Among the many tasks CHROs often face, helping the company’s board of directors shine before shareholders can be one challenging area, especially as it relates to your investors’ “say on pay” vote for executive compensation packages. Because, ultimately, if shareholders don’t approve the compensation strategy, it can give the board, and HR, a black eye.
Take Netflix, for example. Its board of directors encountered an embarrassing situation as shareholders withheld their support during the “say on pay” vote at the company’s annual shareholders meeting last week. Fortunately for Netflix and other public companies, such a vote is advisory only and not binding.
Nonetheless, a lack of support from shareholders on the executive compensation package can sting for the board of directors. It often leads to the board’s compensation committee wanting to find a new compensation consultant—and who is often responsible for that task? HR.
“The compensation consultant works for the board’s compensation committee, but what we’ve found is the compensation committee chair often wants the CHRO to be directly engaged with almost every step in the process,” says Ani Huang, president and CEO of the Center on Executive Compensation and senior vice president of the HR Policy Association.
The goal of an independent compensation consultant is to assist the committee in making decisions about executive pay, benefits and the strategic direction of the company based on relevant information that is also fair and reasonable, according to a report released this week by the HR Policy Association’s Center on Executive Compensation.
When it comes to finding a compensation consultant, the compensation committee often relies on HR’s human capital skills and expertise in assessing and selecting talent, Huang adds.
Related: Who’s your fiduciary?
5 key questions to address when developing your compensation consultant search strategy
When hiring a compensation consultant, the best strategy is to have the compensation committee chair, CHRO and management work together for the search process, according to the Center.
Here are five questions those involved can ask themselves to help develop the search process:
1. Who takes the lead?
Sometimes it’s the committee chair but often it is the CHRO and/or the general counsel.
2. Which firms are considered?
The best approach often involves casting a wide net for consultants, leveraging compensation committee contacts, management contacts, your own contacts and peer group contacts. Typically, the initial list includes between four and eight consulting firms, which are then narrowed down to two to four firms that present a pitch. The Center offers a sample RFP on its site.
3. Who submits the RFP?
Consider collaborating with your procurement department if all supplier negotiations are required to go through them. Also, limit the number of RFP questions to the essential ones the committee needs answered.
4. Who hears the pitches?
One best practice is to ensure the entire compensation committee and management team hear all the pitches, even if the final decision will be made by the compensation committee.
5. How to check references?
Consider asking for a list of prior clients versus references. It’s commonly known that most candidates will only provide references to people who will speak highly of them. Here is a list of the Center’s sample questions to ask during the compensation consultant selection process.
How to set your evaluation and selection criteria
Look beyond general expertise and technical competence for such traits as creative and innovative problem-solving skills; the ability to work well with not only the board of directors but also the management team; and excellent communication skills that can help explain the proposed compensation figures and support accurate computations, according to the report.
Although your compensation consultant may not be an HCM expert, one area to question is whether they have some HCM or ESG savvy, which can bode well if the compensation committee’s agenda broadens.
Top mistakes CHROs and comp committees make during the selection process
After narrowing down the search to a few compensation consultants, it’s common to see some mistakes emerge, Huang says.
One thing to keep in mind after you’ve selected your compensation consultant is that many compensation committees at public companies will revisit whether they plan to retain their existing consultant after five years.
“We surveyed our members and asked if, in the past three years, they have done an RFP for a compensation consultant and about 28% of the members said they had,” Huang says. “And of this group, about 70% said it resulted in a change in consultants.”
How to evaluate a compensation consultant’s performance
The chair of the compensation committee needs to drive the performance evaluation for the consultant, Huang says, but also notes the CHRO can help by providing an evaluation form or sample form that the committee chair can use.
The compensation consultant should ideally receive feedback at least once a year, Huang advises.
“The biggest mistake CHROs can make is not encouraging the committee to give feedback to the consultant,” says Huang. “It’s not a good situation to have a compensation consultant be totally unaware of how the committee feels—especially if it is planning to do an RFP to find someone new.”