. Despite the increased complexity, there is a path forward.

Finance and HR: a Powerful and Necessary Partnership

Now, more than ever, Finance and HR teams must showcase strong and strategic collaboration to navigate an increasingly complex and difficult macroeconomic environment.

According to a leading human capital expert, “high-performing organizations have a greater focus on HR metrics. Costs, performance, attrition, retention, productivity are all being measured with much greater frequency, as the CFOs and CHROs are collaborating to try to ensure the organization is optimizing the return on the money that it’s spending on its people.”

In good times or bad times — I’d argue especially in bad times — the Finance and HR partnership must be strong to navigate what is becoming an evolving and increasingly complex business environment. One that, for the modern Finance team, places compensation at the forefront — not just as the largest operating expense, but as a strategic pillar that can make or break a business.

The Path Forward

The transition from Finance to Strategic Finance is a shift from analyzing the past, to driving investments for the future. To navigate the macroeconomic headwinds ahead, Strategic Finance teams must evolve beyond simply understanding compensation, to helping to drive how compensation is managed — from how a company’s compensation philosophy is defined, to how its compensation bands are set.

While understanding compensation may be daunting at first, Finance professionals can use this as an opportunity to deepen their relationships with their People and HR counterparts, leveraging compensation as the springboard for their own Strategic Finance transformations.



Source link

Leave a Reply

Your email address will not be published. Required fields are marked *