Vol. 51, No. 6
As HR executives influence critical business decisions at the nation's largest companies, their pay levels are trending toward the top tier.
In an era of extended global reach and in-creasing challenge on the people side of business, there’s no disputing that the top human resource executives at today’s most dynamic companies are looked to for vision that facilitates growth. Indeed, these HR leaders not only have achieved the proverbial “seat at the table,” but also are often in the driver’s seat when it comes to making the most critical decisions affecting their organizations’ strategies and operations.
And, as a result, they are increasingly among the most highly compensated individuals in their organizations.
In fact, at large companies, the number of HR executives who rank among the five most highly paid executives nearly doubled—from 13 to 25—between 1999 and 2005. That’s one of the findings of the annual Mercer Human Resource Consulting CEO Compensation Survey of proxy information released by 350 U.S. firms in the major industrial and service sectors—each with revenues topping $1 billion.
The Reasons Why
There are, of course, logical reasons that more HR executives are among their companies’ most highly compensated individuals and are therefore listed as one of the five Named Executive Officers (NEOs) on proxy statements.
HR’s increasingly essential and strategic role—and worthiness of greater compensation—is apparent to executives such as Beth Sexton, senior vice president of human resources at IKON Office Solutions, headquartered in Malvern, Pa., the world’s largest independent channel distributor for document management systems and services. Sexton joined IKON 10 years ago as a regional HR vice president, and as she has risen to the company’s top HR role, she has seen the strategic value of HR—and the compensation of HR professionals—rise in the business world.
“Looking at the changes in business today, there’s no question that human capital is the true differentiator for organizations. The U.S. economy has shifted from manufacturing to service businesses, and in service businesses it’s all about talent,” she says. “Having the right talent and how to deploy it is very often the No. 1 issue at companies, and HR executive pay has to be commensurate with the importance of that.”
And while it makes sense that HR would be invaluable in the service sector, the Mercer data reveal that the profession’s star is rising dramatically in other sectors as well—sometimes higher than in the service sector.
For example, the predominant industries recording HR executives as NEOs are retail and manufacturing, two labor-intensive industries in which people strategies are arguably the most critically important to business results. Within these industries, the rise of the HR executive clearly parallels the growing shift toward globalization in recent years—with significant restructuring, outsourcing and offshoring trends requiring decisive and dynamic HR leadership at the highest levels.
More specifically, each of these industries faces challenges that require successful design and execution of human-capital strategy.
In retail, customer satisfaction and retention are directly tied to maximizing business growth opportunities, with person-to-person contact often cited as a key factor. This makes training and development—along with the attraction and retention of high-quality customer-facing talent—an issue of paramount importance to organizations, which in turn elevates the importance of the HR role.
As for manufacturing, issues relating to labor relations and workforce per-capita cost are critical to operational success. Thus, NEOs in these sectors have included a fair number of hybrid leadership positions—combining HR and chief legal counsel roles—in the past four years, according to the Mercer data. These sensitive positions are critical in negotiating with bargaining units—increasingly and most challengingly in the area of reducing legacy benefits, such as pensions, which represent a growing liability for certain U.S. businesses.
But manufacturing and retail aren’t the only industries where the Mercer data reveal HR professionals to be among the highest-paid executives. Financial services and transportation organizations, most notably airlines, also are in the mix among industries that handsomely reward HR executives.
Here again, people issues—attracting and retaining workers with key specialized skill sets, along with labor relations and rightsizing challenges—are key to business strategy, and put HR not only at the table with top management but also often in a lead role in making decisions that drive operational efficiencies. As recent headlines have shown, airlines have been especially affected by people issues, facing difficult cost and union-workforce challenges that have required deft HR skills to keep some leading carriers flying toward a sustainable future.
(View chart "Compensation for Top HR Executives, 2003-2005.")
Global Pay, Global Concerns
Not only are top HR executives increasingly among the highest paid—from a total compensation standpoint—among 350 of the largest multinational U.S. companies, but they also fare well globally on a comparative level. In fact, HR directors at U.S. companies receive the highest base salaries in the world.
That’s according to Mercer’s 2006 Global Pay Summary, which provides benchmark base-salary and total cash-compensation data for 50 job positions—ranging from entry level to management—in 50 countries.
In this case, the role of HR director is defined as being responsible for the strategic planning of the human resource function—including recruitment, training, organizational development, compensation and employee relations. Mercer’s 2006 survey finds that HR directors in the United States top the salary scale, commanding average annual salaries of $175,000. (Annual total cash compensation—which is the combination of annual base salary, guaranteed cash compensation and actual annual short-term incentives—is highest for this position in Germany, followed by the United States and the United Kingdom. See “Base Pay for Human Resource Directors by Country”.)
