What is the difference between a CHRO and an HR Director in a PE-backed company?

One of the questions I am asked most frequently by CEOs, investors and boards is whether they need a Chief Human Resources Officer (CHRO), Chief People Officer (CPO), Head of People or HR Director.

The answer, frustratingly, is that it depends.

There is no magic headcount threshold at which an organisation suddenly “needs” a CHRO. While headcount and organisational complexity matter, using them as the primary determinant of senior HR leadership is fundamentally flawed. A 300-person business preparing for an IPO may require a world-class CPO, while a 2,000-person organisation operating within a stable structure may not.

The real question is whether what got you here will get you to the next phase of your evolution – particularly if the business is pursuing rapid growth, transformation or a private equity value creation plan.

The fundamental difference

An HR Director ensures the business has an effective HR function. A CHRO or Chief People Officer ensures the business wins through its people strategy.

In a private equity environment, the distinction is clearer still. The HR Director runs HR; the CHRO or CPO treats talent, leadership and organisational capability as strategic human capital assets, in much the same way a CFO treats capital.

Typically, a CHRO or CPO sits on the executive team, reports directly to the CEO and contributes across the broader business agenda. Their remit extends into organisational strategy, leadership capability, change management, organisational culture and value creation.

An HR Director can absolutely possess many of the same capabilities. Some of the best strategic HR leaders I have worked with have carried the HR Director title. However, the distinction often lies in the expectations of the role and the organisation’s readiness to use that capability.

An HR Director may report into the COO or CFO and focus primarily on leading the HR function, including employee relations, employee experience, compensation and benefits, performance management, talent acquisition and operational efficiency. The title itself matters far less than the mandate.

Recent Deloitte research highlights the growing breadth of the CHRO mandate, with the number of unique skills expected of CHROs increasing by 23% over the past five years.

The diagnostic

When advising a board on whether to hire a CHRO, CPO or HR Director through an executive search process, I start with a simple question:

Will what got you here get you where you are trying to go next?

If the answer is yes, an HR Director or Head of HR may be exactly the right hire. If the answer is no, it may be the first indicator that a CHRO, CPO or C-suite executive is required.

Private equity-backed businesses and portfolio companies rarely stand still. Whether the objective is international growth, operational improvement, acquisitions, fundraising, an IPO, transformation or a future-ready workforce strategy, there comes a point when maintaining the status quo is no longer enough.

At that point, boards are not simply hiring a senior HR professional. They are hiring someone with the business acumen to lead change, evolve HR strategies, support due diligence, influence investor discussions, build leadership capability and align people strategy with commercial outcomes and KPIs.

In private equity, the starting point should be the value-creation plan. Bain’s research argues that investors should define the capabilities and mission-critical roles required to deliver the investment thesis, ideally beginning during due diligence.

The cost and investment

Hiring a CHRO too early can be as damaging as hiring one too late. During the post-Covid market cycle, many businesses hired experienced – and often exceptionally expensive – CHROs in anticipation of sustained capital availability, aggressive growth and IPO activity.

When funding slowed, valuations shifted and IPO windows closed, some organisations found themselves with executive-level people leaders appointed for a future state that no longer existed. The result was often top-heavy people functions, frustrated executives and costs that were difficult to justify. The issue was not the talent, but the timing.

It is also a mistake to assume that hiring a CPO solves the problem. It does not. A strategic people leader can only create value when the surrounding operating model enables them to do so, with the right data, technology, specialist expertise and delivery capability – not simply a more senior title. McKinsey’s research on people operating models supports this view.

Investment will typically be needed in:

• HR technology and people data analytics
• Reward, compensation and benefits expertise
• People operations and employee relations support
• Leadership development, talent acquisition and onboarding
• Performance management and employee engagement
• Succession planning, workforce planning and HR business partnering
• Employee experience and DEI initiatives

In many cases, the total investment required is significantly greater than the salary attached to the hire itself. This may be particularly relevant in regulated industries such as healthcare, where specialist HR capability may be needed during scale-up or investment.

Beware hiring the brand

My colleague Sean Tong recently wrote about businesses buying brands rather than capability. The same principle applies when hiring senior people leaders.

There are extraordinary organisations that have developed generations of outstanding CHROs and CPOs. However, moving from a global enterprise environment into a private equity-backed mid-market business is not always straightforward. Influence in a large corporate can be supported by extensive infrastructure, established processes, large teams and organisational credibility; the reality of leading people strategy in a scaling, investor-backed business can be very different.

When assessing CHRO talent, boards should understand:

• How much change the individual personally drove
• How much was enabled by the organisation around them
• Their motivation for moving
• Their appetite for operating with less structure
• Their ability to build rather than inherit
• Their comfort with ambiguity, pace and KPIs
• Their experience of supporting the executive team and working with investors
• Their ability to embed people strategy within the wider value creation plan

Final thought