September 27, 2021 Executive Compensation ESG & Human Capital Management Articles

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ESG & Human Capital Management

The HCM Mandate for Boards Human Capital Management Front-and-center

For years, companies have been moving to treat employees as an asset, not an expense. The pandemic and social protests have only intensified this trend, so that human capital management (HCM) is now a front-and-center issue. With long-term success increasingly depending on attracting, retaining and engaging talented people, HCM has become a concern not just for senior executives, but also for the board of directors.

Succession planning was an early area embraced by boards, as they realized the exposure the company faced when it depended on a single CEO or group of executives. Lost time and momentum from poorly planned transitions, and the potential cost and change management required with leaders from outside, led boards to get ahead of succession issues with paths for both emergency and planned events.

Diversity, equity and inclusion (DEI) have become equally important imperatives, for reasons of social justice, a sustainable workforce, a strong employer brand and the correlation of DEI with better performance. This means companies need strong talent planning and leadership development to identify and build the skill sets of a diverse workforce. It also means that companies need to pay attention to the organizational culture and the environment its leaders are creating to enable individuals to bring their full selves to work.

These trends have prompted compensation committees to go beyond executive pay and assess the broad drivers of employee and leadership performance. Many boards are expanding their compensation committee charters and agendas to include HCM priorities or are creating separate HCM committees. Here is language from some recent charters:

  • “Receive reports from management regarding significant conduct issues and any related employee actions.”
  • “Annually review the diversity of the company’s workforce and its diversity program.”
  • “Oversee the company’s culture, including management’s efforts to foster a culture of ethics.”

Indeed, 47% of the Fortune 100 have changed their compensation committee names (examples include leadership development and compensation, compensation and human resources) to capture this broader focus. Adding new HCM provisions in the committee charter and/or changing the committee names are first steps, but how can the committee assume these broader responsibilities for the highest impact?

Where HCM responsibilities are best covered

After establishing their priority HCM areas, the board’s next step is establishing HCM oversight responsibilities in the proper places with sufficient frequency. Which should remain with the full board, and which are better assigned to committees? What needs to be shared across committees?

Most companies have established CEO succession as a full board responsibility, but the compensation committee might assume succession planning for other executives. Likewise, full boards might oversee diversity and inclusion outcomes but delegate oversight of talent planning for diversity, employee engagement, pay equity and leadership development to the compensation or a separate HCM committee. Some companies have sustainability or ESG committees that might share some of these responsibilities.

It’s common for responsibilities to evolve over time. For instance, a board may initially assume oversight of organizational culture. As priorities for sustaining and improving the culture emerge, it may make sense for the compensation committee to take deep dives into leader assessments and training, employee pulse survey results and the understanding of culture initiatives and rollouts.

With agreement on the allocation of accountabilities, the next step is to consider the board and committees’ decision rights. Are the board and committees’ primary responsibilities to monitor and provide input? Where might they make recommendations or provide approvals for management?

Setting up effective conversations

A number of companies are leading the way in giving their boards and committees the context they need for meaningful conversations. Several have developed HCM dashboards that can be shared at each compensation committee meeting. These track progress on HCM priorities such as changes in representation within the workforce and among leadership (new hires, promotions, turnover), key takeaways from employee pulse survey results, use of mental health and wellness offerings, progress on HCM initiatives within target populations and harassment incidents. This scorecard can also be shared with the board.

Another useful practice is for compensation committees to coordinate the committee discussions on HCM throughout the year. The first meeting centers on a discussion of the overall HCM strategy and then assigns a discussion of each pillar in the strategy for a subsequent meeting. For example, one company’s priorities included diversity, equity and inclusion (including pay equity and global compensation strategy), labor relations, corporate culture and HR transformation. They tackled one topic per committee meeting to bring the strategy to life.

Some companies are even introducing a human dimension to their HCM discussions by having leaders talk about their own experiences. One technology company has diverse leaders talk to the compensation committee about their development within the organization and the training and mentoring that have made a difference. A health care company has invited its division heads to talk to the committee about how they are building inclusive environments and identifying future leaders. The goal is to make these issues real to directors, showing them how HCM strategies are playing out.

Working together to make a difference

Management teams may be concerned about opening the floodgates — that boards will now intrude on a range of operational decisions. Being clear on decision rights can help to reassure them. But it’s important to recognize that HCM issues are no longer narrow operational concerns — if they ever were. For many companies, HCM has become as important to competitive advantage as product and service strategies. Indeed, institutional investors are increasingly expecting boards to get involved.

These issues are evolving quickly. It’s a place where more heads are better than fewer. By working with the board to draw on its expertise as a resource and sounding board, executives can accelerate their learning and drive to better solutions on these tough topics.

View the full article as it was originally published.

Blair Jones

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