HR strikes fine executive pay balance

by 28 Nov 2006

WITH EXECUTIVE remuneration remaining a hot issue for many companies, HR directors need to exercise caution in acting independently on behalf of remuneration committees when setting salaries for senior executives, according to a Sydney lawyer.

Between the twin challenges of increased regulation around executive remuneration and demand to attract the best executive talent, HR directors can sometimes face conflicting demands.

“The difficulty here is that they can get sandwiched. They need clear guidance from remuneration committees when they set salaries for senior executives as the HR director,” said John Colvin, a partner in employee relations at Freehills.

“First of all they need to make sure there are no personal conflicts, as far as they can avoid that, and secondly they need to ensure they’re acting on behalf of the remuneration committee –not the CEO or other executives.”

John Egan, principal of executive remuneration consultancy Egan Associates, also notes that HR professionals are faced with multiple challenges where they are called upon to support a chief executive and the executive team (of which they are often a member) and the board on the one hand, and on the other, provide a balance in managing the perspectives of shareholders and other stakeholders such as analysts, customers and suppliers –“in essence a range of stakeholders who are not always well informed”.

“Where there is absolute transparency in relation to remuneration policy disclosure and clarity of outcomes subject to various performance standards, the task is simpler, though it requires mutual trust of all stakeholders and the ability of the key HR professionals to manage what will on occasions be competing objectives,” he said.

This becomes even more complex in organisations that have challenges because of market demands in attracting new talent and in retaining existing talent where their competitor market consists of organisations playing the game with a straight bat and those who have developed an expertise in obfuscation, Egan said.

“This is further overlaid by differing degrees of prosperity, opportunity and sustainability of a growth business model where HR is required to formulate proposals and strategies which will gain both management acceptance and a board’s endorsement.”

Another continuous challenge is the difficulty of the market’s perception of pay only for performance, according to Egan. “However, any organisation under market stress or undergoing restructure, significant investment or transformation following poor performance cannot attract talent unless there is a guaranteed minimum level of remuneration with an upside of delivering performance,” he said.

“Every CEO in this position has to steward the shareholder’s investment and attract the team needed to deliver outcomes knowing that the disclosure of remuneration where immediate returns to shareholders are not guaranteed will attract criticism.”

Colvin also said the amount of scrutiny public companies face from the media, regulators and the Stock Exchange make the process much harder than it used to be.

“Markets generally have a way of working through issues, but if you have too much regulation, markets go around them or countries go around them. You have to be a bit cognisant of the fact that now we’re in a global market, then so is our regulation in a global market.”

If regulation is too absurd or strict, Colvin said this could be a contributing factor in capital and companies moving headquarters to somewhere else with less onerous regulation. “They’ll want to locate in a country which has very good laws and very good legal systems, because you cannot operate properly in one that isn’t,”he said.

Companies with minimal transparency and aggressive practices can draw the best talent on the promise of participation at the banquet of excess, where the focus in on short-termism rather than long-term career commitments where sustained performance is rewarded, Egan said.

“Without question, there are some serious retention and talent management issues in the professional and mid-management ranks with strong local and international demand and differentiated reward arrangements for high potential executives who can genuinely make a difference,” he said.

“Among the executives disclosed in annual reports – that is, the CEO –and direct reports, our own observations and anecdotal evidence suggests turnover at this level is more often initiated by the organisation than by executives being poached by competitors or lured by offshore riches.”


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