Are HR professionals cut out of key reward decisions?

If you read nothing else,read this…

• Compensation and benefits professionals may be bypassed on key reward decisions.

• HR issues that are often devolved to line managers include staff motivation, talent management and sickness absence, while executive compensation decisions may be made by remuneration committees.

• If responsibility is to be devolved, HR professionals must ensure managers are properly equipped and supported to follow the reward framework.

Case study: People management leaders deliver KPMG policies

In 2005, professional services firm KPMG appointed between 350 and 400 employees working in internal and client-facing parts of the business as people management leaders, who could deliver the employer’s reward policies.

The leaders, who typically manage teams of between 10 and 50 employees, have the autonomy to award pay rises and bonuses. It is also their responsibility to communicate and answer queries about the changes they make to an employee’s reward package.

Ingrid Waterfield, head of performance and reward at KPMG, says: “On the reward side, we have said they are empowered to make and communicate reward decisions. One of the things we notice with reward is the easy option for managers to say ‘I was not involved in the decision about your pay so I cannot comment’.

“The idea is that people get a better quality of conversation and understanding of why we are giving the pay and bonus awards that we do.”

KPMG’s people management leaders are in close contact with the organisation’s HR team and base their reward decisions on a central framework. In addition, they are given regular updates on changes in reward policy and have access to an online portal, which provides further information on how to carry out their duties.

Are HR professionals being bypassed when key decisions are made on reward? Nicola Sullivan investigates

Most employees would give their right arm to be privy to the decision-making process behind their organisation’s remuneration policy. Now, with the continuing furore over bankers’ bonuses, this interest has extended to how remuneration committees determine top-level pay and reward.

Rabble-rousing responses to executive reward, particularly Royal Bank of Scotland chief executive Stephen Hester’s bonus of nearly £1 million, which he eventually waived, have raised questions about the role HR plays in setting remuneration for senior staff, as well as in other key reward decisions.

Although HR’s scope to get involved in top-level decision-making may be limited by an employer’s governance structure, there are a number of ways it can inform the process, utilising its expertise on performance and providing a greater insight into the broader context of pay and performance across an organisation.

Stephen Bevan, director of the Centre for Workforce Effectiveness at the Work Foundation, says: “My experience is that some HR people are very active. They get the strategic dimension of this issue and they provide advice to the remuneration committee. But others do not do much more than provide benchmarking data. Those are the two extremes and then there is every other shade of influence in between.

“I think HR people should be a bit more proactive at that level. One of the issues I am concerned about is if there is a disconnect between the senior executive remuneration policy and the rest of the organisation’s reward strategy.”

Another issue to be considered is how much of a coherent link there is between the way senior management are paid and the way everybody else is paid. Bevan adds: “If a senior executive’s remuneration is intended to incentivise a company’s long-term growth, for example, how is that reflected in the next two, three or four layers down the organisation?

“Is it possible for an employee to sit anywhere in the organisation and say ‘I can actually see there is a golden thread of logic that helps me understand the way I am paid and the way my bosses are paid, and this is telling me the same story about the way we want our business to go’. I am not entirely convinced that is the case.”

Aligning executive remuneration

Involving HR and reward professionals in this process can help align executive remuneration with that of remaining employees. Duncan Brown, principal, reward and engagement at Aon Hewitt, says: “There is a real risk [the remuneration committee] gets divorced from what is happening with other staff. We saw in the recession the possible downside of that, where executive bonuses pay out and staff bonuses do not.”

HR professionals can catch the attention of their remuneration committee by offering up hard metrics on human capital management, which is increasingly important to institutional investors. This concept sees staff as an asset that adds monetary value to an organisation, in turn driving greater returns for investors.

Richard Belfield, a senior consultant at Towers Watson, says: “In many companies, there is an unsatisfied demand from the remuneration committee for involvement from HR, and greater internal engagement and support from HR. The reason is that HR has the capacity to bring to bear the internal decision-making information and metrics in relation to human capital issues that no one else can bring to the table.”

Chris Charman, director of reward, talent management and communication at Towers Watson, adds: “What comes out in the annual accounts, and what is disclosed to the City, tends to downplay some of the important work HR professionals do around things that really drive business and performance.”

Conversely, Nicki Demby, a partner in the executive compensation consulting practice at Deloitte, does not think HR professionals are marginalised from key decisions on reward, arguing that they actually play a key role as in-house adviser to the committee. “If you look at the published reports and accounts of Britain’s biggest companies, you will see who the remuneration committee took advice from in the year,” she says. “They will mention the external advisers, but they will very typically mention the group HR director, too.

“What [HR professionals] are doing is making sure there is a flow of HR quality information to the remuneration committee, both on pay and on business performance and on personal performance.”

