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Article | Executive Pay Matters

Putting people first

Executive Compensation|Talent
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By Shai Ganu | September 11, 2019

In this article, Shai Ganu talks about why boards need to focus on human capital management.

In this age of increasing shareholder activism, investors are calling for stronger board oversight of executive compensation, succession planning, gender equity, corporate culture, and organisation development issues.

For instance, in his annual letter to CEOs of all investee companies, Blackrock CEO Larry Fink highlighted the importance of stakeholder engagement and social purpose in ensuring sustainable, long-term growth and profitability. The key linkage between purpose and profit is the prioritisation of human capital, he noted: “Attracting and retaining the best talent increasingly requires a clear expression of purpose.”

Yet, most boards do not spend as much time and effort addressing human capital issues as they do their financial and intellectual capital. In fact, a company’s people policies and practices are crucial to ensuring that it can attract, retain, and motivate key talent.

Companies should continually review their talent pools to ensure they can adapt to rapidly changing technology and increasingly disruptive environments. To drive productivity enhancements, companies also need to define desired skills and competencies, and continually invest in up-skilling and re-skilling employees.

The board, in its oversight of the company’s human capital strategies, should ensure that there is sufficient focus on four key constituents: senior executives, the entire company, society and, last but not least, the board itself.

Senior executives

The remuneration committee (RC) is responsible for performance management and remuneration of the company’s senior management. This includes performance tracking (setting scorecards, performance measures and targets), executive compensation frameworks, short- and long-term incentive structures, and equity plans.

Listed companies are required to disclose the annual compensation outcomes for the CEO and key management personnel, specifically. The linkage between executive pay, performance and value creation, is an important aspect of remuneration packages.

The more progressive RCs have also expanded their remit to cover talent management. These committees focus on appointing the right people in the right roles, defining performance expectations, and rewarding executives. They are charged with CEO selection and annual performance assessments, succession planning for key roles, and leadership development – including lateral moves, coaching and mentoring.

The company

Boards have to set the tone at the top, and are increasingly assuming accountability for corporate culture. This involves encouraging the right behaviours and minimising the risks of unwanted behaviours, for example, ethical conduct, health and safety issues, fostering a culture of respect at work, and protecting whistleblowers.

The board also needs to take a holistic perspective on organisational development initiatives, ensuring oversight of optimal organisation structures, spans of control, role clarification, human resource analytics, and productivity enhancements. Leading boards adopt active listening strategies and pay specific attention to employee engagement drivers and pain points.

Broader society

With an increasing emphasis on environmental, social, and governance issues, companies are recognising their broader responsibilities to society. From retirement plans to creating new jobs for the future economy, sustainable long-term growth goes hand-in-hand with the community. Boards have the critical accountability to ensure fair treatment of employees, gender-pay equity, workforce diversity, and equal opportunities.

Progressive boards are turning their attention to selection and promotion processes, and proactively creating pathways for women to take on leadership roles. Boards are also responsible for the sustainability of their people practices; calling for a strong emphasis on up-skilling and re-skilling employees, and balancing internal promotions with external hires.

Board of directors

Above all, the board should not forget about itself. The nominating committee (NC) plays a critical role in prudent human capital management, commencing with the formation of the board itself, by determining the different roles that suit the company’s requirements. Separation of duties between the Chair and CEO, composition and size of the board, number and role of independent directors, succession and board renewal, committee structures and board fees are all key decisions.

Progressive boards are very deliberate in selecting non-executive directors (NEDs) that provide diversity of thought and experiences. Board diversity, in terms of gender, age, culture, tenure, domain expertise, and stewardship styles, provide different perspectives, which in turn make for more considered decision-making.

Companies should also carefully examine their board’s processes and dynamics, to ensure optimal decision-making. Progressive companies define clearly the desired relationships between the Chair, NEDs and CEO. All NEDs are called to actively participate, and create a culture where dissenting views are welcomed.

Role of the board

Companies are beginning to acknowledge the broader role of the RCs and NCs. The redefinition of them into committees with names such as Executive Resources and Compensation Committee, Human Resources and Organisation Development Committee, and Organisation Development and Compensation Committee are indicative of this emerging trend.

Most priorities related to driving company performance link back to “people” – i.e. having the right people in the right roles, defining desired performance outcomes, motivating and incentivising talent, and unlocking latent productivity gains. Boards need to be responsible for reviewing and driving business plans, defining performance measures and incentives, and implementing succession plans.

In summary, human capital is a critical asset in every company – it can make or break business strategy, and is often a key performance differentiator. Indeed, the whole board needs to be actively engaged in the new world order of managing human capital.

*This article was published in The Business Times on September 6, 2019.

Author

Shai Ganu
Managing Director, Talent & Rewards business
Willis Towers Watson

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