Firms Tapping HR Experts for Pay Committees

Determining the pay of top executives has become a high-profile, high-stress job for compensation committees at many public companies. First there was the outrage over CEO perks. Then came the stock-option backdating scandal, which last week claimed UnitedHealth Group CEO William McGuire.

Now companies are wrestling with new Securities and Exchange Commission rules requiring them to more fully disclose how they pay executives and show how their compensation is tied to performance.

As a result, boards of directors are finding it harder to fill positions on their compensation committees, consultants say.

“People are calling them the new audit committee,” says David Swinford, a managing director at Pearl Meyer & Partners, a New York-based compensation consultancy. Audit committees are responsible for making sure all of the company’s financial reports and SEC filings are correct—a particularly onerous task in the wake of the Sarbanes-Oxley Act of 2002.

“Just like with the audit committees, today if a compensation committee makes a mistake, there are tremendous repercussions,” Swinford says.

Given the heightened sensitivity about compensation, more boards of directors want at least one individual with an HR background on the compensation committee, says Russell Miller, practice leader at Executive Compensation Advisors, a New York-based subsidiary of Korn/Ferry International.

Based on the most recent proxy reports, Heidrick & Struggles, a Chicago-based executive search firm, estimates that 80 board seats among Fortune 500 companies are held by individuals with significant HR experience. That’s up from 62 in 2003.

The pool of candidates for compensation committees has shrunk because of the time it takes to do the job, coupled with heightened scrutiny of their work, says Clint Allen, chairman and CEO of A.C. Allen & Co., an investment banking consulting firm and a member of compensation committees at five companies.

“Five years ago, we used to meet in person or over the phone about four times a year,” he says. “Today, eight to 12 times a year is pretty standard.”

Traditionally, compensation committees hoped to find current CEOs to fill spots, but that’s becoming impossible, given the time requirements and sensitive nature of the discussions, experts say.

“Today, current CEOs won’t sit on more than one board, if any,” Allen says.

With the increased sensitivity regarding objectivity among compensation committees, some companies are steering away from bringing on active CEOs because they may be perceived as having a vested interest in keeping executive compensation levels high, says Charles Peck, a consultant at the Conference Board.

And directors can no longer turn to friends or former colleagues, Swinford says. “Anything that could be perceived as cronyism falls under harsh scrutiny,” he says.

Just tapping former CFOs or accounting partners with the financial and accounting background isn’t enough in today’s environment, Miller says. “Boards want members with specific functional expertise due to the heightened scrutiny,” he says.

Miller says he has seen many more HR executives serve on compensation committees during the past few years. “But it’s not limited to HR professionals,” he says. “Compensation committees want anyone with hands-on HR experience, so that could include line managers who have been involved in the process.”

—Jessica Marquez