Forward-thinking HR should head off shareholder rebellion
As shareholders' dissatisfaction with directors'
benefits grows, HR will need to demonstrate a clear link between rewards and
company performance if it is to throw off accusations of fat cat pay-offs. By
Richard Cockman
The press has been keen to pin the blame for excessive incentive payments on remuneration committees and their advisers, but in most companies, the HR director will be a pivotal internal figure. The fat cat fuss is not going to diminish - in fact, it will increase significantly. It will become vitally important for companies to ensure their future reward strategies add, rather than detract, value. This is the time for HR directors to make a significant impact on their companies' reputation and effectiveness.
The HR director will have to deal with two major changes to the executive pay scene. The value of share options will hit companies' profits and losses and the new lifetime limit on pensions will prevent them from paying anything further into some senior executives pension schemes.
As a result, we shall witness growing shareholder dissatisfaction over excessive executive pay; unfavourable reaction from other stakeholders - including employees; the staple parts of the executive pay package-options and direct benefit pensions under threat; and the inevitable disclosure of every aspect of executive reward.
The chairman of one major company's remuneration committee told me recently that in his experience, companies tend to deal with executive remuneration on a piecemeal basis "…tinkering each year to keep up or follow the latest fashion". He said it is time to take an overall look at the whole issue.
In many cases the problem lands in the HR director's lap, and will do so increasingly in the future. Does he or she see this as a threat or an opportunity? I believe the forward-thinking HR director will opt for the latter and use it as a catalyst to initiate some fundamental thinking.
They should first consider that there would be little criticism for rewards that are clearly linked to performance. Therefore, companies must ensure this is demonstrably so. Executives do not exist in isolation, and therefore their rewards must have a general and total relationship to those of other employees.
A reward programme should also be looked at as a whole, and the merits (or otherwise) of individual components such as base pay, incentives, shares or pensions need to re-evaluated.
The need to change a pension deal because of the proposed lifetime limit will give a once-in-a-lifetime opportunity to change the way packages are structured.
An increasing number of organisations are already instigating reviews of the fundamentals of their remuneration programmes, and are developing robust models to assist them in determining what is linked with, and what encourages, good performance.
A compellingly attractive study shows performance is boosted when there is a relationship between total employee cost and shareholder value. The latter increases employee reward and should maintain its share, while the growth in employee reward is shared by directors and other staff.
From these three factors the appropriate levels of reward and return can be fairly established and all parties can sing from the same hymn sheet. The challenge now for the HR director, is to establish what is right for their company, and to win support from above and below for its implementation.
Get it right and an organisation's performance and reputation will grow. Get it wrong and…
