We had two employees who drove to work together, and they established a pattern of coming in 10 or 15 minutes late. One of them got fired for coming in late, and the other got promoted. That didn't do much for employees' opinion of the company " recalls John Folkerth, president of Shopsmith Inc. The Vandalia, Ohio, maker of woodworking equipment, at the time in the late 1970s, had about 200 employees. Shopsmith had no personnel department, and the two chronically late employees worked for different supervisors.

Folkerth's story illustrates why a few months later Shopsmith hired its first personnel director and why he wishes he had hired one earlier. The personnel director, a former armed-forces personnel specialist, developed a handbook that spelled out attendance rules, among other things, and began reviewing firings to make sure Shopsmith had obeyed anti-discrimination laws and had considered other options before terminating jobs. He took over the administration of employee benefits and began training programs on such fundamentals as how to use industrial machinery, the duties of a supervisor, and the proper ways for customer service people to handle clients.

But Folkerth knew that Shopsmith's management of its people left much to be desired. The training programs weren't creating the skills needed most. Managers, for example, gained nothing from them and saw that they lacked the abilities needed to guide what was now a $62 million-a-year company.

In early 1981 when Shopsmith -- an INC. 100 company -- had 1,000 employees, Folkerth hired a "vice-president for human resources," Gerald Lerer, who had nearly 20 years of experience with larger companies. Lerer now supervises the personnel director and has reorganized the training program to emphasize skills Shopsmith will need in the next 6 to 12 months. Lerer has become a key consultant, advising managers on setting goals and using their time. And when the company suddenly realized in mid-1981 that it couldn't achieve its 1981-82 sales targets and would have to cut costs he helped reorganize the business along "profit center" lines, helping the company cut employment to 850 from 1,200. Many small and medium-size companies are confused about when and whether to hire a personnel specialist. Personnel specialists generally impose rules on formerly freewheeling companies, and the job requires such an array of talents that the people small companies can afford rarely possess them all.

Yet Folkerth and some other entrepreneurs argue that by the time companies become so large that the owner can't personally supervise every employee, most need to hire some kind of personnel expertise -- even if it is just a consultant who visits every few months or a retired schoolteacher hired as personnel director for $18,000 a year. Folkerth suggests that most organizations are better off getting expert help with personnel "when you have maybe 50 or 75 people."

Personnel and "human resources" tasks range from simple record-keeping to advising top managers on major reorganizations. The job usually includes:

* Managing employee benefits and records.

* Assuring consistency, fairness, and obedience to the law in treatment of employees.

* Recruiting new employees. * Helping evaluate employees' contributions and likely career paths.

* Developing employees' abilities through training programs.

* Evaluating the quality of human relations in the company, including the quality of communications between supervisors and their subordinates.

* Helping top managers define the company's goals and philosophy and design systems to implement them -- methods for regularly setting and reviewing goals for middle managers or planning for replacement of key people, for instarice.

Many entrepreneurs doubt that personnel professionals really help businesses work better. "Personnel management is the president's job," says Gary Hillman, president of Machine Technology Inc., a 100-employee manufacturer of semiconductor equipment in Whippany, N.J. "A personnel director has a fundamentally powerless position and no real constituency." Hillman argues that most personnel management functions that the president can't do himself should be performed by line managers or by the president's administrative assistant.

But most specialists argue that a manufacturing business, at least, shouldn't try to grow much larger than Hillman's without somcone to help with hiring, training, personnel evaluation, and communications -- and without the policy manuals and other printed matter that personnel professionals use. Even a service business where sales, administrative, and professional staffs may each have their own leaders and their own style, needs a personnel director by the time it has a few hundred employees, they say. Otherwise, top managers will become overburdened with detail and lose touch with employees. "It's a very difficult transition from the small company to the mid-size company," says consultant William Ballew of Ballew, Reinhardt & Associates Inc. in Memphis. "If the owner tries to do everything himself, either the company begins to go downhill or he has a heart attack."

Texas Tumbleweed Inc., an 18-unit Houston-based restaurant chain, set up a separate personnel office when it had 8 restaurants, about 30 managerial employees, and nearly 400 hourly employees, most of them part-time. "We were really struggling when we had people from operations handling all the hiring and such," says Steven Reingold, one of the chain's officers. "When we had only 4 or 5 units it was very easy for someone from operations to feel at ease handling personnel matters because he knew everybody. Later, we lost that." Today the company has about 80 managerial employees, 800 hourly workers, and $20 million a year in sales. The personnel director has made growth easier by taking on the hiring and training of managers and the administration of employee benefits, Reingold says.

