Last year, hip hop superstar Dr. Dre raked in more than $100 million. Pink Floyd rocker Roger Waters pulled in about $88 million and Elton John took home a cool $80 million. That trio formed the highest paid group of rock stars in 2012, according to Forbes.
But in the real world, paying corporate rock stars — coveted, top-performing executives and high-performing employees — can sometimes strike the wrong chord.
Executive compensation is a “highly charged issue and a lightning rod for criticism, both internally and externally,” said Ian Hendry, president of the Strategic Capability Network in Toronto. So he put the question out to panellists: How worrisome is the issue of executive compensation and what are organizations doing about it?
Exec comp in the public sector
Executive compensation in the public sector has become politicized, even though it represents only a fraction of the savings governments need as they attempt to balance the books, said Judy Hunter, vice-president of HR and organizational development at Holland Bloorview Kids Rehabilitation Hospital in Toronto, which is affiliated with the University of Toronto and has 840 employees.
“There have been nine legislated changes restraining and freezing executive compensation in the health-care sector in the past three years,” she said, adding the most recent legislation in Ontario freezes executive compensation for a minimum of eight years.
Hunter also lamented the fact legislation hinders pay-for-performance elements, key levers in the health-care sector for quality and performance improvement initiatives.
“The sector is beginning to see significant compression between the compensation of senior leaders and other staff and that will become a growing problem over the course of the next few years,” she said. “Executives in the health-care sector are truly feeling increasingly undervalued.”
This year, the issue of executive compensation scores an eight out of 10, said Suanne Nielsen, senior vice-president and chief talent officer at Toronto-based Foresters, a life insurance firm with 2,000 employees across Canada, the United States and the United Kingdom.
“It really has come to a head more recently as talent gets tighter and talented people can demand more money,” she said.
Independent compensation advisors, working in conjunction with the CHRO and compensation committee, can help organizations set remuneration at competitive levels.
“In-demand candidates tell us a story of what they need to be paid, and our compensation philosophy has to be broad enough to be able to accommodate top talent,” said Nielsen.
At the Ontario Municipal Employees Retirement System (OMERS), which has 2,400 employees in Canada, the U.S. and the U.K., compensation is an important issue but it’s not on the front burner, said Warren Bell, executive vice-president and CHRO at OMERS in Toronto.
“You can’t get compensation wrong,” he said. “But as important as compensation is, it pales in comparison to the importance of the talent agenda, leadership development and preparing your organization to perform. Compensation has taken a back seat from my perspective. It happens to be what gets publicized, but boards, shareholders and HR committees are consuming themselves much more with the development of leadership and succession.”
OMERS has even changed the name of its board committee to “HR committee” to signal the importance of the talent agenda as well as compensation, said Bell.
The emphasis on leadership and talent is encouraging, said Bell, who expects it to be a long-term focus.
“I think that we’ll see more and more of that and we’ll see the shine, or the spotlight, on compensation for short periods of time but the vast majority of effort and time and energy going into the talent agenda,” he said.
Paying high performers and internal friction
Citing a recent article in the Globe and Mail with the headline “Talented techies deserve rock star treatment,” Hendry asked the group if there is a recognition that you have to “pay rock stars, and how does that create internal friction if you start to do that?”
If an organization wants “A-team” results, it has to have A-team players, said Victoria Hubbell, senior vice-president of strategy and stakeholder relations at the Toronto-based Healthcare of Ontario Pension Plan (HOOPP), which has 450 employees.
“The B-team delivers B-team results,” she said. “There is a direct correlation between the expertise within any investment organization and its returns. For HOOPP, this has translated into returns of 12.1 per cent at the end of 2011 and, more importantly, fully funded status.”
HOOPP’s high performers have helped the plan weather the burst in the tech bubble and the credit crisis of 2008, providing 10-year investment returns that are 10 per cent compounded, she said.
To prove the value of its A-team talent, HOOPP did an internal study in 2007 to find out what it would mean for the bottom line if it had B-team performers with B-team results.
“We worked with the investment professionals and finance department to actually translate what degree of negative impact this could have in terms of investment results,” she said. “It was significant.”
Using research gathered by Morneau Shepell on investment results for the top 50 pension funds from 2004 to 2007, HOOPP consistently placed in the top quartile, ranking between ninth and 13th for those three years.
“If we had instead delivered the median rate of return, as outlined in the Morneau (Shepell) research, it would have made a difference of $2.24 billion over a three-year period,” said Hubbell. “That’s the value they bring, in a situation where each employee is responsible for managing nearly $1 billion.”
A key concern for all organizations is ensuring the compensation for top performers doesn’t reset pay levels for all employees, said Bell. After all, not every employee can be a rock star — so they can’t all be paid like one, he said. But it’s critical to recognize and reward high performers.
“It would be hard to see a time when you don’t actually have to reward your top-contributing, top-performing people with top-level compensation,” said Bell, especially in the financial services industry.
But how transparent should employers be when it comes to compensation? For organizations with multiple businesses, it can be difficult to paint a picture of all the units, how well they’ve done and how that impacts compensation, said Hendry.
“That’s one of the friction points in organizations, certainly internally, where you’re trying to justify paying those people for good performance versus allaying the concerns of others who hadn’t had a particularly good year.”
Generally speaking, more transparency is better, said Bell.
“Trying to be open in the dialogue is half the battle in driving your engagement levels up with your people.”
As organizations become more complex, even more transparency is required, said Nielsen.
“It becomes hard to see how the business plan flows through to results,” she said. “You’ve got to paint the picture, for both employees and the board, as to how the business plan and results are reflected appropriately in incentive payouts.”
Meet the panellists
In December, Canadian HR Reporter sat down with five senior HR professionals in Toronto to discuss some of the pressing topics facing employers. The roundtable discussion was hosted and moderated by Ian Hendry, president of the Strategic Capability Network, an association for senior business leaders. Visit www.scnetwork.ca for more info.
executive vice-president and CHRO at OMERS
president of Strategic Capability Network
senior vice-president and chief talent officer at Foresters
senior vice-president of strategy and stakeholder relations at HOOPP
vice-president of HR and OD at Holland Bloorview Kids Rehabilitation Hospital
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