Meeting fiduciary responsibilities in four areas of HR.
What is human resources governance? HR governance focuses on the process and structure used to direct and manage HR functions. An effective HR governance structure provides a framework to retain employees and meet business objectives, as well as create a system where the delivery of benefits is performed in a cost-effective manner while safe-guarding the best interests of employees and other beneficiaries.
The key to governance is defining fiduciary responsibilities and creating the structure and processes to manage these responsibilities. Ultimately, responsibility lies with an organization’s board of directors. It is the responsibility of the board to decide which duties will be delegated and then to ensure that the individuals responsible have the required knowledge and experience to perform these duties. A governance structure creates a process where these duties and responsibilities, and the individuals performing them, can be monitored and evaluated.
HR governance consists of four specific areas:
•retirement plan governance;
•benefit plan governance;
•compensation plan governance; and
•employment practices governance.
Employers have recently been focusing energies on retirement plan governance. However, organizations would be well advised to ensure governance principles are applied to all four of these areas, from allocation of responsibilities and decision-making, to daily administration of plans and policies.
Retirement plan governance
Retirement plan governance has received an abundance of attention in Canada as evidenced by the following:
•In 1998, the Senate Banking Committee, issued the Kirby Report which examined the state of pension plan governance in Canada.
•In January 2000, a joint task force, consisting of the Association of Canadian Pension Management, the Pension Investment Association of Canada, and the Office of the Superintendent of Financial Institutions released its Report of the Joint Task Force on Pension Plan Governance listing six pension plan governance principles.
•The Canadian Association of Pension Supervisory Authorities (CAPSA) released its Report by the Joint Forum of Financial Market Regulator’s Working Committee on Investment Disclosure Capital Accumulation Plans in April of this year. The paper proposes a set of criteria establishing the duties and responsibilities required of plan sponsors and administrators when administering capital accumulation plans.
•As recently as May 25 of this year, CAPSA issued a draft report entitled The CAPSA Pension Plan Governance Guideline and Implementation Tool. The proposed set of guidelines is meant to ensure that a plan sponsor is able to provide members with the benefits promised to them.
While there has been much commentary on these and other reports and the steps employers can take to implement a sound governance structure for retirement plans, little attention has been given to the three remaining areas of HR governance. It is time that employers give due notice to governance structures related to benefit plans, compensation plans and employment practices.
Benefit plan governance
An effective governance structure should ensure that the employer’s benefit plan is in alignment with its business objectives and, at the same time, attracts, retains and motivates employees. On an annual basis, a governance structure should be reviewed to ensure that the benefit plan remains competitive, is cost efficient and continues to comply with employment and human rights laws. Just as importantly, good benefit plan governance will ensure that the plan is being communicated to employees so that it is understandable, yet legally accurate.
Legal liability can result from the failure to ensure that persons hired to provide information about the employer’s benefit plans to employees have sufficient knowledge of those plans and have the ability to properly communicate the terms of the plans. In the case of Lehune v. Kelowna (City), a benefits supervisor hired by the British Columbia city advised Lehune (who was terminally ill with cancer) and his spouse that a group life insurance policy provided by the City could not be converted into an individual policy upon retirement. On the contrary, the group life insurance policy did allow for conversion within 31 days of retirement without the need for a medical examination. The court found that Lehune and his spouse relied on the mistake of the benefits supervisor and therefore did not convert the insurance. Judgement was issued against the City (Lehune v. Kelowna (City), [1994] B.C.J. No 2100 (B.C.C.A.).)
Compensation plan governance
Compensation is frequently one of the largest costs of operating an organization. A compensation committee is responsible for overseeing the overall compensation cost and structure within an organization. This includes overseeing internal equity and external competitiveness, and the design features of compensation, for example, the appropriateness of the organization’s long-term incentives, equity compensation, and so on.
A proper governance structure will ensure that a pay equity plan is reviewed on an annual basis to determine how different circumstances will, or have had, an impact on the plan. The individuals responsible for governance should determine whether these changes require that jobs are re-evaluated, pay adjustments be made or whether the plan needs to be amended.
Employers should not rely on deemed approval of a pay equity plan for re-assurance; a plan may be reviewed at any time and found non-compliant. For example, in January 1990, Toronto’s Humber College posted its pay equity plan for non-union employees and no complaints or objections were filed. Consequently the plan was implemented, and all required adjustments were made by November 1991. In 1996, a pay equity officer reviewed the plan and found that it did not comply with the Pay Equity Act. In 1998, Humber College was required to file a revised plan effective Jan. 1, 1990 and to pay any additional money owing, including interest from 1990 (Humber College of Applied Arts and Technology, [2000] O.P.E.D. No. 5).
