Comp Committees: Time for a Greater “Human Capital” Role?
We’ve written a few times about the trend of compensation committees taking on a broader role — and held a webcast about it a couple of years ago. At our upcoming “Proxy Disclosure Conference” — which is being held virtually in September so that everyone can attend — we have a panel devoted to the comp committee’s role in “human capital management.”
It’s great timing for anyone considering a broader mission for their own committees, particularly because former Delaware Chief Justice Leo Strine has now co-authored this 34-page essay that might give the concept more steam. He reimagines the compensation committee as being “deeply engaged” in human capital management, including oversight of:
– Workforce motivation & retention programs
– Employment practices
– “Fair gainsharing” with employees
A blog from Cooley’s Cydney Posner gives a detailed review and analysis. Here’s an excerpt:
The authors contend that, to address these issues, “the most sensible answer is for the mandated board committee that is required to address the related area of top management compensation—the compensation committee—to expand its perspective and become a committee focused on the company’s workforce as a whole.” Reimagining the committee will require that the board gain some understanding of the historical context of “gainsharing” among executives, workers and shareholders over time. The committee will need to arrive at a fair balance that “will best align the interests of all stakeholders in sustainable wealth creation, and develop compensation plans for the board that implement that goal.” The authors contend that understanding this broader context will help boards “constrain top management pay in sensible ways”:
“If, for example, the company’s workforce is getting no raise, does it really make sense to give top management an increase for “managing through tough times”? And if the company is doing well after a period of employee sacrifice, are their raises keeping up with gains for stockholders and the CEO? Does the company have a goal of paying its CEO and top management at or above the 75th percentile on the industry average? If so, does this goal extend to all company management? To all company employees? Or just to top management? If the latter, why?
If the board has a better sense of how the entire workforce is compensated, and the importance of the workforce to the company’s plan for selling products and services, the board is also better positioned to understand what will have the most important effect on productivity. Is it increases to top executive compensation? Or increases that motivate a much greater number of company employees?… Perhaps it is just the magic four or five at the top who really have a bottom line impact, or perhaps, and much more likely, the overall workforce’s productivity is more vital to the company’s profitability, and that providing all the company’s workers with quality pay and the opportunity for continuous training, employment, and advancement makes good business sense.”
As Cydney notes, the essay suggests data points and questions that comp committees should start considering:
What are the employee functions most critical to the company’s ongoing vitality?
How is the company treating workers that are essential to its operations?
What are turnover rates?
What is the extent of retraining of existing workers to master new skills?
What is management’s process for setting employee compensation?
To what extent does the company bargain with workers or give them any leverage?
What is the company’s view regarding its employees’ right to form a union? If opposed, how does that harmonize with the company’s ESG commitments to workers and with its treatment of executives?
Does the company pay equally for equal work, regardless of gender, race or ethnicity? Does it promote equally? Is the workplace welcoming and inclusive?
Are employees treated with respect and dignity (perhaps by reference to surveys or other behavior monitors)?
Do the data provided by management reflect productivity and effectiveness of company practices?
Is the board using metrics and factors for determining executive comp (e.g., use of a 75th percentile goal) and not applying the same metrics to company employees?
Is executive comp “tilted toward the stock price and risk taking,” thus potentially undercutting the company’s commitment to sustainability? Is the salesforce incentivized to sell customers “things they do not need”?
Does the company’s compensation system appropriately recognize the importance of ethics and compliance executives or “hold them down in pay because they do not run ‘profit centers’”?
-Liz Dunshee, CompensationStandards.com June 29, 2020
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