Human Capital Management or “HCM” is becoming an integral part of an organization’s stated priorities as they seek to successfully utilize their people to attain individual as well as organizational goals. In order to achieve this objective, organizations must view their employees as assets with value that need to be retained, as opposed to resources that can be exploited. HCM involves hiring, managing, training and retaining talented and high performing employees. While this has always been challenging, the adoption of technology has proven to be beneficial and essential in streamlining this process. Companies such as Workday and Ultimate Software have created software systems that Human Resources professionals have started to leverage more and more to manage their HCM challenges, below the executive level, in this ever-evolving environment. However, there is still a disconnect and lack of attention when it comes to leveraging technology to manage Executive level human capital.
Attracting and retaining high-performing executive talent is critical in driving organizational performance to meet an organization’s stated goals. This makes it even more important to find ways to improve upon a company’s existing HCM practices. A few key areas where technology can be leveraged include:
- Competitive compensation bench-marking against peers
- Measuring pay-for-performance against peers
- Administering and measuring annual and long-term performance
Competitive compensation bench-marking against peers
Making sure that you are paying compensation at a fair, reasonable and competitive level against your peers is imperative to ensuring you are able to retain and motivate your executive team. Being able to quickly benchmark how your salaries, bonus and long-term incentive opportunities stack up can provide you with critical business analytics in order to make the right decisions on what to offer your top talent. It can also help you in your recruiting efforts by being able to see what level of compensation is offered in your peer group for specific executive roles. This process historically has involved HR collecting its own research or relying on third party data from a compensation data provider or executive search firm (typically taking a few weeks), but static data dumps are a thing of the past.
Static data dumps take time. They force an organization to manually extract the data to put it into summarized tables and graphics that can be used to communicate key findings to the Board and broader executive team. Detailed analysis on peer group performance measures and incentive plan designs may require more detailed analysis working with an independent third party, but in today’s environment, static data dumps on compensation levels are unnecessary and the process of bench-marking pay levels can be shrunken down to a few mere minutes. Software solutions such as GGA’s emPowerHCM™ application allow organizations to search for and select a peer group of companies using criteria such as Industry, Market Cap, Revenue and Assets. Once your peer group is selected, effective software platforms should also allow you to run customized analysis to generate high-level data surrounding competitive compensation levels for you to compare your organization to, in order to gauge your overall competitiveness. This allows you to make more informed decisions in a lot less time.
Measuring pay-for-performance against peers
In addition to seeing how you stack up from a compensation perspective against your peers, it is also important to monitor how that level of pay compares to the performance of your peers over time. Performance should not just be measured over a single year, but over longer time periods such as 3 and 5 years. Similar to compensation bench-marking, this type of analysis typically takes a few weeks, working internally or with an independent third-party expert, but can be expedited through the use of a proper software platform. Software should allow you to quickly create a customized peer group and then be able to select the executives you want the analysis to cover, the time-frame (1, 3 and/or 5 years) as well as the performance metrics you want to compare in your analysis While industry-specific analysis may still require the use of an independent third party, being able to measure your pay-for-performance alignment quickly against common market performance measures such as Total Shareholder Return, Return on Equity, Return on Assets or EBITDA Growth is invaluable.
The results of this relative pay-for-performance analysis should illustrate if your organization is paid higher or lower in relation to the level of performance you have achieved when compared to your peers. Ideally, your organization will demonstrate a high level of alignment between pay and performance, but if there is misalignment, being able to swiftly determine if you may face headline/stakeholder risk (high pay, but low performance) or executive flight risk (low pay, but high performance) will aid you in determining appropriate adjustments that need to be made to compensation in order to mitigate these risks. It can also be leveraged to further illustrate your organization’s compensation story through the ability to download pay and performance graphs directly from the platform for use in the Compensation Discussion & Analysis section of your annual Management Information Circular (Form DEF 14A). Once again, this process saves you valuable time, provides your organization with critical business analytics and allows for more streamlined decision-making.
Administering and measuring annual and long-term performance
Tracking performance and determining payouts under annual and/or long-term incentives is another time-consuming exercise for boards and HR professionals. The traditional approach sees the use of Excel spreadsheets, which are highly susceptible to typographical error and inaccurate formulas, which could lead to inaccurate payout calculations if not designed properly. Administering tens, if not hundreds of performance scorecards is just not practical using Excel spreadsheets. Organizations needs to be able to leverage a software platform that allows them to easily set relevant performance measures, associated weightings and expected performance levels for each executive while also outlining the potential payout outcomes under the scorecard. This provides clarity for both the Board and each executive on how payouts will align with organizational performance all on one page. Advanced software platforms, such as GGA’s emPowerHCM™, should also allow you to create a scorecard template for one executive with the ability to reuse that template and modify performance measures, weightings and potential payout levels, as necessary, for other executives. Once the scorecard is approved, the software platform you use should allow you to forecast expected payouts based on performance-to-date, but also allow you to make appropriate adjustments to the performance scorecard as circumstances change. Lastly, at the end of the year you should be able to assign a certain level of performance for each of the performance measures included in the scorecard and have the platform calculate the level of Annual Incentive payout, significantly reducing the risk of calculation error. The finalized performance scorecard with calculations can be shared in one page with the Board and/or the executive team directly to clearly demonstrate the alignment between pay and performance. A similar process can also be utilized when administering long-term incentive payouts as well as outlining the performance measures associated within the long-term incentive plan, expected performance levels and potential payout levels over the performance period of the plan. Progress can then be tracked on a regular basis using performance-to-date figures to forecast projected payouts at the end of the performance period. This information can be used to ensure the proper accruals are being made for financial reporting and cash flow purposes.
Attracting, retaining and motivating executive talent is paramount in the competitive market today to ensure your organization is able to meet its objectives and guarantee long-term value creation for stakeholders. This means that in today’s world, organizations cannot be stuck in the past when it comes to Human Capital Management. They must leverage big data and embrace software solutions to complete processes such as performance scorecard management and compensation bench-marking. By doing so, organizations will be able to use business analytics to make more informed decisions in an efficient and timely manner. Ultimately, better decision making based on accurate information and the saving of time and resources is in the best interests of stakeholders and will ensure organizations are able to effectively manage one of your biggest assets, your people.