Adding HR Audits to the audit rhythm builds and validates HR competency.

By Jean Roque, President, Trupp HR.

HR Audit

You eat income statements for breakfast. Now you can master HR with equal vigor.

The growing cost and complexity of health care, financial impact of human capital decisions, and reduction in human resource staff has driven many companies to the decision of expanding the CFO’s role in the HR function. In fact, over the last three years, nearly 20 percent of senior financial professionals have expanded their responsibilities into HR decision-making (Robert Half Management Resources), which translates into less time focusing on the financial performance of the company and more time spent in areas that are not a core competency.

Although human resource activities are sometimes viewed as burdensome at best, the impact of HR-related activities, policies and decisions should not be taken lightly. Not only do these decisions substantially impact the health and profitability of the company, they also carry the real threat of personal liability. Since financial leaders are intimately aware of the importance of protecting the welfare of the company and its decision makers, this mindset should easily extend into HR responsibilities.

Short of becoming a human resource expert, how can leaders insure they are taking the proper steps to protect the well-being of the company and maximize their human capital ROI? Many financial leaders are turning to a familiar tool–the audit process. Extending the annual audit rhythm to include an audit of the human resource function is an ideal approach to building and validating organizational HR competency. A comprehensive HR audit addresses not only simple regulatory compliance, but identifies the more complex areas of expense reduction strategies, litigation risks, along with opportunities to increase profitability and employee productivity. Some of the more common areas explored during an HR audit are:

HR Audits reveal opportunities to reduce expenses

  • Employee selection. Companies with excessive turnover can experience considerable savings. Replacing one person costs as much as 50-250% of annual salary. Average turnover for all industries is around 18%.
  • Benefits administration. Improperly administered or negotiated benefits result in excessive spend. For example, on average, 3-8% of covered dependents are actually not eligible.
  • Automation. Systems that simplify and combine storage and reporting of employee data can save as much as $19.07 per employee per month in improved efficiency and accuracy.
  • Absenteeism. Absences are expensive to an organization. Direct and indirect cost of absences averages 36% of total payroll with unplanned and intermittent absences at roughly 8.7% of payroll.

 

HR Audits identify compliance and litigation risks

  • Wage and hour. Wage claims increased 10% from 2009 to 2010 and settlement amounts also increased. It only takes one disgruntled employee to cause an employer’s entire time records to be scrutinized resulting in back wages and penalties for class action damages.
  • Exempt employee status. Federal enforcement is increasing. 100 new federal employees were hired to carry out audits and litigate employers who misclassify employees as exempt.
  • Independent contractor status. Other enforcement is focused on willful misclassification of employees as independent contractors with penalties of up to $25,000 per violation. Individual damages are added on top of any penalty imposed.
  • Retaliation. In 2010, the EEOC reported retaliation claims continuing to rise, representing 36.3% of all claims filed. Retaliation charges can occur when an adverse employment decision is connected to such things as an employee’s protected leave, their race or sex, or whistle-blowing.
  • Discrimination/Harassment. EEOC charges filed increased by nearly 30% between 1999 and 2009. The average cost to defend a charge was $250,000 and $550,000 is the average settlement award.
  • Pay Discrimination. The new Fair Pay Act (2009) extends the filing deadlines for pay discrimination charges and lengthens the historical data used to determine damages; drastically increasing damage awards.

 

HR Audits highlight opportunities to increase productivity and profitability

  • Employee Engagement. Getting the most from each employee creates profits. Companies ranked in the top 10% for employee engagement achieve a 72% differential in earnings per share when compared to their competition.
  • Compensation. 80% of a company’s value is contributed by employees who perform in the top 20%. Assessing compensation plans and merit increases based on rewarding top performers and aligning employee behavior with company objectives contributes to productivity and employee retention.
  • Outsourcing. Human resources costs per employee are increasing, recently by as much as 17%. Strategic outsourcing of activities can shift HR resources to activities that directly impact productivity and profitability.

Successful HR audits actively involve company leaders in enhancing efficiency and performance through people. The audit starts with preparation, or the pre-audit stage, when records and documents are identified and gathered ahead of the on-site visit. When the on-site visit is launched, a business with 100 or fewer employees can estimate the review to last 2-3 days. Most importantly, leadership should be prepared to actively engage in the post-audit review meeting where key findings are shared and translated into a plan which defines priorities, implementation owners and the success measures that will be used to assess progress and ongoing performance. With a few simple strategies your company can harness savings, reduce financial exposure, and increase productivity while strengthening organization-wide HR competencies.

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