How should HR leaders respond when people-related costs become a board problem? Three HR leaders share their perspectives.

When two organisations decided to merge, the financial case looked compelling. 

In an environment of tight margins and overlapping cost bases, the merger proposal assumed synergies over time, a significant portion of which sat in workforce and leadership structures. On paper, the savings were promising. But in reality, the implications were complex.

“The financial modelling showed clear duplication in corporate functions and some operational overlap,” says veteran non-executive director Samantha Martin-Williams FAICD.

“However, the more difficult discussion centred on capability: Which leadership roles were essential to execute integration successfully? Where did each organisation hold institutional knowledge that could not be easily replaced?”

Initially, the conversation leaned toward accelerating cost-out to demonstrate merger momentum. But a more disciplined shift came when the board reframed the issue. 

“We slowed pace and asked what workforce decisions would genuinely strengthen the combined entity and which might undermine integration success,” says Martin-Williams.

That tension between immediate margin relief and long-term organisational capability is increasingly familiar in boardrooms across Australia. Labour costs are claiming a larger share of business revenue, thereby putting margins under sustained pressure.

The latest data from the Australian Bureau of Statistics shows wages climbed 3.4 per cent over the year to December 2025, while company gross operating profits rose 1.1 per cent over the 12 months to September 2025. Wage pressure ranked the biggest or second-biggest business inhibitor for 34 per cent of respondents in the Australian Industry Group’s January 2026 Leaders Survey.

“People costs show up as a board or executive issue, but they often point to a broader performance challenge in strategy, execution or both,” says Melissa MacGowan, HR Executive and leadership coach, who partners with leaders and HR leaders navigating these conversations. 

“Understandably, the question is: are we getting the return we need on our greatest and most expensive asset – our people? Are we protecting the capability that allows the business to perform tomorrow?”

Finding the right metrics to demonstrate impact

The questions boards are asking of HR have shifted materially. Five years ago, directors tended to focus on total labour cost, headcount growth and alignment to revenue. 

Today the conversation is more strategic and risk-based, covering which capabilities will differentiate the business in three to five years, where there is over-reliance on key individuals and where critical skills are thin. 

Leadership pipeline strength, workload sustainability and early signals of cultural stress now sit firmly within the board’s line of sight.

Christina King FCPHR, a Chief People Officer with experience across well-known Australian organisations, sees this reflected in board composition. More boards now include directors with HR or organisational capability experience, actively seeking a CPO perspective alongside the CFO’s and asking for data that sits outside the profit and loss statement.

But that shift creates a gap that traditional HR frameworks need to close. Boards and executive leadership teams continue to receive engagement scores, turnover percentages and training hours. While these are all useful data points, they’re not answers to the questions they are now asking.

“Boards [and leaders] are not looking for activity reports. They want to know what those numbers mean for performance, risk and strategy,” says Martin-Williams. 

MacGowan identifies the core issue: the longstanding practice of measuring activity as a proxy for performance, which boards have historically accepted.

“People costs show up as a board or executive issue, but they often point to a broader performance challenge in strategy, execution or both.” – Melissa MacGowan, HR Executive and leadership coach

It works well in good times, but when margins tighten, the gap becomes visible. She recalls working with a leadership group where hundreds of performance goals had accumulated in the system. Many were well intentioned but described activity rather than outcomes. 

“There were too many, and most described activity rather than outcomes that improved performance,” she says.

King believes the solution requires translating HR’s work into financial impact – i.e. supplementing traditional metrics with dollar outcomes and a narrative that connects the two.

HR leaders also need clarity on what value different teams contribute to the P&L, because once cost pressure intensifies, decision-making can become clouded.

High-performing boards and executive teams recognise workforce spending as enterprise capability and approach it with the same discipline as any other strategic investment, says Martin-Williams. 

When margins tighten, people-related costs attract attention as the largest controllable expense. But in well-governed organisations, the conversation quickly moves beyond how much can be removed to what capability is being shaped, protected or potentially eroded. 

How HR can move from advocacy to stewardship

The pattern of capability erosion is familiar. Organisations remove experienced middle leaders who hold deep operational knowledge, freeze specialist recruitment during downturns or accept voluntary redundancies without mapping the capability being lost. 

The early warning sign, says Martin-Williams, is when proposals are framed purely in financial terms, with little discussion of execution risk. The cost often reappears later, through the need for consultants, delays or stalled initiatives.

MacGowan sees these patterns play out after restructures. Businesses reduce headcount under pressure, then lack discipline to prevent capability creeping back in through contractors at premium cost. The result is no structural improvement, higher ongoing expense, and disengaged staff. Businesses that avoid these traps reframe cost discipline. 

“My first question is, are we sure we need to cut costs, or do we actually need to grow revenue or profit?” says King, adding that this simple intervention forces a distinction boards often blur: between a cost problem and a performance problem.

King describes an example when reframing changed the outcome.

A proposal to cut training linked to quality outcomes looked sensible on the surface. Instead of defending the program on principle, she calculated the full cost picture: customer complaints, remediation, regulatory exposure and reputational damage. As a result, the training was protected. 

Avoiding damage requires HR leaders to influence before parameters harden. MacGowan challenges HR’s tendency to position long-term capability against short-term cost discipline as a false choice. She recalls advice from a former boss: there is no long term without the short term and there is no short-term performance without the right capability.

“If I’m sitting at that table as an HR leader, and we’re talking about cost pressures, and I’m also wanting to move forward with something that perhaps was aligned back when we made that decision, but now is not the right time from a cash perspective – it’s tone deaf, and I lose credibility.”

That doesn’t mean accepting every reduction uncritically, but distinguishing between discipline and damage. 

“A CHRO who positions themselves as a steward of enterprise capability, willing to identify inefficiency as well as risk, builds credibility quickly,” says Martin-Williams. “It’s entirely possible to support disciplined cost management while being clear about where reductions would damage strategic capacity. That balance earns trust in the boardroom.”

In her merger example, the approach was eventually staged rather than immediate. Structural redesign occurred where duplication was clear, but critical roles were protected. Investment in integration capability happened early. 

When boards and management operate as a cohesive team, workforce scrutiny becomes strategic, not simply cost-cutting.  

🧰 HR’s career resource toolkit

• Infographic: How to talk about HR’s work at a board-level
• Learning: Learn how to effectively balance and manage the needs of employees and leaders, handle pushback and successfully manage conflict and emotion with AHRI’s Overcoming Stakeholder Resistance course.
• Article: A glossary of boardroom terms to enhance your executive influence.
• Article: 4 ways to work through executive resistance.

This article was peer reviewed by Dr Michelle Phipps FCPHR, CPO SDN Children’s Services, AHRI Board. Member and Chair of AHRI’s DEI Advisory Panel. A longer version of this article was first published in the July-August edition of The HR Agenda, AHRI’s member-exclusive magazine.