Payroll & Compensation

CEO’s Letter: The Odd Logic of CHRO and HR Compensation

We recently published our annual CHRO Compensation Study. As we have seen before, there is no rhyme or reason to CHRO compensation. In our cover story, Zee Johnson interviewed some CHROs and thought leaders on compensation, but how HR compensation is “typically” structured remains a mystery. Why you ask? The sad answer is “just because.”

Let’s step back for a minute. In a number of recent CEO surveys, they listed the quality of the workforce as one of their top concerns. In addition, during the pandemic, all companies leaned heavily on their HR teams. Why are we not seeing that correlate to an elevation of HR compensation?

Part of the answer is market dynamics. HR was the lowest paid management profession before the pandemic and it will be for the foreseeable future. HR professionals have a huge impact on culture, engagement, and performance, but the linkage modeling is still weak as to how that mathematically translates to the bottom line. We intuitively know it has an important impact, but we don’t know how to quantify it. It is not really much different than the societal debate about teachers. We all know they are important, but they don’t get paid as well as they believe they should. Of course, teachers unions would never let pay schemes be tied to measurable outcomes such as national test scoring or graduation rates, etc.

I believe that part of the problem we have with CHRO compensation and HR in general is that there is no established rubric for tying pay schemes to anything. That isn’t because those measures don’t exist—it is because there is no agreement on what they should be. Yes, market forces and prior compensation levels of the executive hired plays a part, but CEO and CFO compensation are usually tied to market measures such as market capitalization, EBITDA, EPS, or overall revenue. 

Part of the problem is that we keep trying to “quantify” HR’s impact on the bottom line. This is similar to the attitude about teaching and education and its impact on future economic prosperity. Sometimes, knowing intuitively that things like positive culture improves company performance should be enough. We don’t have to know if it makes a one-point difference to EPS or a two-point difference. I can share something we absolutely know–bad culture causes poor retention and poor productivity. Paying to avoid a bad culture may be a good place to start.  

Variable compensation is the vast majority of executive committee comp, including bonuses and stock option awards that are typically tied to one or several metrics. As above, the models for CEOs and CFOs are well established, but other executive committee members are as well. For example, the head of sales is tied to revenue growth, or the head of manufacturing is tied to gross margins. These are examples of how compensation is structured. What is the model for HR?   

HRO Today took our comp study data and tried to establish a coefficient of correlation to data points such as number of employees, market cap, top-line revenue, and EPS and found no correlations. There was some limited correlation in the Fortune 50 related to company size, but below that, there was not even a correlation to that metric. HR is also, as aforementioned, still the lowest paid management profession. This is baffling given the impact on company performance. Much of a CFO’s job is establishing disciplines that impact the future, but much of that job is about analyzing the past and communicating with markets. I am NOT diminishing the importance of CFOs, but the impact of a great HR leader is all about driving value in the present and the future. We just need to get smarter about making the case for both pay parity for HR and the metrics that drive HR success. 

CHROs are sophisticated business professionals, as are their direct reports, and I am sure they would agree to variable and total compensation tied to specific outcomes. These should include not just standard measures such as EPS or EBITDA, but also HR-specific goals such as employee engagement scores, DEI stats, or the stability of staffing levels related to talent acquisition and retention.   

HR deserves recognition of its significant impact on corporate growth and profits and deserves parity with other management professionals.  

Elliot S. Clark


Tags: CEO's Letter, October 2022, Payroll & Compensation

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