The onus has fallen on employers to monitor and review plans to ensure pay equity plans remain in compliance with applicable legislation. Not reviewing these issues on an annual basis can result in a pay equity complaint that could lead to costly retroactive payments.
Employment practices governance
Employment practices governance involves the establishment and review of policies and procedures that deal with compensation, retirement, hiring practices, terminations and promotions. These policies should be reviewed for consistency with the organization’s objectives and for compliance with employment and human rights legislation.
The importance of communicating an employment policy is highlighted in the legal decision of McLaren v. Pacific Coast Savings Credit Union. In 1985, Pacific Coast issued a retirement policy in which employees were advised that normal retirement age was 65. Later, in 1988, the retirement policy was re-drafted and employees were advised that, with approval, exceptions could be made and employees could extend employment beyond age 65. McLaren made such a request six months prior to turning 65. The request was denied. McLaren commenced a wrongful dismissal action against Pacific Coast.
The Court ruled in favour of McLaren because, among other things, Pacific Coast had failed to communicate the retirement policy effectively and at no time had McLaren expressed his acceptance of the policy as a term of employment (McLaren v. Pacific Coast Savings Credit Union, [2000] B.C.J. No. 393.)
Employers must ensure that their employment policies are carefully worded, that policies are enforced without exception and that polices are communicated to employees on a regular basis.
What should HR do?
The backbone of good governance is “process.” Fiduciaries are not expected to guarantee the outcome of a particular event — people make mistakes. However, fiduciaries must institute the proper process and follow that process when decisions are made.
Keeping this in mind, the starting point in developing a governance framework is to self-assess what processes are currently in place. This should be done on an objective basis to avoid ending up in the same place that you started. The next step is to identify the processes that should be followed and then develop a strategy to close the “governance gaps.”
An effective HR governance structure may not guarantee business results but it can make an impact on the success of an organization. A formal HR governance structure clearly outlines the duties and responsibilities of all parties involved, and makes them accountable for their actions. In turn, this accountability leads to the efficient administration of the organization’s retirement program, benefits plan, compensation plans and employment relations. Further, good HR governance reduces the risk of legal liability facing employers and other fiduciaries.
Valeria Garcia and Rick Headrick are consultants with Hewitt Associates. They may be contacted at (416) 225-5001.
The key to governance is defining fiduciary responsibilities and creating the structure and processes to manage these responsibilities. Ultimately, responsibility lies with an organization’s board of directors. It is the responsibility of the board to decide which duties will be delegated and then to ensure that the individuals responsible have the required knowledge and experience to perform these duties. A governance structure creates a process where these duties and responsibilities, and the individuals performing them, can be monitored and evaluated.
HR governance consists of four specific areas:
•retirement plan governance;
•benefit plan governance;
•compensation plan governance; and
•employment practices governance.
Employers have recently been focusing energies on retirement plan governance. However, organizations would be well advised to ensure governance principles are applied to all four of these areas, from allocation of responsibilities and decision-making, to daily administration of plans and policies.
Retirement plan governance
Retirement plan governance has received an abundance of attention in Canada as evidenced by the following:
•In 1998, the Senate Banking Committee, issued the Kirby Report which examined the state of pension plan governance in Canada.
•In January 2000, a joint task force, consisting of the Association of Canadian Pension Management, the Pension Investment Association of Canada, and the Office of the Superintendent of Financial Institutions released its Report of the Joint Task Force on Pension Plan Governance listing six pension plan governance principles.
•The Canadian Association of Pension Supervisory Authorities (CAPSA) released its Report by the Joint Forum of Financial Market Regulator’s Working Committee on Investment Disclosure Capital Accumulation Plans in April of this year. The paper proposes a set of criteria establishing the duties and responsibilities required of plan sponsors and administrators when administering capital accumulation plans.
•As recently as May 25 of this year, CAPSA issued a draft report entitled The CAPSA Pension Plan Governance Guideline and Implementation Tool. The proposed set of guidelines is meant to ensure that a plan sponsor is able to provide members with the benefits promised to them.
While there has been much commentary on these and other reports and the steps employers can take to implement a sound governance structure for retirement plans, little attention has been given to the three remaining areas of HR governance. It is time that employers give due notice to governance structures related to benefit plans, compensation plans and employment practices.
