HR Investment Is Flawed: 4 Essential Actions To Fix It

HR strategy research insights at a glance

In partnership with Revelio Labs, our analysis of 50 top-performing companies on what sets their HR investments apart revealed four insights:

• Insight 1: The HR function size reflects investment priorities
• Insight 2: HR skills composition reflects investment in HR’s strategic focus areas
• Insight 3: HR salaries are lower than other roles
• Insight 4: HR is expected to do more with less investment in the function

Execution is the Achilles’ heel of strategy. Over 90% of strategies fail to materialize as planned. 

HR leaders, in particular, encounter significant hurdles when executing their strategic initiatives. These challenges stem from issues, including a lack of stakeholder buy-in, failure to adapt to changing circumstances, and insufficient investment in enabling the strategy’s success. This harms HR’s perceived value and contribution to the business, and impacts its credibility, as well as the perception of HR as a strategic partner. 

In this article, we examine the gaps in current HR investments and propose three actions organizations can take to close these gaps. We also share insights from our analysis of 50 top-performing companies to highlight what sets their HR investments apart and what we can learn from their approaches.

The flaws in current HR investment strategies 

Outdated methodologies

The nature of work has drastically changed over the years. Yet, the approach to HR investment has largely remained the same. Organizations often stick to outdated methodologies that don’t reflect the complexities of today’s workplace. Traditional strategies for investing in HR rely on archaic HR-to-employee ratio guidelines, inflation-adjusted budgets, and a lack of attention to the changing scope and skills required in modern HR teams.

Despite significant advancements in HR technology, many organizations still view these innovations mainly as tools for reducing headcount and cutting costs rather than as platforms for enhancing HR capabilities and expanding the scope of HR services.

This narrow view overlooks the greater potential of technology to drive strategic value. By using technology to scale HR functions, organizations can better support talent management, improve employee engagement, and build a more adaptable and resilient workforce.

Outdated workforce planning

Current approaches to HR workforce planning also fail to reflect today’s work environment. Outdated full-time equivalent (FTE) ratios are still being used for today’s varied and complex roles. 

Effective HR investment requires understanding key factors: the specific roles within the workforce, the importance of skills, the geographic and operational distribution of employees, and the efficiency and productivity of work processes. For example, remote and digital workforces need different HR solutions, which an employee-to-HR ratio cost calculation cannot determine.

Overlooked HR capabilities

There’s also a persistent lag in investments in developing HR skills. While many organizations prioritize reskilling roles directly impacted by digitization and automation, they often overlook the critical need to build HR capabilities.

This gap limits HR’s effectiveness since HR professionals aren’t equipped with the skills needed to navigate and lead through technological and organizational changes. 

To address these challenges, we analyzed 50 top-performing organizations to understand their HR investment strategies and identify opportunities to improve how organizations invest in HR.

A call for change in the strategic HR investment approach

We will unpack four key insights from the data and propose actions HR leaders must adopt in their organizations.

Insight 1: The HR function size reflects investment priorities

Our data reveals that successful organizations typically have larger HR teams compared to their counterparts in the U.S. In these organizations, HR accounts for 1.9% of the workforce versus 1.3% in other organizations. 

Even though HR teams are relatively small compared to the broader workforce, successful organizations show a clear commitment to investing in growing their HR teams proportionately with their workforce. This differs from the general trend, where the growth of the HR function often lags behind overall business growth.

The size of the organization also plays a significant role in the growth of the HR team headcount. In smaller organizations, HR remains one of the least represented functions compared to other functions like sales and operations, with little variation between companies. However, in larger enterprises, successful companies significantly invest in growing their HR teams. 

This investment is crucial for managing the increased complexity of a large workforce, often spread across multiple geographies, which requires sophisticated HR strategies to address diverse and distributed workforce needs.

The strategic investment in HR helps manage the complexities of a vast, multi-geographic workforce and ensures that HR strategies are effectively put into action. Our findings highlight that investing strategically in HR can significantly impact organizational long-term success.

Insight 2: HR skills composition reflects investment in HR’s strategic focus areas

Our data indicates that successful organizations prioritize investment in transformational HR skills, like leadership development, talent management, and performance management. Notably, these organizations don’t sacrifice operational skills for transformational ones. Instead, they build robust capabilities in both areas. This ensures that they maintain strong transactional HR skills in areas such as employee relations, talent acquisition, onboarding, and training.

This dual investment approach highlights that HR strategy success depends on balancing strong transactional skill sets with adequate transformational skills. The findings align with data indicating that top-performing companies invest substantially in employee engagement, Environmental, Social, and Governance (ESG) initiatives, and Diversity, Equity, Inclusion, and Belonging (DEIB) as core components of their HR strategy.

