Home' HR Monthly : March 2016 Contents 12
Where there's smoke,
there's firew rks
Anger over record-breaking executive pay outs puts the onus on HR to take an ethical lead.
BY PROFESSOR PETRINA COVENTRY
AFTER THE SMOKE CLEARED FROM NEW YEAR'S
fireworks I, like many, turned, bleary-eyed, to the world news in
expectation of seeing what the celebrations had brought.
Rather than be amazed by celebrations, I was amused by headlines
of record breaking remuneration pay outs for CEOs in 2015. Fireworks
went off for me again.
CEO and executive remuneration is an ethical issue.
It's of increasing relevance and concern for shareholders, of increasing
importance for HR leaders, and it has fallen victim to increased
complexity, controversy and risk.
Complexity in executive remuneration has been driven by a number
of factors: a desire following the global financial crisis (GFC) to regulate
remuneration in an attempt to strengthen pay for performance links;
increased interest and activity from accounting firms and consultants
to 'assist'; growing shareholder activism; and regulation driving the 'say
on pay' and AGM activity promoting Yes/No votes around executive
remuneration reports which affect board representation.
For all this activity, angst, interest, and fees spent on consultants,
the issue of CEO and executive remuneration has continued to grow
in size and complexity. The gap between the top and the bottom of
organisations has become increasingly disproportionate and striking;
CEO packages appear to be out of line with results, and pay ratios are
widening. If we look at the AGM reviews this appears unbounded by
sector or location.
Despite the escalation in consulting and remuneration committee
commitments, and increased push for transparency around reporting
combined with the introduction of 'say on pay' for shareholders, there is
an increasing problem.
Start with the question "does pay affect performance"? If you believe
research in this area, the answer would be no. Roles that are complex
and manage ambiguity, that is management and executive roles, do
not lend themselves to pay for performance. Recurring research
(Harvard meta-analysis) indicates that only 4 per cent of a CEO's salary
influences a company's performance. The recommendation seems to
be that you should understand what the real value of the role is, pay
that, and focus on delivering results. Reducing unnecessary complexity
will help all those who vote to have a greater chance of supporting
Keep consultants accountable for fixing the problem rather than
adding to the problem. Consulting advice and recommendations for
remuneration committees typically centre on mathematical equations
focussed on the packaging and valuation of short and long term
incentives as well as fixed pay calculations. These calculations are often
based on benchmarking which proliferates the problem by reinforcing
out-of-date practice, false comparisons and no perspective on what
the individual may actually be able to influence. Continued repetition
of practices that don't work, and benchmarking through peer pay
comparisons helps account for the rising tide of corner-office salaries.
Ensure that any conflict of interest is killed. The relationship between
compensation committee members and the CEO, including the HR
team, are not always impartial and this can influence decision making.
Compensation consultants that are often brought in to help figure out
remuneration levels are at risk of conflict as they hope to secure other,
more lucrative business from the company or from board members.
Have the courage to innovate. For some there is a fear that other
companies may not follow suit which may erode their competitiveness,
which seems like false logic. With the right logic and explanation, proxy
advisors would vote yes for packages that are more aligned with reality.
The responsibility of HR practitioners is critical. It is the final frontier
for HR leaders. When dealing with executive remuneration there is
no barrier between you and the board, shareholders and media. It is
a moral imperative that HR leaders know the science, mathematics,
formulas, history and logic behind executive remuneration. That
does not just mean packaging, but also understanding how to make
recommendations, negotiations and responsible reporting. The onus on
responsible remuneration systems and how they operate rests with the
HR function; it cannot be outsourced completely.
It will be ethical organisations that are courageous enough to change
the system, be brave and smart enough to say no to old practices that are
not working. The real 'Yes/No' vote should be centred on whether to
eradicate outdated paradigms and to innovate, driving real pay for result
ratios, equity and fairness for all stakeholders. I vote YES to that.
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