What are HR directors worth?

While
other company directors seem to be paid vast sums regardless of their
performance, HR directors do not. Scott Beagrie finds out what HR needs to do
to boost its image as well as its pay packet

Executive remuneration has been a big headline issue of late. The business
world is reeling from the recent bout of executive payouts that have seen the
likes of Jean-Pierre Garnier, chief executive of pharmaceuticals company
GlaxoSmithkline, rewarded with £7m in earnings plus the prospect of a £22m
payout if the company is taken over.

The list of large bonuses to executives that have overseen falling profits
and share prices is long, and has been greeted by a chorus of disapproval by
disgruntled shareholders. Even the Department of Trade and Industry has
responded by publishing Rewards for Failure – a consultation paper on curbing
so called ‘fat cat’ pay.

Executive pay awards in the UK HR arena, however, don’t tend to hit national
headlines in quite the same way. So it was a big day for the profession when it
was announced 18 months ago that Jim McKenna, then group HR director of Logica,
was ranked as the fourth-highest paid director in the country with a £7.2m
award.

It made a big statement about the perceived value of the profession, but
sadly the case of McKenna – now chief executive of the UK operation of
LogicaCMG – doesn’t reflect the full story of HR remuneration in the UK.

Richard Cockman, partner in the human capital group at Watson Wyatt, says
the consultancy’s research shows that an HR director on the executive committee
(where most are found) will typically earn 10 to 20 per cent less than other
function heads. And even those on the main board are still earning 10 to 20 per
cent less than other directors reporting to the chief executive.

Is HR really perceived as a lesser function in the UK, and are many HR
directors being sold short when it comes to pay and rewards? And what is the
market price for HR? The answers, it seems, are yes, yes and a rather grey
area.

"HR is in the second division at least in terms of function," says
Mark Thompson, head of reward at pay specialist the Hay Group. For the second
year running, a study from Croner Rewards shows the median salary for an HR
director as falling below comparable posts in other functions.

The latest findings from the Personnel Rewards 2003 survey, conducted by
Croner Rewards in association with the Chartered Institute of Personnel
Development (CIPD), shows the average pay for HR directors is £57,449 – 4.3 per
cent below the average for other functions. This is a marginal improvement on
last year’s figure, but a significant reversal from 2000, when average pay for
HR directors was 3.2 per cent higher than other functions.

Senior HR managers also lose out this year with an average annual pay of
£46,207 compared with £47,277 for all other functions – a differential of 2.3
per cent.

A major factor in this discrepancy seems to be how the role and its various
responsibilities are perceived within organisations. The chief executive, chief
financial officer and operations director positions carry enormous
responsibilities. This is particularly true in FTSE 100 companies, ranging from
corporate governance and managing investor relations through to strategic
planning. Sadly, people management strategies still aren’t given the same
prominence, and indicative of this is the fact there are only around 15 HR
directors on the main board of companies in the FTSE 100.

People management practices

Ironically though, the operations director is likely to be responsible for implementing
some of the people management practices devised by HR. "Often there is a
woefully inadequate approach to people issues by the CEO and financial and
operations directors on the board unless you have a ‘John Harvey Jones’-type
figure, who is obviously hugely engaged and involved with people," says
Thompson. "Most organisations aren’t lucky enough to have a CEO in that
position."

Thompson’s sentiments are echoed by Richard Lamptey, a partner in the
executive compensation division of Mercer Human Resource Consulting.

"There is a perception that the HR director is not a strategic
management role as compared with finance, marketing or operations. They are
there mainly to implement what the board – and, in particular, the CEO – has
decided on the people strategy, rather than actually formulate it and present
it in their own right to the board," he says. "That is [one of the
reasons] why we tend to see HR directors as somewhat lower paid."

Yet in the not too distant past, when HR (or personnel as it was then) was
heavily involved in tackling industrial relations head on, it was perceived as
far more influential than it is now.

