September 26, 2022 Executive Compensation ESG & Human Capital Management Articles

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How Compensation Committees Can Improve Impact on Talent Planning

In recent years, many compensation committees have greatly expanded their charters and influence to cover a broader range of talent management issues and, in some cases, adopted the human capital committee moniker.

Historically, compensation committees have given their greatest attention to the pay of the C-suite and sometimes one level down. As committees have started to extend their purview deeper into the organization, the focus has primarily centered on reports on the current status of key human capital metrics (e.g., diversity, inclusion, and equity; turnover; retention;  engagement).

This broadened purview is certainly a notable first step, but how can committees continue to improve their impact on talent planning without “stepping on the toes” of management—recognizing that the administrative responsibility for talent matters is a management activity? We believe that the answer lies in a targeted focus on both:

  1. key strategic and value-creating positions and
  2. high potentials below the senior executive level

A recent McKinsey & Co. study supports this approach. McKinsey found that the talent-related practice most predictive of winning against competitors was a frequent reallocation of high performers to the most critical strategic positions. In fact, “fast talent reallocators were 2.2 times more likely to outperform competitors on [total returns to shareholders] than were slow talent reallocators.” This method suggests that committees looking to improve their impact on talent planning ought to focus in two areas:

  1. High potential individuals. Employees with the skill sets and performance histories that make it likely for them to be future leaders within the corporation or key individual contributors.
  2. Pivotal positions. Strategically important jobs that contribute significant value to the company now and in the future. These positions play a key role in executing the company’s strategy and achieving its mission and purpose, and thereby create the greatest value contribution.

With these key populations identified, we see three ways in which the compensation committee can help guide management on talent planning.

3 Ways Compensation Committees Can Guide Talent Planning

Assessing Employee Value Proposition

First, the committee should carefully understand and assess the full breadth of the company’s employee value proposition (EVP) and the degree to which the EVP meets—or does not meet —the specific requirements of those high potentials and incumbents of pivotal jobs. For example, a company with a relatively lean and flat organizational structure may view that design as a positive benefit to the EVP, generally, in that it empowers the decision-making authority of leaders lower in the organization. That said, it can also result in blocking high-potential talent on the move that are ready for the next, bigger opportunity. Alternatively, consider the way many organizations—across all sectors—have sought to expand their digital and technology talent to advance various strategic imperatives. Oftentimes, the sources of talent for these positions will be the high-tech sector with radically different EVPs. Will the company’s EVP, at large, resonate with this group of individuals in pivotal jobs? In both cases, it may be appropriate to consider differentiated EVPs for the key focus populations.

What might a differentiated EVP entail? In some cases, it may need to focus on the quantum or structure of pay and benefits. In other cases, it may focus on flexibility, resources, and opportunities to serve on “skunkworks” teams to support key company initiatives.

Key Focus Populations And Top Tier Developement Plans

Second, the committee should monitor whether the key focus populations have top-tier development plans that management administers. These plans might include exposure to different parts of the organization, work on special cross-functional project teams, and internal or external training. All of this works best if the key talent is supported by experienced and well-respected mentors and champions in the organization. Importantly, these development plans should also specifically orient to matching the highest potential employees to the most impactful and pivotal jobs.

Strategic committee pay Philosophy

Lastly, committees may want to use a more strategic approach to pay and pay philosophy. This method might entail more careful consideration of the peer groups, benchmarks, and pay positioning used for pivotal jobs and high potentials (possibly in support of providing a differentiated EVP as noted above).

For example, certain situations, such as the example above for pivotal roles supporting digital transformation, may warrant an alternative comparator group for competitive references. Alternatively, the circumstances may require a more aggressive pay positioning philosophy to reflect the opportunity for impact. It may be that paying in the 75th to 90th percentile for the role in the marketplace, which really may represent median pay if compared to other internal positions with similar impact, is necessary.

As the compensation committee’s mandate expands to meet corporate needs, its impact can be increased by focusing deeper in the organization on key individuals and positions that can help ensure the company’s future high performance. Differentiated EVPs, including pay, may be needed to help ensure the successful attraction, retention, engagement, and development of these individuals.

View the full article as it was originally published.

Mark Emanuel

Seymour Burchman

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