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Compensation Committees Relying More on HR

HR executives have stepped up their work with compensation committees in response to the new SEC disclosure rules on executive compensation and heightened shareholder scrutiny of executive compensation plans.

May 18, 2007
HR executives have stepped up their work with compensation committees in response to the new Securities and Exchange Commission disclosure rules on executive compensation and heightened shareholder scrutiny of executive compensation plans.

"Particularly in the context of the external controversy around executive compensation, compensation committee chairs are relying more and more on HR," says Ira Kay, global leader of the compensation practice for Watson Wyatt Worldwide.

Doug Jensen, vice president and U.S. executive compensation practice leader at the Hay Group, reports that more HR executives are adopting best practices for working with compensation committees. "It’s about building personal relationships with the compensation committee members, especially the chair," he says.

The compensation committee may work directly with the top HR executive or, in very large companies, the top HR executive may delegate much of the work to the head of compensation and benefits.

"The committee will want to work with the person who has the most specialized knowledge," Jensen notes. But even in these cases, the top HR executive will attend all the compensation committee meetings with the head of compensation and benefits.

The primary role of the HR executive is to provide staff support for the committee, including setting the agenda and managing the calendar with the committee to ensure that members have all the information they need before their meetings.

"Boards are more prepared than ever before," Jensen says. "They read the materials that they receive and they ask more questions of management. The HR executive needs to be prepared to answer these."

Diane Doubleday, leader of Mercer’s global executive remuneration business, notes that HR executives have expertise and institutional knowledge that can be a valuable tool for the compensation committee, but are too often overlooked. "HR executives can add a great deal of value to the work of the compensation committee and should have more of a role," she says.

The HR executive can assist the compensation committee chair with the mechanics for meetings, but more strategically, the executive can ensure that the compensation committee is aware of broader HR policies and programs and relevant parts of the corporate culture so that the committee does not make decisions in a vacuum.

"For example, if a reduction in force is under way, the committee should certainly be aware of that in its discussion of executive compensation," Doubleday says. "Also, if the company is attempting to change its approach in a specific area, if it has new leadership development and accountability programs, the committee should be aware of those so that any discussion of incentive plans for senior executives reflects those new corporate goals."

Doubleday also notes that HR needs to educate the board. "It should be an annual agenda item that HR presents information about internal workforce management issues, competitor practices and the broader market for talent," she advises. This will help ensure that the board can make the appropriate links to broader workplace and talent market issues when considering executive compensation.

Workforce Management, April 23, 2007, p. 26 --Subscribe Now!

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