Treading a thin line: Does HR have a role in setting executive pay?

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Expert Perspective from Grahall’s OmniMedia Editorial Board

Mark McGraw’s article Comp, Consultants and Conflicts of Interest in HRE Online quotes Charles Tharp, executive vice president for policy with the Center on Executive Compensation at the HR Policy Association in Washington, saying about executive compensation strategy: “… HR should play a significant role in supplying leaders with the information they need to make an informed decision… the HR leader can help the committee in assessing and [aligning] the compensation recommendations of the consultant with the business strategy and talent strategy of the company.”

The article closes with this quote form Tharp: “…there tends to be an effective partnership between the HR leader, the independent consultant and the compensation committee in determining the appropriate executive compensation program for the company.”

The fundamental question is how should HR participate in the process of setting executive pay?  No doubt since HR reports (directly or indirectly) to these executives, it would be awfully tough to be anything but constructively facilitating of a significant increase for the person who controls your continued employment. We couldn’t imagine a situation where the head of HR joins the compensation discussion saying “my boss is only average so he or she should be paid just average.”

The CHRO, along with the VP of Compensation & Benefits (or their equivalents), helps to set the Total Rewards Strategy.  HR also participates in the broad based compensation process for non-executive employees.  We believe it is appropriate and necessary for Boards to listen carefully to the insight and advice of the Human Resources and compensation and benefits experts within the organization. Since these individuals develop the people and reward strategies that are required to implement the strategic business plans they are invaluable in helping Boards and their consultants understand the linkages between the business strategy and the people and rewards strategies.

However, there is a significant risk that if HR gets overly involved in compensation decisions for executives, who are their supervisors and superiors, a process that should be objective could become contaminated by the understandable self preservation instincts of the individual HR practitioner.

Let’s look at this more scientifically.  There are essentailly four levels of information exchange:
1. lnformational: provides data and results of research pertaining to a topic
2. Advisory: gives advice but does not participate in voting and does not share in the obligation or accountability for the decision
3. Shared: provides input into and votes on the final decision
4. Primary: is critically involved in the development and determination of a decision, and owns accountability for that decision

Once HR moves from providing data to participating in the decision, then he or she is beyond the level of objectivity that is needed to make these decisions correctly. Even advice may taint an otherwise objective process if the advisor has ulterior motives.  We caution Boards to be thoughtful and clear about the scope of HR’s role in executive compensation strategy. 

Contact Grahall’s OmniMedia Editorial Board at edie.kingston@grahall.com

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