HRs New Pay Role Isnt Easy

Jim Ellinghausen had virtually no experience working with compensation committees until he started at Pulte Homes in April 2005. In his previous roles at Frito-Lay and later at Bristol-Myers Squibb, Ellinghausen was more of an HR generalist, he says.

    So when he became se­nior vice president of HR at Pulte Homes, a Bloomfield Hills, Michigan-based home-building company with 14,100 employees, Elling­hausen knew he had a lot to learn.

    That’s why he was relieved when Bernard Reznicek, chair of Pulte’s compensation committee, invited him to dinner a week after he started his new job.

    “He knew a bit about me from our CEO but wanted to sit down and talk to me about my role working with the compensation committee,” Ellinghausen says. “He was sharing his expectations, and it helped get us all started on the right foot.”

    With the heightened scrutiny of executive compensation, the compensation committees of company boards are relying more heavily on HR executives to help them understand all of the factors in play when making their decisions. This trend poses an opportunity for HR executives to demonstrate their value to both the board and management, experts say.

    But balancing their dual role—helping compensation committees while still reporting to the CEO—can be a delicate situation.

    “It used to be that the primary relationship of HR executives was with the CEO, but now you are seeing a more direct link with the chair of the compensation committees,” says Charles Peck, principal researcher and program manager on compensation for the Conference Board. “It’s an awful lot of pressure for HR executives because they are dealing with the compensation of the most powerful people within the organization.”

    Some organizations are deflecting undue pressure by creating formal reporting lines in which the HR executive only reports to the compensation committee chair on all executive compensation issues, says Russell Miller, practice leader for Executive Compensation Advisors, a Korn/Ferry International company.

    “It’s then up to the compensation committee to determine how things are communicated to the CEO,” he says.

    If HR executives shy away from this high-profile role, they risk becoming little more than the lackeys of compensation consultants, relegated to just collecting comp data, consultants say.

    “This is one of the last few opportunities for HR executives to be in an area that is highly influential,” says Jack Dolmat-Connell, CEO of DolmatConnell & Partners, an executive com­pensation consulting firm in Wal­tham, Massachusetts. “If they don’t capitalize on it, they are going to be fully marginalized.”

Best practices
    In many companies, boards of directors and company management are working together to establish best practices to ensure that HR officers have independence when dealing with executive compensation issues.

    With the backdating scandals and the scrutiny of executive perks, companies are taking extra measures to make sure the whole process of determining executive compensation is beyond reproach, Peck says. “It has stretched the need for objectivity,” he says.

    As part of that effort, an increasing number of organizations are having their compensation committee chairs meet with candidates for top HR positions before they are hired, says Joe McCabe, managing partner at Heidrick & Struggles.

    “I can’t tell you the last time I did a head-of-HR search where there wasn’t some sort of dialogue between the head of compensation and leading candidate for the role,” he says.

    Often the chair of the compensation committee will meet with the candidate separately from the candidate’s meeting with the CEO, McCabe says. The meetings serve a dual purpose, he says. It gives the compensation committee chair an opportunity to explain the fiduciary duties that come with the job. But more important, the discussions allow HR executives to understand what is expected of them and what challenges they may face, he says.

    “Savvy candidates want to understand what their relationship with the compensation committee is going to be,” McCabe says. Ultimately, he says, “both parties want to be sure that they have an independent relationship with each other and that it is not controlled by the CEO.”

    During that first dinner with Reznicek, Ellinghausen got a clear picture of what the compensation committee needed from him. A lot it revolved around making sure the committee received materials on time and that the committee stuck to its published agenda.

    “One of my questions to him was, ‘What’s working, and what’s not?’ ” Ellinghausen says. “As a new person at the company, I was very concerned about understanding everything from a compliance perspective. I wanted to understand all of the processes and the flow of documentation.”

    Pulte CEO Richard Dugas recognized how important this was and made establishing Ellinghausen’s role with the compensation committee one of the HR executive’s initial 90-day goals.

    Dugas also solicits feedback from Reznicek and the other members of the compensation committee on how Ellinghausen performs. This feedback is part of Ellinghausen’s annual performance review.

    “One of my objectives each year is my effectiveness with the compensation committee through the eyes of the committee,” Ellinghausen says.

    Including the compensation committee in the performance reviews of HR executives is a practice that all companies should adopt, but less than 20 percent do, says David Swinford, a senior managing director at Pearl Meyer & Partners, which works with Pulte’s compensation committee and Ellinghausen.

    “I think that as people see this happening more and boards of directors share ideas, we will see this trend increase,” he says.

Information source
    For his part, Ellinghausen spends much of his time working with his staff to help Pulte’s compensation committee stay ahead of trends and understand upcoming regulations. “We send them articles and other types of information and are constantly trying to educate them,” he says.

    Ellinghausen works closely with Swinford of Pearl Meyer to make sure Swinford understands the cultural nuances of the company, such as how performance goals are set, where the talent is and where there are shortages. “We know who the people are who create the most value,” he says. “I don’t know that any consultant will ever have that level of insight. They are looking at the numbers, but they don’t have intimate knowledge of our talent and what we are doing.”

    Unlike many companies, Pulte often looks outside its industry for senior talent, Ellinghausen says. That means that Pulte can’t just look at what other home-building companies pay their top executives to determine what it should do, he says.

    Swinford agrees that as a compensation consultant, he relies heavily on HR executives to explain the nuances of the organization. “If I am charged with developing incentive plans for three or four levels of management, I can design a plan, but I know nothing about the people, and HR knows that.”

    Outside of being the expert on organizational culture for the consultant, HR executives who really want to get the compensation committee’s attention need to stay on top of the regulations that could affect the committee’s decisions, consultants say.

    A few executives have developed “source books” for their compensation committees, which provide historical data of executive compensation at the company, Dolmat-Connell says. Putting data in this format can be extremely helpful, particularly for boards that do not use compensation consultants, he says.

    HR executives can also prove their value by helping to manage the salary expectations of top executives, says Ira Kay, director of the compensation practice at Watson Wyatt Worldwide.

    If a CEO expects a big bump in compensation, “the HR person can say, ‘I don’t think the committee is leaning in that direction,’ ” Kay says. “There is no mechanism for the chair of the compensation committee to do that because it’s such a formal relationship.”

    Ellinghausen is grateful that he came into a company where the CEO gives him room to work independently with the compensation committee. But not all companies run so smoothly, consultants say.

    In those cases, it’s crucial for the HR executive to be proactive, reaching out to the compensation chair and understanding how the committee operates, Ellinghausen says.

    “HR executives need to get to the compensation committees early and understand their governance processes and information flow,” he says. “I have got to believe that most HR folks understand that this part of their role and they may need to initiate that relationship.”

Workforce Management, November 6, 2006, p. 1, 35-37 — Subscribe Now!