Question: Who should the HR manager report to?

We are new owners of a small furniture making and retail business with about 60 employees. We are two partners. My partner is the CFO of the company. I am the CEO, sales head and the majority owner. We split the operations roles based on whether we are working on projects (my role) or existing processes (my partners role).

The previous owner had the controller (CPA) be the HR manager as well, but no real time was spent on training, employee issues, etc which may be the reason for high staff turnover in the past.

We are leaning on hiring an HR manager, but are unable to decide who he/ she should report to. My partner believes the role to be very transactional, so should roll into his team. I, on the other hand believe this role is key to driving culture change, and hence, should report to the CEO.

Your advice is appreciated.

9 Expert Insights

There are a few pieces of critical information missing that I would need to give you an answer. You might be able to get the answer yourself if you answer them, however.

1. Do you want employees, or team members? Employees are recruited primarily for their skills and retained by their compensation package. They make decisions primarily based on what the impact would be on their compensation package. Team members are hired for their fit to the culture and make decisions first on what is "right" according to that culture, and secondarily by the impact the decision would have on their compensation package. An HR manager of employees needs to report to the keeper of the purse-strings. An HR manager of team members needs to report to the primary team leader.

2. Which reporting relationship is more in line with your organizational touchstone? The vision, mission, and values of the organization should serve as a touchstone, determining the "purity" or value of every decision. What does your vision, mission, and values say?

3. What is the critical role for the CEO? What is the critical role for the CFO? What is the critical role for the HR Manager? Which critical role (CEO or CFO) is most aligned with, and most needs the support of the HR Managers critical role?

4. Why not just leave things as they are? The worst reason to do anything is "because everyone else is". If you don't hire an HR Manager, what impact will that have on your bottom line? What impact will that have on achieving your Vision? What impact will that have on your ability to successfully address the four areas of you mission statement? What costs & benefits (money, time, CFO bandwidth, CEO bandwidth, etc) would be involved in keeping things the same? What costs & benefits would be involved in adding an HR manager under the CFO? Under the CEO?

5. What "feels" like the right answer to you? To your partner? Why? Often "feelings" are a synthesis by our non-conscious mind that can provide a very valuable insight that is not yet accessible by our conscious mind.

I think the first thing the two of you need to do is agree on what the role, the focus and the priorities are for the business in terms of managing and developing your people. Are you planning on growing significantly? Do your people have the skills needed to be successful in the future? Will the organization need to change as you grow? Do you need to pay primary attention to being in compliance?

The bottom line is that both of you will be involved. Given your current responsibilities you will no doubt have different conversations with the HR Manager, based on what is most important from your point of view. You and your partner will undoubtedly have differences of opinion along the way … which in part is the value each of you brings perhaps to the partnership.

The important thing to remember is that whomever the HR Manager reports to will need to pay attention to and be ready to mitigate issues that arise so the HR Manager is not caught in the cross fire generated by the two of you.

I'd be willing to bet that this is just the first of what will prove to be many fundamental gaps between you and your partner pertaining to the business. You have lots of great insights provided above, but I suspect that what you need more than an answer to this particular question, is some work on revealing and reconciling the gaps between you.

This is just a symptom of more difficulties to come if you don't get clear on the underlying principles on which the company will operate.

An interesting question, I believe you will need to first determine exactly what the expectations and the requirements of the position are, once that is decided it will be easier to know who the HR person should report to.

In this situation I get the impression that the CEO is more action oriented and will want accountability and benchmarks where as a CFO usually uses the bottom line as the accountability marker and more times than not there is more than just the bottom line.

Although there are certainly many aspects of HR management that are transactional, tactical, and compliance oriented, there can be no doubt that selecting, developing, and pruning employees is strategic. As such if the choice is between the CEO and CFO the choice for reporting structure for the HR manager is similarly very clear.

CFOs are responsible for the extremely important financial management of the concern. The CEO is responsible for all the elements whose success determines whether there is even a need for a CFO - namely customers, marketing & sales, operations, product/service development and the supply chain.

In a company this size the CEO should be directly involved in every hiring, promotion, and pruning action. Without the best employees, the company will either fail or operate at a less than robust level. The CEO is in the best position to know what skills and experiences are truly important. And the CEO is the one person in the organization who will set the operational and cultural tone of the organization.

Like the others, I agree that you and your partner need to create an alignment about what this role will be because it does have an impact on your shared operating principles and vision for the firm.  That said, to not view this role as a significant contributor to building your culture, attracting and retaining key talent, and developing the skills you'll need for the future would be a missed opportunity.  

I disagree with the others on the importance of the reporting relationship, based on your very different views of HR and its contribution, where this role reports does matter.  If it reports to you, the message you will be sending to the company is that HR is a strategic part of your business and is as important as finance or sales in building company success.  In my experience, the vast majority of the time when HR reports to the CFO, it is a transactional function with little emphasis on strategic culture and talent issues.  It's about he basics -- managing payroll and benefits, writing the employee handbook and managing compliance issues.  There are exceptions to this -- I'm working with a CFO right now with a very strategic view of HR.  

How you define the role will also have significant impact on the types of candidates you are able to attract to the role.  All HR professionals are not the same. There are a significant number who view it as a strictly transactional role -- the old 'personnel' model.  There are others who view their role as strategic business partners and approach the work with both cultural and organizational expertise and business acumen.  My guess is that your partner has worked with the former and you, with the latter.

I have seen HR report to the CEO or the CFO. As I read your statement it appears the question is not where HR will report but how to deal with training, high turnover, morale and as you comment culture. HR will not solve your problem until you and your leadership team decide on what is your culture, your plan for your employees, how success will be measured. I would guess that interpersonal training maybe needed. HR will be responsible for executing your programs that support your culture but should not be responsible to create it.    

Congratulations on your purchase! On the surface your question sounds quite simple with a request for rationale behind the HR reporting decision -- transactional based with the CFO or more strategic with the CEO. However, a more thorough analysis of the business you purchased would be useful to set a baseline of the overall health of the company (HR, Operations, Finance, Sales and Marketing, Liabilities and Risk Management, Industry and Market Dynamics).

The results of this diagnostic can be used by yourself and the CFO to set overall company objectives and strategies for all facets of your business. Making a decision about the reporting structure for the HR manager in isolation might result in a decision that you'll regret later and there are affordable diagnostic tools for small businesses such as yours.

I agree with Karl as the reporting relationship is less important then the agreement about what you expect the HR manager  to do and how the two of you align on those requirements.