Benefit plan governance
An effective governance structure should ensure that the employer’s benefit plan is in alignment with its business objectives and, at the same time, attracts, retains and motivates employees. On an annual basis, a governance structure should be reviewed to ensure that the benefit plan remains competitive, is cost efficient and continues to comply with employment and human rights laws. Just as importantly, good benefit plan governance will ensure that the plan is being communicated to employees so that it is understandable, yet legally accurate.
Legal liability can result from the failure to ensure that persons hired to provide information about the employer’s benefit plans to employees have sufficient knowledge of those plans and have the ability to properly communicate the terms of the plans. In the case of Lehune v. Kelowna (City), a benefits supervisor hired by the British Columbia city advised Lehune (who was terminally ill with cancer) and his spouse that a group life insurance policy provided by the City could not be converted into an individual policy upon retirement. On the contrary, the group life insurance policy did allow for conversion within 31 days of retirement without the need for a medical examination. The court found that Lehune and his spouse relied on the mistake of the benefits supervisor and therefore did not convert the insurance. Judgement was issued against the City (Lehune v. Kelowna (City), [1994] B.C.J. No 2100 (B.C.C.A.).)
Compensation plan governance
Compensation is frequently one of the largest costs of operating an organization. A compensation committee is responsible for overseeing the overall compensation cost and structure within an organization. This includes overseeing internal equity and external competitiveness, and the design features of compensation, for example, the appropriateness of the organization’s long-term incentives, equity compensation, and so on.
A proper governance structure will ensure that a pay equity plan is reviewed on an annual basis to determine how different circumstances will, or have had, an impact on the plan. The individuals responsible for governance should determine whether these changes require that jobs are re-evaluated, pay adjustments be made or whether the plan needs to be amended.
Employers should not rely on deemed approval of a pay equity plan for re-assurance; a plan may be reviewed at any time and found non-compliant. For example, in January 1990, Toronto’s Humber College posted its pay equity plan for non-union employees and no complaints or objections were filed. Consequently the plan was implemented, and all required adjustments were made by November 1991. In 1996, a pay equity officer reviewed the plan and found that it did not comply with the Pay Equity Act. In 1998, Humber College was required to file a revised plan effective Jan. 1, 1990 and to pay any additional money owing, including interest from 1990 (Humber College of Applied Arts and Technology, [2000] O.P.E.D. No. 5).
The onus has fallen on employers to monitor and review plans to ensure pay equity plans remain in compliance with applicable legislation. Not reviewing these issues on an annual basis can result in a pay equity complaint that could lead to costly retroactive payments.
Employment practices governance
Employment practices governance involves the establishment and review of policies and procedures that deal with compensation, retirement, hiring practices, terminations and promotions. These policies should be reviewed for consistency with the organization’s objectives and for compliance with employment and human rights legislation.
The importance of communicating an employment policy is highlighted in the legal decision of McLaren v. Pacific Coast Savings Credit Union. In 1985, Pacific Coast issued a retirement policy in which employees were advised that normal retirement age was 65. Later, in 1988, the retirement policy was re-drafted and employees were advised that, with approval, exceptions could be made and employees could extend employment beyond age 65. McLaren made such a request six months prior to turning 65. The request was denied. McLaren commenced a wrongful dismissal action against Pacific Coast.
The Court ruled in favour of McLaren because, among other things, Pacific Coast had failed to communicate the retirement policy effectively and at no time had McLaren expressed his acceptance of the policy as a term of employment (McLaren v. Pacific Coast Savings Credit Union, [2000] B.C.J. No. 393.)
Employers must ensure that their employment policies are carefully worded, that policies are enforced without exception and that polices are communicated to employees on a regular basis.
What should HR do?
The backbone of good governance is “process.” Fiduciaries are not expected to guarantee the outcome of a particular event — people make mistakes. However, fiduciaries must institute the proper process and follow that process when decisions are made.
Keeping this in mind, the starting point in developing a governance framework is to self-assess what processes are currently in place. This should be done on an objective basis to avoid ending up in the same place that you started. The next step is to identify the processes that should be followed and then develop a strategy to close the “governance gaps.”
An effective HR governance structure may not guarantee business results but it can make an impact on the success of an organization. A formal HR governance structure clearly outlines the duties and responsibilities of all parties involved, and makes them accountable for their actions. In turn, this accountability leads to the efficient administration of the organization’s retirement program, benefits plan, compensation plans and employment relations. Further, good HR governance reduces the risk of legal liability facing employers and other fiduciaries.
Valeria Garcia and Rick Headrick are consultants with Hewitt Associates. They may be contacted at (416) 225-5001.
