Few would argue HR doesn’t have a leading role to play in setting reward strategy for an organisation’s broader workforce. But at executive levels it can be a different story, with decisions over top pay led by remuneration committees (RemCos), supported by remuneration consultants, often with limited HR expertise in the room.
The recent CIPD and High Pay Centre report RemCo Reform: Governing successful organisations that benefit everyone highlighted a shocking and depressing – to me at least – statistic about the lack of HR expertise on remuneration committees. Only 16% of companies mention HR or people management experience in their profiles of RemCo members. Comparatively, 27% have at least one member with a background in sales or marketing.
This runs directly counter to advice around the principles of renumeration from the Investment Association, which states: “RemCo chairs should have sufficient skill and experience to manage the remuneration setting process.” And it’s reflected in the experience of a FTSE 100-listed CHRO I recently spoke with, who despaired over the lack of expertise – or even basic knowledge – in reward of RemCo members she has worked with.
Although some RemCo chairs have told me they are seeing evidence of pay restraint, our latest report finds FTSE 100 CEOs still earn 117 times more than the average employee. Little wonder the issue remains toxic. Many agree CEO pay is too high, packages too complex and the link to organisational performance and long-term value creation ineffective or non-existent. A recent report from innovation charity Nesta found that the UK’s executive bonus culture is discouraging R&D, saying “the weight of incentives are geared towards financial performance, particularly short-term financial performance, which can be enhanced by cutting innovation”.
In our report, a RemCo chair is quoted as saying pay is “nuts…and nuts has become the benchmark”. Another RemCo chair I spoke with recently described the system as “broken”. Shareholder revolts over executive reward are hitting the headlines with increasing regularity (in the last two months alone, see: Standard Chartered, De La Rue and JD Sports). With pay ratio reporting coming in as of April 2020, noise over pay disparity seems unlikely to quieten down.
What is less clear is where we go from here. There is no silver bullet, but one angle I believe needs more consideration is the link between executive pay and corporate governance and culture more generally. And having more people expertise on boards is one lever of doing this.
This isn’t about giving the CHRO a board position (I know we are all sick of that debate), but rather recognising the skills and expertise people leaders can bring as non-executive directors, as well as equipping HRDs with the confidence to influence at board level from an executive position. One chairman I interviewed a few years ago recommended a dotted line from the HRD into the chair, and encouraged HRDs to push themselves into the executive pay conversation, “pull[ing] things back to schemes that are sensible and fit for purpose” – ones investors will want to vote for.
In my seven years commentating on the HR profession, I have seen a steady increase in HR leaders taking up board positions as NEDs, proving the value that a deep understanding of people and culture, plus wider business expertise, can bring to the governance of an organisation. But there is opportunity for more HR leaders to take up the challenge, given the increasing focus of corporate governance frameworks on culture, behaviour and long-term value creation, as well as pressure over executive pay.
As our research found, people expertise is obviously not being seen as a key priority when it comes to board recruitment. This is reflected in the experience of HRDs I know, some of whom have successfully made the move into portfolio careers, who find they have to prove their capability more than another functional leader to land a position.
This undervaluing of people and culture expertise is limiting. The lack of people expertise on RemCos and boards risks isolating remuneration decisions. Exec pay should not be dealt with in a vacuum. It needs to be considered within the whole system and linked to broader people issues across the organisation, including engagement, voice, diversity and succession planning. People leaders should be skilled in spotting areas of dissonance that can derail an organisation.
As part of the RemCo Reform report, the CIPD recommended that company boards considered re-modelling their RemCos to become ‘People and Culture Committees’, responsible for designing reward practices that incentivise long-term value creation for individuals, businesses and societies, and taking accountability for organisational culture more broadly. Doing so shifts the focus from the narrow, time intensive and potentially toxic conversations on executive remuneration to encompass people, culture and impact in the round. And places people expertise at the heart of long-term value creation and sustainable success.
The CIPD is working with the High Pay Centre on research around non-financial measures of performance and long-term value creation, as well as broadening the remit of the RemCo into people and culture. We are also planning more events and content around supporting HR leaders into non-executive roles. HR leaders interested in getting involved in or hearing more about this agenda should contact Katie Jacobs - k.jacobs@cipd.co.uk
