Given the potential pitfalls associated with executive compensation how can HR do its job in a manner that protects the organization’s interests?
Certainly not by avoiding direct involvement in executive compensation, leaving it to the Board. Quite simply, HR must listen to, understand and consider the perspectives of all constituencies and reconcile them by ensuring compensation programs are reasonable, competitive and effective. The programs that have been described here as “high risk” must be avoided. And the programs that are utilized must be communicated to all parties-at-interest, when they are adopted and on an ongoing basis. HR must consider the impact of all actions on the social capital of the organization and use professional expertise to ensure the executive compensation package still attracts and retains high quality executives. Some of the steps HR can take are:
- Develop a clear compensation strategy in conjunction with the Board, providing the function’s technical expertise to those charged with developing a strategy. HR has an obligation to become competent in the principles of executive compensation and to maintain staff support for the Board.
- Embrace “defensible” and avoid “high risk” programs, as described earlier in this article. The fact that other organizations are using programs that breed shareholder criticism does not justify their use. If there is some doubt shareholder approval should be sought even if it is not legally required.
- Communicate freely and continuously to all parties, even going beyond legal and regulatory requirements when it is information that is relevant to shareholders and the investment industry.
- Monitor adherence to policies and either deal with infractions or report them to the Board. If the HR executive loses a job by adhering to ethical principles the chance of getting another one is many times greater than if that executive went along with actions that violate policy, ethics or the law. HR should attempt to convince the Board to develop ethics guidelines that ensure parties reporting policy violation are protected and that it is those who do not report violations that will suffer.
- Maintain a professional posture, avoiding advocacy and considering the various perspectives about what constitutes reasonable rewards. Points of view should be supported by empirical evidence, such as market data and competitive practice benchmarking results. If outside consulting assistance is used by HR and the executive management the same support should be provided to the Compensation Committee of the Board. It has been argued that the Board should have a separate consultant but this often leads to “my consultant can beat up your consultant” confrontations that accomplish nothing except to positively impact the revenue of the consulting firms.
If HR executives are participants in the programs they design, administer and evaluate the need to demonstrate objectivity becomes even greater. There certainly is nothing inherently unethical about HR executives becoming wealthy as a result of outstanding performance by their organizations. But the recent public exposure of criminal and irresponsible behavior has made many cynical and all necessary steps should be taken to ensure all executive compensation is earned and deserved.
An excerpt from:“Executive Compensation: The Optics Are Critical” by Robert J. Greene, PhD
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Robert J. Greene | Reward $ystems, Inc. 