Achieving these objectives depends on a combination of transactional and transformational HR skills, demonstrating that neither set of skills is inherently superior.

By investing comprehensively in HR capabilities, organizations can develop a dynamic and responsive HR function that supports current and future business objectives. Valuing transactional and transformational skills equally ensures that organizations are well-equipped to handle the diverse challenges of today’s workplace while positioning themselves for sustained success.

Insight 3: HR salaries are lower than other roles

Our analysis of the 50 companies found that HR salaries have decreased over the past five years, while salaries in other roles have seen significant growth.

Specifically, HR salaries within these companies have decreased by 2%, whereas other roles have increased by almost 8% during the same period. This trend is also consistent with trends across the U.S. beyond the 50 companies we studied.

HR pay equity remains a contentious issue. At the executive level, organizations often pay their Chief Human Resources Officer (CHRO) less than other executives, reflecting ongoing remnants of historical pay disparities. Since 65% of HR professionals are women, this pay discrepancy could also be linked to the broader gender pay gap that still needs to be addressed within HR.

However, the gender pay gap alone doesn’t fully explain the decline in HR salaries. Several factors are at play:

• Cautious workforce investment: Organizations have become more conservative in their workforce investments, often targeting HR departments for cost savings. This is evident in recent reductions in Diversity, Equity, Inclusion, and Belonging (DEIB) departments and widespread layoffs in the tech sector that have also affected HR professionals. Hiring freezes also reduce the demand for talent acquisition roles, creating a more competitive environment for recruiters and leading to more commission-based pay structures.
• Changing HR role composition: There may be a shift in the types of HR roles organizations invest in, which could lower the average salary base. There has been an increase in investing in more generalist skills instead of deep-seated specialist expertise, which could contribute towards the decreasing average salary in HR.
• Legacy perceptions: Some companies still don’t see HR as a strategic priority, viewing HR salaries as less critical from a retention perspective. In a tight economic labor market, this perception could contribute to a lack of salary growth for HR professionals.
• Rise of fractional HR roles: An increase in fractional HR roles, where organizations opt for part-time or contract HR talent instead of full-time employees, also contributes to the decline in average HR salaries.

Given the increasing pressure on HR teams and the expanding scope of their work and expectations, we believe that organizations aiming for success should approach HR remuneration with the same rigor as they do for other critical skills within the business. There is a tendency to overlook the market rate for crucial and scarce HR skills, which, if not addressed, could result in a future shortage of qualified HR professionals.

Insight 4: HR is expected to do more with less investment in the function

While top-performing companies effectively leverage HR teams, it often comes at a significant cost. HR teams in these organizations tend to have shorter average tenures and a 4% higher turnover rate compared to other roles. Reports also indicate burnout levels as high as 98% among HR professionals, signaling potential issues ahead. Additionally, 71% of HR leaders say that burnout within their teams is becoming an increasingly critical issue.

These insights highlight the need for organizations to rethink how they support and retain HR talent, emphasizing the importance of a more comprehensive approach to managing HR careers. 

The insights from successful companies reveal a paradox in their approach to HR strategy. They are investing in a balanced mix of transactional and transformational skills, aligning their HR team growth with overall workforce expansion. However, this success is marred by overshadowed HR turnover rates, relatively small HR teams compared to the total workforce, declining salaries, and potential retention issues. 

This raises a crucial question: is short-term success paving the way for long-term challenges?

The potential cost of this approach could be significant, measured in HR burnout, insufficient infrastructure for HR professionals, and a continued undervaluation of HR roles in terms of salaries. This scenario is unsustainable given HR professionals’ increasing responsibilities in a changing workplace, and it doesn’t reflect the true value HR brings to organizations. 

Many would mention that HR technology is the answer to solving these capacity challenges. While we firmly support the role that HR technology needs to play in the future to drive efficiencies and impact, our research showed no significant investment in HR technologies beyond standard HRIS and ERP systems. We believe that HR technology has a role to play, but it won’t be the silver bullet many believe it could be. Responsible organizations will take a more holistic approach to investing in technology, talent, and skills.

Final words

Given HR’s changing role and scope in today’s workplace, it’s crucial to invest in strategic initiatives for successful execution. While HR leaders face tough challenges, they can be overcome. This requires a deliberate focus on positioning the HR function effectively, investing holistically in HR in alignment with other business disciplines, developing the skills needed to meet strategic objectives, and prioritizing HR talent and wellbeing. 

Currently, HR strategy execution is falling short of delivering the desired value. If we continue on this trajectory, we risk significantly diminishing HR’s impact, now and in the future — missing opportunities for the function to drive meaningful change.