With Compensation Knowledge Comes Increased Credibility
By: Leslie Stevens-Huffman, Journal of Corporate Recruiting Leadership
More Companies are removing the barriers between HR functions such as succession planning, executive development, and management of both internal and outsourced executive searches. It’s happening because of the global war for talent and the realization that success does not come from continuously refilling positions in a vacuum. It also results from senior management’s increased expectations that HR should become more strategic in its approach to human-capital issues and have greater accountability for ROI. Accompanying those expectations by senior management is one more belief: senior talent-acquisition leaders should be able to work at a “board level,” not just as assistants to the board.
In some cases, talent=acquisition leaders are reducing costs by conducting fewer outsourced executive searches and managing those that are outsourced more cost-effectively. At the heart of those accomplishments lie increased understanding of compensation plans and control of a candidate’s offer and buyout process by the talent-acquisition leader.
“HR people have been thought of as administrative in nature, reactionary, and nonstrategic. Consequently, they are always trying to find a seat at the board,” says Paul Dorf, managing director for Compensation Resources, a compensation consulting firm. “You have to earn that seat. One of the ways you do that is by gaining credibility and making the case for the value of people and being able to communicate on a board level. Being conversant in executive compensation is one of the skills you need to do that.”
Dan Hilbert is the global talent leader with Valero Energy Group, a Fortune 15 Company based in San Antonio, Texas. Previously, Hilbert was a CEO, so he understands executive compensation from a firsthand perspective. His use of that knowledge is part of the reason that Hilbert has conducted only two retained searches for executive positions during the four years that he has been the firm’s global talent leader. He has accomplished that during a period of extreme growth at the company.
“As a CEO candidate for a venture-capital funded software company, I was presented with a 2-page contract,” says Hilbert. “So, I hired an attorney, paid quite a bit of money, and had him explain everything in the contract to me. In my second assignment at another early stage revenue company, I had to hire all of our senior executives: a COO, CFO, CTO, and senior vice presidents of sales and marketing. Having the knowledge of executive compensation helped me sit down over dinner for two hours with a candidate and compare all the parts of his current agreement to ours. That hire would not have happened had I not been able to do that.”
Hilbert says the knowledge gives him confidence, and also gives him credibility with candidates. “I can build trust with the candidates because they see me at their level, and that translates to a much more positive image of the company.”
At some point in the hiring process, it is appropriate to ask candidates to provide the details of their current agreement for comparison purposes so that buyouts and offers can be calculated. “There can be confidentiality issues in some cases with candidates providing certain information to me,” says Hilbert. “Because I understand the agreements, I know what they can provide and I can ask questions that help them understand what they can and cannot do.”
Hilbert says that his knowledge also enables him to act as a consultant to candidates because many times they don’t understand their current deal and in fact often think it’s worth more than it is. By being able to show them that the true value of their current compensation package is less than they perceive it to be, it’s easier to move a candidate, both for financial reasons and by causing a shift in their trust.
“As an example, if they have stock options, I ask them if the options are registered,” says Hilbert. “If they are unregistered, they really aren’t worth anything, but not everyone knows that. I often ask to see their pension statement if they have a retirement plan. They may not have noticed that the plan contains early-retirement penalties, so unless they are planning on staying a very long time, their retirement is worth less than what they figured.”
Hilbert says that about 70% of the time, and existing package proves to be worth less than the candidate thinks it is.
Once he has worked through a few competitive deals, Hilbert says, he begins to get a sense of which firms have truly applied the “golden handcuffs” to their executives and which are vulnerable. With that kind of knowledge, he’s able to build a solid pipeline of prospective candidates and can better allocate his time in luring talent.
Hilbert’s knowledge helps when consulting with senior management on talent-retention strategies. In the oil and gas industry, specific concentrations of retiring baby boomers are leaving some business units at risk. Hilbert gathered historical data and then extrapolated those numbers into a predictive forecasting model showing where retirements and the natural cycles of the industry would create management gaps through attrition. After calculating the “business value” of various executives in the company, he proposed using restricted stock options as a retention tool to proactively slow down attrition.
Hilbert also consults with Valero’s business leaders, who are given a pool of options to distribute each year. “I was able to directly link an individual to revenue. From there, I could show the managers where the business was at risk and provide recommendations as to where they should allocate $20,000 in additional income to retain an employee in order to protect $600 million in annual revenue over the next few years.”
