HR and the Compensation Committee in the New Era of Executive Compensation

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Author(s): Jack Dolmat-Connell is president of DolmatConnell & Partners, Inc. located in Waltham, MA.

Overview

The role of HR relative to the compensation committee and executive compensation today is a very delicate one given the changes in recent years. Today, most organizations have their executive compensation consultant work directly for the compensation committee, rather than management, who, in the past, generally worked for the CEO and/or HR. This ensures a much greater degree of consultant independence, but has dramatically altered the role of HR in the process.

Executive compensation provides the head of HR with the greatest opportunity to interface with the board and to work on an issue of very high visibility (internally and externally) and importance to the organization. So, how does HR continue to add value in the process and play a key role?

The Role of HR Today

We believe that the most effective role for HR today is being the official secretary of the compensation committee, much like the head of legal is often the corporate secretary on the board. This role is much more than just minute taking; it is helping to shape the agenda of the committee and actively engaging all relevant parties.

There are also two other very important roles that HR can and should play today. First, there needs to be continual, regular education for the compensation committee. HR can determine the education needs, explore the options available and schedule the sessions.

Second, every committee member should have a compensation committee sourcebook: a reference manual of plans, contracts and agreements, compensation history, resolutions and a history of key actions. HR can be the creator and maintainer of the sourcebook, a by-product of which is education for HR.

Today's Hot Issues

What are the top issues that compensation committees are dealing with today that HR needs to be fully versed in?

* The new SEC disclosure is going to have significant impact on the executive compensation arena as firms need to discuss the "how" and the "why" as well as the "how much." * While FAS123R has been in place for close to a year, we are just starting to see its impact. Firms are discovering that it is about more than "the expense" of options; it is about the link to performance and whether time-based restricted shares remain an attractive vehicle remains to be seen. * Strengthening the link between executive compensation and firm performance is on the radar screen of every compensation committee, and thus needs to be on the agenda of every head of HR. * Today, firms are extremely concerned with the optics of their executive compensation: how will shareholders, the media and employees view executive pay?

What You Need to Know

In order to be effective in this role, the head of HR needs to be very comfortable with the accounting and tax ramifications of long-term incentive plans. If you aren't, you run the risk of the CFO being the "go to" person with respect to these issues. Second, knowledge of the government regulations impact on executive compensation and benefits is crucial: the impact of 409(a) on deferred compensation, the new SRC disclosure requirements, and 162(m) and the deductibility of executive compensation are a few of the important areas to be familiar with. Finally, you need an intimate understanding of your company's business, its strategy, and its competition to ensure that the plans are linked to the right performance measures, that you are able to attract and retain the talent you need to be successful, and that the plans balance the short-term and long-term goals of the business.

HR has a window of opportunity to define its new role in the executive compensation process. It needs to seize the day and carve out a value-added role, or it will lose the opportunity to be "at the boardroom table."

Jack Dolmat-Connell (JackDC@DolmatConnell.com) is president of DolmatConnell & Partners, Inc., a leading executive compensation consultancy located in Waltham, MA.

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