Compensation & Benefits Review

This article first summarizes key themes from a recent article by Gerald Ledford that was published in Organizational Dynamics. That article reviewed changes in employee reward systems during the past 35 years, looked at factors explaining the changes and recommended a set of five changes in the future. Five distinguished corporate HR leaders then comment on the article, exploring a number of important topics in contemporary employee rewards. Finally, Ledford summarizes and responds to the commentaries.

The role of the Board’s Compensation Committee is to approve the design of the pay programs for the top executive officers and to approve specific payments based on the plans and the company’s performance. Typically, the specific responsibilities of the compensation committee is specified within the company bylaws. This includes composition of the committee, statement of pay philosophy, implementation of plans approved by the board, identification of specific performance objectives, assessment of competitive pay practices, approval of employment contracts, role of external consultants, preparation of a Compensation Discussion and Analysis Report consistent with Securities and Exchange Commission requirements and filing a copy of the committee minutes to the board of directors and responding to their questions. Committee members have responsibility to put shareholder’s interest above their own (duty of loyalty), understanding the issues and alternatives (duty of care) and exercising prudent judgment (avoiding conflict of interest) and acting in good faith. These actions are required to meet the business judgment rule and avoid being held liable to their actions.

Economic profit (EP) is often portrayed as a gauge of company and executive performance that can align the interests of shareholders and corporate executives. We report the results of an investigation into the relationship between EP and compensation paid to “named executive officers” (NEOs) for an extensive sample of companies, over several years. Although the original objective was to establish the share of EP that is typically paid as compensation to NEOs, the empirical relationship between the two variables is negligible to nonexistent. Instead, most firm-level NEO compensation is explained by a company size measure, in particular, total assets, with some additional explanatory power added by operating income and industry type.

Organizations entering into mergers, acquisitions, joint ventures and alliances must formulate rewards strategies that are effective and appropriate for the new entity. The rewards strategy should be influenced by the new culture, strategy and objectives and must be viewed by employees as equitable, competitive and appropriate.

The federal government, through its recent Executive Orders, is mandating pay transparency for the federal contracting community. This new way of doing business has potentially profound implications for all employers. Companies must be prepared for employees, the federal government and third parties to closely scrutinize their compensation systems and decision-making practices.

The Pension Protection Act of 2006 changed the way in which the value of lump sum distributions is calculated. When the new method was fully implemented in 2012, it triggered a flood of de-risking activity by sponsors of defined benefit pension plans via one-time lump sum distributions, group annuity contracts with insurance companies and liability driven investing. Underlying these developments were a number of economic and demographic factors including a rising equity market, low interest rates, increased Pension Benefit Guaranty Corporation insurance premiums and a declining number of active participants. These forces are still there. Indeed, they have strengthened due to recent legislation (MAP-21 in 2012, BBA in 2013 and HATFA in 2014). In addition, a number of legal questions have been resolved by the Verizon Communications decision of 2014 and new mortality tables have just been published by the Society of Actuaries. The combination of these developments indicate that 2015 will be another big year for pension plan sponsors to transfer pension risk to participants through lump sum distributions and to insurance companies through group annuity contracts.

Employers of all sizes need to make financial wellness a priority in 2015. Over the past couple years, we have seen some really inspiring trends in the areas of physical and mental health. Companies are implementing healthy eating initiatives, allowing fitness breaks, and offering 24-hour mental health hotlines. These programs are gaining popularity as more organizations realize that healthy employees are happier, more productive, and cost less. The remaining and possibly most costly concern is their financial wellness. Both employees and employers realize gains when financial stress is reduced.