How CAPEX and OPEX Can Drive Employee Retention
Most companies don’t look to their finance teams for wisdom on the topic of employee happiness, but maybe they should. That’s because the finance department, traditionally the behind-the-scenes steward of expense reimbursement and payroll, has years of experience performing a kind of analysis that management gurus say is the foundation of a happy, healthy workplace.
This thinking doesn’t have to do with bonuses or lavish perks. It’s about understanding what people want out of work and enabling the business to deliver it to them. As finance teams evolve into increasingly advisory roles, could we one day see the loftiest thinkers in HR rushing over to the accounting room for advice?
Infrastructure vs. investment
Business expenditures come in two varieties: costs that pay for revenue you’ve already earned, and costs that pay for revenue in the future. Accountants will recognize the terms “operating expense” (OPEX) and “capital expense” (CAPEX), but the distinction boils down to a simple idea: that paying to keep the lights on is different than investing for the long-term.
Every business needs to do both. On the OPEX side, you’ve got ordinary expenses you can’t avoid paying. They don’t really add anything to the business, but they’re necessary to stay up and running. It’s hard to generate revenue when your electricity is getting shut off.
CAPEX, meanwhile, refers to expenditures that add value to the business in the long term. This type of expense is typically more costly and more strategic than operating expense.
Part of the finance team’s job is to manage company spend in a way that achieves specific business goals. If management wants to hit some specific operating margin next quarter, it’s Finance’s job to analyze what they had to outlay in the past, predict what they’ll need now, and come up with a strategy to spend or save money where necessary. That involves reducing or increasing OPEX and CAPEX in various combinations.
So even though everyday costs and long-term investments are treated differently in accounting terms, the finance team is used to viewing both through the same strategic lens. They’re good at determining and achieving an optimal balance of OPEX and CAPEX so that both work together towards business priorities.
Herzberg’s two-factor theory
What does any of this have to do with employee happiness?
As it turns out, the infrastructure-versus-investment framework that distinguishes OPEX from CAPEX happens to look a lot like the relationship between hygiene and motivators in the famous two-factor theory of employee motivation.
In 1959, psychologist Frederick Herzberg published The Motivation to Work, one of the most influential business management books of all time. In it, he proposed the idea that there are broadly two kinds of factors that influence employee satisfaction in the workplace: “hygiene” factors and “motivating” factors.
Hygiene factors are those elements of the office experience that have the potential to cause dissatisfaction if not attended to. Examples include the safety of your workplace and the quality of the benefits package. These are things that buy you peace of mind, but won’t make you fall in love with your job. The same goes for salary. Getting paid more money makes you more comfortable, but the defining characteristic of salary is more so its ability to dissatisfy you by not being high enough.
The same way operating expense is about maintaining a stable business operation, so are hygiene factors about maintaining a baseline of employee comfort.
Motivating factors, by contrast, are the elements of work that can positively create employee satisfaction. These are more intangible boons to the working experience: things like getting recognized for good work, being given challenges that develop your skillset, and having good prospects for advancement. Like capital expenditure, motivating factors tend to be strategic and long-term. They’re also more effortful to obtain. Paying for more office snacks — a hygiene factor — is easy. Making sure employees are growing into new opportunities is a lot harder.
Since Herzberg first published his theory over fifty years ago, it has been tested and embraced by some of the most progressive thinkers in management. Today, many HR leaders around the world think in terms of hygiene and motivating factors. Maybe sometime soon, finance teams will join them.
How Finance could help HR
Finance teams are already used to juggling infrastructure and investment imperatives in order to achieve business goals. There’s no reason they couldn’t apply the same thinking to human capital needs.
Just like when it comes to strategizing CAPEX and OPEX, they would start with the HR goals management wants to achieve, then work down to which combination of hygienic and motivating factors needed to be in place.
Let’s say Company A decides that it needs to double the headcount of entry-level salespeople over the next two quarters. That means that they’ll need an in-office experience that attracts, and is affordable to provide for, a big group of energetic young people. In that case, building out a ping-pong rec area where people can socialize might be a more efficient and effective perk than continuing to reimburse gym memberships. At the same time, budget should be set aside for in-depth managerial training so that sales leaders can provide their new employees with good management — a high motivating factor.
Company B, meanwhile, needs to build a digital product. Fast. The veteran engineers they’re seeking to recruit won’t be impressed with snacks; they’ve seen every tech-company perk under the sun. They’re more interested in motivating factors like autonomy. So maybe the company will decide to implement a policy similar to Google’s 20% time, where employees are free to spend a fifth of their work week developing their own projects.
The challenge is projecting the relationship between hygiene and motivation, because both factors impact one another. Finance teams know that increasing capital expenditure sometimes has an effect on operating costs, and vice versa. Similarly, creating a motivating culture that attracts engineers will also require the workplace to boost salary and benefits, which are hygiene factors, to afford the engineers. That balance is what finance teams are good at working out.
Traditionally, hiring and employee engagement initiatives have been separate. Departments hire people based on strategic needs and let HR implement a one-size-fits-all approach to office experience once the employees onboard. But if a little bit of financial analysis went into crafting employee happiness the same way OPEX and CAPEX are optimized to hit management goals, finance and HR would be two sides of the same people strategy.