As Steve Gross, global leader of broad-based rewards at Mercer, observes, these high base salaries reflect social and economic realities. The fact that HR directors in Germany are paid the most in terms of annual total cash compensation, says Gross, “reflects the value placed on HR directors in steering their companies and dealing with the various work councils, while salaries are generally higher in the United States because there is greater competition for talent and employers must pay more for top employees.”
As represented in the Mercer data, HR leaders with corporate executive roles (designated by titles such as senior vice president or executive vice president of HR) now face broader and more global issues than overseeing functional HR performance at their organizations. And HR executives have responded by earning the respect and attention of their organizations’ chief executives.
As a result, it’s fair to say that the top HR leaders are among the most trusted advisers to their CEOs on what have become the mission-critical issues in this new century for large, multinational corporations.
These issues include ensuring that their companies are prepared to effectively compete in the war for talent, along with the tactical considerations of globalization and offshoring. Indeed, global workforce deployment—finding and putting the right people in the right places—is an HR challenge that requires the highest level of strategic planning.
Such formerly straightforward HR mandates as attracting and retaining employees with the most critical basic skill sets, fine-tuning those skills with organization-specific training, and ensuring a reasonable work/life balance are now further complicated by the cultural, economic and lifestyle differences inherent in a global-workforce approach to doing business. In that regard, the challenge for HR lies in balancing global consistency with practices that comply with local legislative requirements.
Amid that new complexity for HR’s top executives is the evolving issue of ensuring pay for performance—from the mailroom to the boardroom. From a business standpoint, this puts pressure on HR leaders to demonstrate a measurable return on their organizations’ human-capital investments. At the same time, the pay-for-performance mandate connects with a new cultural imperative, one in which the corporate scandals of recent years have placed unprecedented emphasis on corporate governance and the stewardship of shareholder value, with HR very much in a pivotal role.
Thus, the continued legislative pressure on executive pay issues is another factor that makes top human resource executives indispensable to CEOs and corporate boards. The drive toward more transparency in compensation schemes—and especially more public disclosure of executive compensation—is expanding, as the Securities and Exchange Commission’s proposed new disclosure rules for executive compensation are implemented.
(See chart, "2005 Compensation for Different Named Executive Officers.")
But these issues of talent, workforce deployment and compensation are often overshadowed by such issues as the escalating cost of health care—an economic reality that has reached crisis proportions as organizations grapple with the challenge of providing health benefits to employees and retirees. There’s also the thorny issue of pension reform, as more companies freeze their defined benefit plans and move toward other models for meeting retiree obligations. HR leadership is on the front lines of these struggles as well.
“When you’re looking at human capital today, all the elements of it are of critical importance, and that includes health care, pensions, pay and talent management,” says IKON’s Sexton.
She points out that IKON is a transformational company. “We went from selling equipment to solutions, so there’s been a tremendous evolution in employee learning,” she says. “Now, in the strategic discussions I lead with our board’s HR committee, there are discussions of how we are transforming learning and development at IKON, and what strategic investments we need to make, and so on. The board is so much more involved in human-capital strategy.”
An example, she says, is the board’s involvement in succession planning. “When I review our succession planning candidates with the board, we are going two and three levels deep,” says Sexton. “The board doesn’t just want to know the names—they want to meet these people.”
Sexton is not alone in her observations on the evolution of the HR function and the growing prominence of the role of its leaders in setting business strategy. Mercer’s network of consultants across the country report similar circumstances at hundreds of companies, big and small, spanning all industry types and geographic settings.
As Challenges Grow, So Will HR Pay For HR executives, challenges are increasing while the sense of complexity, ambiguity and uncertainty about the future is growing. Some of the key challenges facing the profession include:
- Cost containment as a corporate mantra and mandate.
- Delivering more services to line management and doing so with fewer resources.
- Efficiently outsourcing transactional work so as to redeploy existing HR staff to more strategic roles.
- Re-visioning HR service delivery.
- Staying current with rapidly changing compliance rules.
- Providing the CEO and senior line leadership with timely, accurate and fact-based strategic and tactical solutions to business problems.
In addition, HR must continue to partner with finance and other corporate functions; articulate and execute human-capital strategy; ensure that rewards at all employee levels deliver value; work with compensation committees of boards of directors to satisfy governance and shareholder constituencies; optimize labor relations; and manage employee benefit costs while maintaining the value proposition to current and prospective employees.
And yet these are only some of the accountabilities of HR leadership. Mercer believes that, in the coming years, more HR leaders will join the ranks of the most highly paid five to 10 leaders in many organizations. Is it any wonder why?
Joe Vocino is a principal in Mercer Human Resource Consulting’s Human Capital practice, based in the Philadelphia/Princeton office. He consults and manages complex projects in the areas of variable pay design, compensation for teams, base salary program management, job evaluation and the development of compensation plans.