Recommended Ways of Setting Up a New HR Department

November 1, 1993
Although the development of human resources departments in rapidly growing organizations can vary greatly from company to company, there are some recommended ways of going about the process, depending on the type of company. The point at which you formally establish the HR function, for example, depends on whether the company provides a service or manufactures a product.

According to Candice Mendenhall, group vice president of Manchester Inc., an HR consulting firm in Washington, D.C., manufacturing companies usually can continue without an HR department for a much longer period of time than a service business. This is because service companies are much more labor intensive, and the quality of the "product" that they provide is more directly linked to the quality of the people that they hire.

"Typically," she explains, "I would say that a stand-alone HR function is needed when a company reaches about 200 employees." This is because business changes can't be communicated as easily, managers aren't on a first-name basis with every employee any longer, and policies and procedures are needed to treat the growing number of employees fairly. Additionally, effective recruitment is essential because the type of people hired can greatly influence the culture of an organization that's making the transition from a small- to a mid-sized company.

Once the department is established, how much money should be budgeted for HR programs? That totally depends on the culture of the organization's financial health, Mendenhall says. "There's no magic number," she adds.

Selecting the right person to head up the HR function is important in any company, but it's crucial in rapidly growing organizations. Typically, what happens is that someone without a human resources background is promoted through the ranks. This person usually is very bright, and other employees know and trust the individual. In the short term, that person probably can get things done quickly. "However, the individual also is learning the function as [he or she is] doing it," says Mendenhall, "and this isn't in the best interest of the company for the long term. There's a high rate of failure with this approach because the organization can outgrow the person quickly."

A more ideal situation is to bring in an HR generalist, a practitioner who has solid human resources experience with other companies. This person should be a doer and become a strategic business partner. Because the individual is working in a staff position, this professional also should be a diplomat—someone who can convince people without controlling them.

Even if the HR staffers in young companies have extensive experience, they may have difficulty designing programs that are capable of growing with the company. In fact, this is one of the biggest challenges faced by fledgling HR departments, Mendenhall says. For example, compensation plans typically follow a range with established minimum and maximum levels. The problem is that small companies have to compete with large companies for talent, and that range may not be competitive. A better, more long-term approach would be to offer compensation that's weighed more heavily toward bonus payments rather than base salary.

Mendenhall says that another example of an HR program that will have difficulty growing occurs when a company decides to pay all health-care costs for employees, thinking, "We only have 50 people, we can afford it." "Well, maybe you can afford it now, but by the time you reach 2,000 employees you might not be able to, and it's bad for morale to take away a benefit," she adds. A better approach would be to design a health-insurance plan that's always somewhat contributory.

To determine how effective the new HR programs are, personnel professionals in small companies should learn to monitor their effectiveness, just as professionals do in larger companies. Employee surveys, market and industry data and competitive benchmarking can provide a valuable basis of comparison. "You need to be able to justify everything, from the cost of recruiting to turnover rates," Mendenhall says. "I'm a strong proponent of taking the CEO to HR workshops and seminars, so that the CEO can learn about current personnel issues and how HR problems are being addressed at other companies."

If HR professionals in small companies do their homework, they most likely will find that for the organization to grow, HR has to be a strategic business partner. The days of HR serving simply an administrative staff function are rapidly coming to an end, regardless of the size of the company involved. As Mendenhall explains, "I believe HR should be an active partner in creating and reaching the goals of the organization. If the HR director isn't a member of the executive team, the individual is at a disadvantage in helping the organization move forward. If they aren't strategic partners, they'll always be trailing the business, and this is especially dangerous in a growing company."

Personnel Journal, November 1993, Vol. 72, No.11, p. 59.