Increasing Speed to Market
Eighteen Months ago, Amber Kennelly was hired into Allstate as senior manager of executive talent acquisition. In addition to saving money, Kennelly was charged with centralizing the executive talent acquisition function for positions at the director level and above. Having a background in retained search and being both an MBA and CPA enables her to understand executive-compensation structures, but she says it’s not difficult to gain an understanding of the concepts. Since assuming the position, she has used the company’s executive-compensation team to reach her staff what they need to know about executive compensation in one afternoon.
“The executive-compensation team held a seminar for our recruitment staff, and they were able to reach them the terms that describe the executive pay components, the right question to ask a candidate, and what information recruiters need to obtain from candidates in order to calculate a buyout and formulate an offer,” says Kennelly. “I think that being comfortable speaking with a candidate helps you gain credibility, and it is an imperative skill in order to be conversant when presenting our organization and our views on total compensation.”
Kennelly also helped her team gain competency by carting an executive-compensation matrix. The one-page reference sheet lists compensation components side by side under the headings of the current and the proposed payment plans. In addition, the matrix provides detail on items such as pension plans. It is used as a quick reference guide by her staff when speaking with candidates.
“This matrix helps us work up and close offers for non-officer candidates more quickly, and it serves as a resource to the internal hiring manager,” says Kennelly. “Also, having the details within the various components helps us present an offer to a candidate. Some candidates are gun-shy about options, but equity is an important component of our compensation plans. By having the detail behind the options, we can help to alleviate a candidate’s fears.”
After the technology bust in 2000 and the recent scandals about backdating stock options, many candidates are naturally fearful about stock options. Getting candidates to accept an offer often means helping them to get comfortable with equity again and understand where options have value.
Kennelly says that knowledge of executive compensation has enabled her recruiters to assess the competitive landscape for high-level candidates in “real time.” From there, recruiters have been able to build pipelines of prospective talent and are able to share that same information in real time with Allstate’s executive-compensation team.
Having real-time information is important because rapid changes in compensation regulations, including provisions under Sarbanes-Oxley, and the increased hiring of executives for global assignments, have made staying current with executive compensation an ongoing challenge.
Earning a “seat at the board” or at least gaining recognition for the importance of talent acquisition and recognition within the organization is affected by knowledge of compensation in general and executive compensation in particular, according to Dave
Hofrichter, managing director of Global Compensation Services for Buck Consultants, a compensation consulting firm. Executive compensation is generally tied to achieving certain business-performance benchmarks, such as increasing profits or sales to certain levels. Talent-acquisition leaders and senior HR generalists need to be familiar with the company’s business plan and know how to tie compensation and performance together so they can demonstrate their knowledge and communicate their strategies to the board.
“Talent-acquisition leaders need to understand how annual incentive plans are constructed,” says Hofrichter. “They can be supported by others in the organization such as the CFO, attorneys, or the compensation committee, but they need to know enough to spearhead change, guide retention efforts, and generate new offers.
“The entire landscape for executive compensation has shifted away form salary to equity and bonuses for both executives and high-potential performers who are on the way up,” says Hofrichter.
“Because of Sarbanes-Oxley, a greater part of executive compensation is now performance based, so you need to understand how to author the goals that are triggers for comp payouts and how the company has performed against those types of goals in the past, because candidates will want that kind of information,” says Hofrichter. “If you are offering options and deferred compensation, you need to know how the ‘golden handcuffs’ work.”
Senior HR leaders need to serve as a balance between management and the board by helping both sides understand compensation issues. They should take the lead in developing a company’s compensation philosophy, and achieving that means keeping up with trends in the field.
“The trend in executive compensation is away from the old bonus plan, which was a pool of funds that was divided on a discretionary basis and usually totaled 25% to 50% of salary,” says Paul Dorf. “Now incentives are as high as 100% to 200% of salary or beyond, but part of the qualifcation for the incentive being tax deductible is that they have to be performance based. Also, there’s a movement away from stock options to the granting of restricted stock.
“With so much of comp being performance based, it’s important for the organization to have a good way to measure people and to evaluate performance,” says Dorf. “Also, you need to make certain that you aren’t bringing in new people at a higher compensation level than existing employees, or you will lose people. Accomplishing this means breaking down the silos in HR that can cause talent acquisition to be separated from general compensation administration and performance-review functions.”
A demonstration of competence and seamless integration in all areas of human resources by talent-acquisition leaders will generate positive results both internally and with candidates.
“You have to look at it from the outside,” says Hofrichter. “Sometimes how a process is conducted is as important as the end point. Your will lose good people if the hiring process doesn’t look integrated, the response isn’t done in a timely manner, and the entire orchestrating of the offer event appears to be siloed.”