Sir Pat Lowry, who was director of industrial relations and later director
of personnel at car manufacturer British Leyland during the strike-torn 1970s,
was chief executive Sir Michael Edwardes’ right-hand man. "Nobody would
have said that he wasn’t a major pillar of company strategy," says
Cockman.

Former director of HR at oil giant BP, Nick Starrit, now a consultant on HR
strategy and a non-executive director at RebusHR and Capital Resource
Consulting (who refuses to discuss his remuneration while at BP), contends pay
should come down to job evaluation which recognises the size and contribution
of a job in relation to the success of the enterprise.

"Base pay still reflects the size of the portfolio you’ve got to
manage. It may be that the HR portfolio is perceived under a company’s job
evaluation system to be as large, for example, as sales and marketing," he
says. "It’s not been my experience, but my view is that big ticket jobs
with responsibility for the predominant profit and loss of a company will
command higher base pay."

By far the area that attracts the most flack from fellow directors and line
managers – and the one that affords most opportunity for HR to increase its
personal profitability – is its lack of alignment to real business issues. The
only way to combat this is to heed the clarion call of the likes of Dave
Ulrich, John Sullivan, Tom Peters et al for HR to reinvent itself as a
strategic business partner that can influence the board and the direction of
the business.

These are the kind of HR individuals Aine Hurley, partner at executive
search company Odgers, Ray and Berndtson, has conducted major searches for on
behalf of Royal Mail and BT in the past nine months. In both cases, she says,
the company’s chairmen wanted to recruit individuals with ‘very commercial
outlooks’ and general management experience who also happen to be HR
professionals.

"I know [the potential to be a change agent] directly impacts on
remuneration because organisations are looking for a new breed of HR
director," Hurley says. "It is moving the HR role into something that
has a much wider contribution to make to the business: a change agent, a
facilitator, an enabler or culture changer. Therefore the person needs to be
very credible with line managers and to be able to talk a good business story,
not just a functional one."

She adds: "There is an upward pressure for these commercial change
agent-types of HR director and an upward pressure on the remuneration. They are
at a premium because these are very big jobs."

Degree of risk

There are, of course, downsides to HR being recognised as a ‘big job’ –
principally that if you fail to deliver, you won’t be duly recognised or
rewarded, and at worst, your number could be up.

"If you want to get paid the same as your peers, you need to share the
same degree of risk," says Ralph Tribe, vice-president of HR at Getty
Images. "The concept of risk is fundamental to how much you get
paid."

Tribe says his pay is exactly in the middle of what other VPs get paid at
the company, and believes his remuneration reflects both the level of risk he
accepts as part of his job, and HR’s constant alignment with the organisation’s
business issues. At Getty Images, HR was the architect of a project that would
see a switch to a new business model and the headcount reduced by 50 per cent
as a result of integration, acquisition, and overlap.

"You normally need a stimulus to generate quite aggressive changes, and
the way we did this was by setting a target around headcount reduction based on
what we believed the optimum size of the business should be in a fully digital,
fully integrated state," says Tribe. "A lot of the reason we have
been so successful is due to a very rapid integration strategy. If that had
been wrong, we could all have been fired."

If HR wants a lesson in successful reinvention, it could take a leaf out of
the finance department’s modus operandi, says Hay Group’s Mark Thompson. He
reckons the function has managed to transform operational financial roles such
as the chief accountant who ran "the amazing drudgery of paying invoices
and managing credit control" into a strategic leadership role of finance
director.

"HR doesn’t seem to have succeeded in doing this, but that’s the model
it should focus on," says Thompson. "There should be a head of HR or
people services that is quite separate from [the position of] HR director who
will focus on issues such as ‘what kind of organisation do we want to be’, and
‘what kind of culture do we need to support the business strategy?’ It means
being heavily engaged with strategy and planning, but linking the big people
issues to that business strategy and making it happen."

One of the ways in which HR can tangibly demonstrate its worth to the board
is by providing people management data on which to base business strategies.

