What do human capital management, succession planning, employee engagement, diversity, equity and inclusion, and leadership training and development have in common? These are new common responsibilities and areas of oversight that fall under the purview of compensation committees today, whose remit has expanded beyond executive pay and benefits.
Mercer research shows that since 2016, the percentage of S&P 500 compensation committees whose titles indicate a broader mandate beyond just compensation has increased from roughly one-third to just over 50%. Given this trend, which now accounts for more than half of large U.S. companies, here are three key areas for directors to consider when evaluating the broader mandate of their compensation committee:
1. Treat human capital as a strategic asset.
Increasingly, internal and external stakeholders are asking companies how their talent investment efforts connect to the success of their corporate strategy. Simply collecting data on various talent-related factors is only part of the answer. The real value comes from how compensation committees and executives operationalize and optimize the data over time. To effectively use data to drive successful transitions to expanded roles, compensation committees must adopt a talent management philosophy and governance process.
- It is essential to adopt a philosophy around human capital similar to that used for traditional tangible assets: for human capital to be a differentiator for a company, it must be invested in, developed and deployed in a thoughtful and strategic way.
- Establishing a structured governance process embedded in the committee's annual calendar is important to foster collaboration between management and the committee, ensure alignment of key priorities, collect relevant information, and track progress towards agreed-upon goals.
2. Understand what your employees value.
Today, committee members need to not only know the facts about their company's workforce (such as demographics and turnover rates), but also understand what employees value. While traditional compensation elements such as salary and bonuses remain important, compensation committee members are increasingly encouraging companies to offer additional perks that employees value in the current environment, such as expanded benefits programs, career development opportunities, training courses, employee resource groups, and more.
When selecting between these add-on offers, it is important to remember that seemingly similar companies have different employee profiles and demographics, and employees may value different things. As a result, compensation committees and management need to understand that Company A’s strategy will not necessarily work at Company B.
Additionally, during times of great innovation or economic challenge, employee preferences and needs will shift and evolve. The pace of change is likely to accelerate as adoption of artificial intelligence and other technological advances increases. Ensuring that the committee has a good grasp of workforce trends through employee surveys and regular updates from management will ensure that the committee's decisions can keep up with these evolutions, or at least reduce the time lag significantly.
3. View deep bench strength as a necessity, not a want.
Given their broad mandate, committee members are increasingly seeking more information about succession plans for future company leaders more than one level away from the C-Suite. While the most discussion typically revolves around immediate successors for specific executives, there is also increased attention to succession planning for current executive successors.
Committee members often take an active role in meeting and engaging with the identified “successors to succession” to ensure they are ready to assume executive roles when the time comes. The process of developing the importance of a strong talent pool helps to forecast talent strengths and weaknesses, employee development opportunities, and areas where special retention awards would be beneficial.
Continued expansion and evolution
These three key considerations provide a starting point for addressing the broader committee's mandate, but complementary areas of focus are likely to emerge as the compensation committee's role expands and evolves. Addressing all three areas simultaneously will create a combined effect that complements and amplifies each other, ensuring a smooth transition to the committee's new role.
