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

The furore on the
subject of executive pay and incentives has made this year’s AGM season high
profile. Companies in the spotlight for handing out fat cat pay have found
themselves alienated from their shareholders and employees.

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

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

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…

By Richard Cockman, Partner, Watson Wyatt

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