Rewards strategy: What do boards expect?
If a sales manager can take accountability of results despite the existing ambiguity in the market, Boards expect the same from HR
As per the new Company Act 2013, the compensation committee ought to be headed by an independent director. The probable reason behind the law shifting the onus of this committee to an independent director, as against a shareholder director, is the need to look at rewards not as a short-term lever, but as a long-term enabler of shareholder value creation.
Boards rely on the compensation committee for all aspects related to execution of reward strategy, which is looked at from a much wider perspective today than it was before. Prashant Tripathy, CFO, Max Life Insurance elaborates: “Boards today look at the reward strategy from many lenses — the shareholder lens, customer, regulator and employee lenses.” Reward strategy has a lot to do with governance and should consider the viewpoint of all stakeholders in the process: Business, Finance, Human Resources and Compensation & Benefits. This exercise is a critical enabler of business and is a very significant component of costs in the P&L statement.
Some critical reflections that the compensation team needs to consider before submitting a reward strategy are:
Philosophy. Does the reward strategy align with the business strategy of the organization? As far as the alignment test is concerned, “Boards are interested in knowing the philosophy behind the reward strategy. What are we trying to incentivize? What kind of behavior should be rewarded?” says Anand Bhaskar, CHRO, Sapient. As long as there is a philosophical alignment in the board of directors in terms of why they’re doing what they are doing as an organization from a rewards perspective, any strategy is likely to work.
Sustainability. There are different levels to the sustainability test. It starts with the regulation and compliance angle. Shikha Sharma, Director C&B, American Express holds, “The need of the hour is not only to comply with regulation, but to stay ahead of the regulation curve.” Second comes the benchmarking exercise. Are employees being paid more or less compared to the talent peer group? Is the rewards plan reasonable and sustainable from an external market perspective?
The third element in the sustainability test affordability and funding of the plan itself. The reward plan should be linked to the business plan; it is not only about the numbers but also about how these are achieved. “The entire compensation scheme is contingent on the delivery of business plans, not just in terms of numbers but also in terms of the spirit. Often, even if the numbers have been delivered, the board will look for its connection with that segment,” Tripathy elaborates.
Variability. The variability frame comes from the shareholders. It is highly important that the compensation scheme is variable, which means that it has to go along a straight line, have a correlation with the overall prosperity and delivery of a business.
Accountability. Ultimately, as Bhaskar says, “All that the boards care about is accountability.” Boards want the HR leaders to be accountable for the recommendations they make and elaborate the business benefit expected from those recommendations like accountable for his/her targets, so should HR. HR leaders argue saying that attrition is not in their control as employees report to their respective managers and not HR. However, same is the case for a sales leader: the market forces are not in his control, the government regulations change and he cannot influence customer choices. Yet, he has a revenue target for which cost has already been built in. So, if a sales manager can take accountability despite the existing ambiguity in the market, so can HR and thats what the Boards expect.
How much money is being allocated to the compensation strategy is not a concern for the Boards. Thier concern is whether the reward strategy is in line with the four factors mentioned above. How CHROs deploy money for compensation is a huge responsibility, for which they are expected to wear the business hat as part of the leadership team and work from the perspective of a cross-functional player. For all of these factors to come together simultaneously play, governance is highly important. “When a company starts to implement the spirit of governance, these problems will get solved,” asserts Tripathy. While outlining the governance structure, the focus should be on collective outcomes, that is, for sales, marketing, finance and human resources.