Some specialists advocate that small companies rely on part-time consuItants rather than on professionals.Says Peter Grimm, a partner in Nordeman Grimm Inc. a New York management recruitment firm: "Really good personnel guys cost $150,000 to $200,000." He says, "The company that isn't able to afford to pay a personnel director $75,000 to $100,000, is probably better off relying on a consuItant" who will work part-time to prepare personnel manuals, advising on recruitment and training, and evaluating how well employees are being managed. The consultant can organize clerks within the company for such personnel functions as benefits administration.

Advanced Instruments Inc., a Needham Heights, Mass., maker of medical diagnostic equipment, has taken that route. In the late '70s, with about 90 employees, president Romano J. Micciche hired Springfield, Pa.-based M. J. Carroll Co. For a monthly rate of $1,025, Carroll provides experienced personnel professionals for at least half a day a week to small companies. Micciche says everyone in the company likes the arrangement -- even managers whose freedom is limited by the policy manuals prepared by Carroll consultants. "Surprisingly enough, even our managers are happy to have all these things spelled out. They don't have to guess anymore, " says Micciche. Other companies use moonlighting professors of human resources or industry specialists as their personnel consuItants.

Not all companies need to rely exclusively on consultants and clerks until they can hire someone full-time, however.Alternatives include:

* Hiring an untrained personnel director. Consultant Ballew suggests that many times small companies want "a schoolteacher who will keep the records and do the routine things and function as an ombudsman for the employees. A retired teacher often also "knows which families in the community have created problems for companies in the past," Ballew says. Such people can be hired for $18,000 to $25,000 and are often adequate for companies that aren't expecting rapid growth.

* Hiring an inexperienced professional or promoting someone from within to administer benefits, sort out conflicts of policy, and run some training programs Such people can be employed for $25,000 to $35,000. But as Shopsmith found, they have limitations. "You always hope that the person you put in as personnel manager can develop into a true human resources manager, but it doesn't usually work out that way," says Folkerth. "You can't train that person because you don't know what he or she is supposed to do."

* Hiring a professional with limited experience but an ability to grow. The person shouldhave demonstrated competence by holding a variety of increasingly important personnel jobs in a larger company and probably also by obtaining significant academic qualifications. Several consultants suggest that such individuals can be hired for $40,000 to $45,000.

Professor Michael Beer of the Graduate School of Business Administration at Harvard University suggests that any campany that hpes to grow and that lacks a capable human resources manager should consider a "personnel audit" once a year. An outsider should interview all key staff and a random sample of lower-ranking staff. "So often I find people as managers who just don't have the skills to do their jobs," Beer says. "And nobody recognizes that they need the skills. Then the company gets into trouble and there's nothing that can be done. You can't develop those skills overnight."

The important point is that no entrepreneur should neglect the tasks that a good human resources manager performs just because they are less pressing than the challenges of marketing and product development. Many entrepreneurs can manage well by instinct when they employ only a few people, but many employ ees can't effectively communicate their problems, achievements, and needs even to a highly capable boss when they no longer see him every day.

Folkerth notes that an entrepreneur typically hires a personnel manager when he becomes "tired of all sorts of petty details" such as whether to permit a sick-day excuse for certain unusual conditions. Often, however, companies pay a heavy price for waiting until personnel management is an obvious burden. I nothing else, regularly evaluating the company's relations with its people is vital for preventing lawsuits and employee unrest.

Anti-discrimination laws, for example, apply to most businesses with more than 15 employees, and few company presidents can evaluate every hiring or firing by one of their supervisors to make sure no laws were broken. Professor George Odiorne of the University of Massachusetts at Amherst notes that rules against age discrimination, which were strengthened in 1978, are especially poorly understood by most managers outside of personnel. Employees over the age of 45 are now heavily protected. "In this recession there's been a lot of unloading of deadwood over 45. People don't realize that they can't do that anymore," Odiorne notes. "There's a guy suing a major department store for $1.7 million, and he's going to win."

Too many businesses first think about hiring a personnel manager, Odiorne comments with a sad laugh, "the day the subpoena arrives."