Developments such as Watson Wyatt’s Human Capital Index and Dave Ulrich and
Mark Huselid’s HR Balanced Scorecard are all attempts to measure the
effectiveness of HR. While they have their critics, they do represent the best
chance for HR to deliver on this front.

"HR directors have got to start positioning themselves and the work
they do as being absolutely crucial to the forward strategic thinking of the
business," says Mark Lamptey. "They have to start thinking about how
they demonstrate to the rest of the board the value of the functions, how they
measure the performance and work of their functions and of the contribution
they make to the business."

Probably the only other area deemed to have an impact on the overall rate of
reward for HR, is the vexed subject of qualifications, although much has been
done to improve the status of HR’s professional qualifications – not least
gaining chartered status. Refreshingly, at director level, fellows of the CIPD
can expect to earn around £12,500 per annum more than non-members, while senior
managers who are CIPD members could add up to another £1,600 to their base
salaries.

There is a view in some quarters, however, that people management
qualifications don’t carry the weight that other chartered or business
management qualifications do such as accountancy, management and marketing.

Allied to this is the notion that individuals can (and frequently do) enter
the profession from other disciplines without relevant qualifications because
the sector offers a freedom of entry that others don’t. There are also
instances where the HR position has been combined with other roles such as
finance director or company secretary, which can also diminish the function’s
importance. It wasn’t so long ago that Shell’s HR and finance director were one
and the same person, for instance, while the HR director of Allied Domecq’s
also wears a finance hat.

"There are lots of people who feel they can come into HR management
having come from other backgrounds. They have been practical engineers, they’ve
done other things, and they think: ‘I’m able to manage people and look after
admin and stuff’," says Lamptey. "Compare that to the top people in
finance, who are likely to have chartered accounting or another business
qualification."

Mega salaries

Although HR director salaries rose more than expected this year, it is
likely to be some time, if at all, before their rewards routinely hit the
headlines as they do in the US. A report at the end of last year carried out
for Society for Human Resource Management (SHRM) by Mercer, detailed that
Dennis Donovan, executive-vice president of HR at Home Depot Inc, earned
$21.2m, making him the company’s second highest paid executive for 2001. This
mega-bucks reward is significant not only because of the amount, but also
because it showed how HR chiefs are gaining financial parity.

Mercer’s findings also showed that by achieving business results,
"senior HR executives have earned a seat at the executive table equal to
their colleagues in finance, operations, marketing and other corporate
functions" states the SHRM HR Magazine.

There has been a great deal more clarity about executive earnings over the
past five years which can only benefit the profession, but there is still some
way to go. In line with what the SHRM report demonstrates in the US, Starrit
points out that HR directors, whether they sit on the board or not, have no
automatic right to equal rewards.

He says: "What is more important is that the HR director, or head of
the function, is seen to be contributing to the commercial success of the enterprise
– albeit through the people dimension – and they are doing that in a tangible
way that will make people say ‘wow!’"

www.celre.co.uk

www.haygroup.co.uk

www.mercerhr.co.uk

www.watsonwyatt.com

Personnel rewards 2003: How HR ranks in the pecking order

When it comes to pay, a variety of
factors naturally come into play, including geography and company size. An HR
professional in London, not unexpectedly, comes out on top with a median salary
of £28,625, which is nearly a fifth above the national average. Practitioners
in the West Midlands fare worst with £21,078, which is 12 per cent below the
national average.

When it comes to size, average earnings for an HR director at
the helm of a company with a turnover in excess of £500m can earn £67,000,
which is 16 per cent above the average.

The Personnel Rewards 2003 survey shows the gender gap has
almost closed, with female HR directors now earning just 1.3 per cent less than
their male colleagues, compared with 5.6 per cent last year.

Changing jobs is also a good thing as HR directors who have
moved in the past 12 months have gained a 7 per cent premium on the survey
average of £57,449.

The communications sector is where practitioners can earn the
most money, recording 47 per cent above the all-sector average, while travel is
the lowest paid at nearly a fifth (18per cent) below the average.

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