Executive pay hurdles for HR

by 27 Nov 2007

CHALLENGES LIE ahead for HR departments in devising executive remuneration packages in collaboration with boards which will strike a balance between performance and rewards and satisfy both shareholders and executives, according to an executive remuneration expert.

In light of recent shareholder activism at Suncorp and Telstra, HR departments are faced with the task of reviewing remuneration packages which allow them to attract and retain top executives, while at the same time satisfying shareholders that they are fair and deserving, said John Egan, of Egan and Associates.

However these two interests can come into conflict, as was seen twice in recent times. More than 40 per cent of Suncorp’s shareholders voted against the executive pay structure, which included a controversial package that removed performance hurdles from some long-term executives as a condition of the merger with insurance group Promina. Shortly afterwards, 66 per cent of Telstra shareholders voted against proposed changes in a company report as to how its executives would be remunerated.

According to Egan, it will be a challenge for HR to better understand why such objections have occurred. It may simply be that they haven’t explained their program well, he said, or it may well be that they have taken a position which shareholders are not comfortable with.

Egan explained some of the difficulties and complexities facing HR. “For example, an HR department might, in collaboration with the board, form a view that management should be paid in the top quartile of the market because it’s a very competitive environment, or because that makes it easier for them to get top-quality people,” he said.

“Shareholders would object to a team of executives being paid very generously in relation to the rest of the market if the performance isn’t there.”

This is where a misalignment between pay policies can occur, he said. “So shareholders will respond in an unfavourable way if, in their judgement, there’s a misalignment between a reward strategy, which is put together by the human resources team and approved by the board remuneration committee … and the company’s performance,” he said.

However, companies which are sometimes going through mergers and transformations may find it difficult to set clear performance hurdles and align these with a clear bonus structure, as was found with the Telstra report. Telstra argued that because it is a company undergoing large changes, simple performance hurdles are not easily applicable, and to follow procedure would undermine the company’s competitive position.

Egan believes HR play a vital role in such situations. “So HR has got a very complex job. What they really need to do is make sure they’re open, frank and honest with the board and with the chief executive they’re advising,” he said.

“But they can’t be any of those things if the HR department isn’t part of the executive team of the company. In other words, if they are purely a service provider and kept in the dark, it becomes quite difficult for the HR department.”


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