High-profile role in policy setting

There is a real opportunity for reward professionals to play a high-profile role in remuneration policy setting. Otherwise, dealing with a remuneration committee may be left to senior HR generalists, who could be very strong on talent management, but have surprisingly little reward experience.

Demby says: “Reward professionals can have a very high profile in the organisation because what we pay people is a big piece of the business’s costs. They are seen as able to manage operational costs, are very good with analytics, financially literate, and boards like to work with people with those skills.”

To ensure they are not bypassed on other key reward and benefits decisions, compensation and benefits professionals also need to be influential at line-manager level. Line managers of front-line staff must tackle HR-related issues, but problems can arise if they have too much autonomy. For example, line managers may be charged with distributing variable pay without having the expertise to do so consistently and cost-effectively.

The Work Foundation’s Bevan says HR needs to be a better custodian of the costs and business reasons for offering cost-of-living increases, progressional pay and bonuses.

That said, many HR professionals recognise that line managers can play a key role in the successful delivery of reward policy. For example, in 2005, KPMG created a network of people-management leaders across its internal and client-facing divisions who have the autonomy to award pay rises and bonuses to the teams they oversee (see case study above).

Tools to make sensible decisions

Aon Hewitt’s Brown says: “HR should not be making the decisions, it should be giving the processes and tools to managers to make sensible decisions on pay and reward, as well as the tools that can help staff realise the full value of the package.

“In some organisations, the problem was line managers pretty much left it to HR, and if there was an issue, they would say ‘I would love to give you more money, but HR have given me this matrix and will not let me’.”
If such responsibility is devolved to managers, HR must ensure they are properly supported and equipped to follow the reward framework, possibly educating them in HR systems, issuing updates on reward changes, and providing communication tools. Brown adds: “With previous reforms in HR to slick up processes, quite often local [HR] support was removed and put into a call centre. This put more onus on line managers.”

According to Brown, most HR functions that adopted US management consultant David Ulrich’s model of HR, which advocated reorganisation into a shared service centre and the creation of HR business partners, felt this did not give line managers enough support to deliver HR policy. “The better HR functions are recognising that now,” he says. “They are getting much more involved, making sure the governance is good, making sure there are process checks for the recommendation of pay awards.”

Nevertheless, it is essential for HR to influence the underlying strategy and theory. Brown adds: “HR will facilitate the business need of sitting down and saying: ‘Why have we got a skewed distribution towards high performance in one area and not another? Why have we got a skewed distribution towards [men]?’”

Staff motivation, talent management and sickness absence are also HR issues often devolved to line managers. Wolfgang Seidl, head of health management at Mercer, says: “Line managers should continue to manage and exercise duty of care to employees, but HR should be the ones, as well as occupational health, setting the framework before line managers. They should be able to empower line managers to spot the early warning signs of stress in employees.”

In addition to being educated about relevant absence triggers, line managers need to be referred to benefits, such as employee assistance programmes (EAPs), which underperform when inadequately engaged. Meanwhile, to maximise their impact on key reward policy, HR professionals must make themselves visible in their organisation’s highest echelons, while ensuring a robust framework exists to guide line managers delivering policies at grass-roots level.

Sales commission role

Sales commission is an area that reward professionals are likely to find it hard to put their stamp on, because this has, historically, been the preserve of the sales or finance director.

Marc Bishop, director of reward consulting at PlusHR, says: “It is very typical across organisations for the sales director to have complete control. This is an area that has been not particularly open to HR professionals in the past.”

However, reward professionals can play a key role in ensuring sales commission and variable pay accurately reflect business strategy and assist the organisation in achieving its objectives. This is especially pertinent when cost margins are squeezed.

Sales commission is increasingly likely to be a topic of discussion for HR professionals. Brian Hartlen, vice-president of marketing at Varicent, says: “If an employer looks at somebody’s variable pay, it has to figure out what their quota was and that ties back to the financial system. It then has to figure out what territories it wants to sell in and that ties back to the marketing system. It then has to figure out what the incentive plans look like and what the job roles look like and that [feeds into] the HR system.”

If the finance department is too heavily involved in sales compensation plans, these can become overly complex and lose their motivational impact. A typical scenario is that finance wants to have every single measure in the plans that is important to it, whereas HR and reward functions can point out that this is likely to confuse people rather than motivate them.

How HR professionals can maximise their impact on reward decisions

• Sitting on another organisation’s remuneration committee as a non-executive director can boost a reward professional’s credibility within their own organisation.

• Reward professionals need to ensure there are robust processes in place, to assist line managers in delivering HR and benefits policy to front-line staff.

• Setting sales commission has historically been the preserve of the finance director, but HR professionals have a key role to play in ensuring the policy is motivational and aligned with business objectives.

• Reward professionals can ensure a remuneration committee’s decisions on executive reward are informed by providing data on human capital management, benchmarking and information on broader reward policy across the organisation.

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