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Compensation & Benefits

Published March 2008

HR Crucial to Executive Compensation Process

Irv Becker and David Wise

 

The world of executive compensation has changed during the past few years. Never before has there been more attention paid to the finer details of compensation programs, and the roles of key players in the executive compensation process have changed dramatically.

In most companies, it is now the job of the board compensation committee to govern executive compensation — and for good reason. Board members have a fiduciary responsibility to manage not only the costs of the executive pay program, but also to ensure its link to long-term value creation for all of the company's constituencies.

However, as the board has taken over the process, some companies have overreacted to the shift in the governance landscape by leaving many HR practitioners — who used to be the strategists and administrators behind the plan — out in the cold. The irony of this outcome is, given the current demands on executive pay programs, it's more important than ever for HR to play a central and critical role in the process. The best way for HR to do that is to gain perspective on what makes a good executive compensation program and provide proactive support for the committee.

Three Things Every HR Practitioner Needs to Understand

A good executive compensation program balances three key forces.

1. The company's strategic needs. An executive compensation program needs to support the organization's near-term and long-term strategy. Incorporating strategy involves a detailed understanding of how the business makes money and how executives create value. This isn't an intellectual exercise. This information should provide a baseline for how the pay program should be structured. HR practitioners need to be able to answer critical questions, including:

• What's our strategic plan?
• What's important for our business to do well this year? During the next three years?
• Who are our customers, and what do they want?
• How do we compete, and how are we differentiated in the market?
• How do we make money?

2. Shareholder concerns. HR professionals in public companies have a broader audience than those in private companies, as public company shareholders demand more attention than ever in the area of executive pay. However, that doesn't mean private company practitioners don't have plenty of stakeholders of their own to be concerned about. Stakeholders are not just those who own stock; they can be employees, customers or those in the local community.

In public companies, shareholders have more information than ever before to help them understand the pay program. Under the Securities and Exchange Commission's (SEC) new proxy disclosure rules, there is enhanced detail in the compensation tables and in the compensation discussion and analysis, a straightforward description of the components of and intent behind the program. As a result, there's more focus everywhere on the what, why and how of executive compensation.