Do The Right Thing

Meeting one of my heroes resulted in a values-based discussion about executive compensation. The issue, says Harry Kraemer, may be putting a crimp in creating a "phenomenal workforce." And the most effective strategy should involve HR leaders stepping back to visualize the larger impact on shareholder value -- and doing the right thing.

I've always maintained a collection of heroes. Some are obvious choices: my dad, several teachers and university professors, my high-school principal and my first boss -- Bob Narcessian.

Other heroes include public figures whose work or character became known to me via playing fields, Broadway stages, research journals or publications: Larry Bird (Boston Celtics), Christopher Reeve (before and after his accident), Ron Kessler (Harvard Medical School), Debra Lerner (Tufts-New England Medical Center), Dee Edington (University of Michigan) and Harry Kraemer (Kellogg School of Management as well as executive partner with Madison Dearborn).

Through a combination of coincidence, risk-taking and divine intervention, I've spent time with all of them, except for Larry Bird and Harry Kraemer. Now, I can add Kraemer to my "heroes visited" list.

I became aware of Kraemer's leadership and moral fiber after reading a 2002 Fast Company feature story. Then Baxter International Inc.'s chairman and CEO, Kraemer stunned the business world when he addressed a company crisis by apologizing, taking responsibility and doing the right thing.

And, despite exceeding overall financial targets for the year, Kraemer recommended the Baxter board reduce his bonus by 40 percent.

I saved that article and still read it once a year, along with a small collection of other pivotal pieces that influence my worldview.

I never thought I'd meet Kraemer until coincidence presented an opportunity. My friend, Tricia Crisafulli, co-authored a book last year called Comebacks -- a collection of lessons from 10 leaders who endured setbacks and recaptured success on their own terms.

Crisafulli gave me the book and invited me to attend a Kellogg forum with most of the featured leaders. At the time, I didn't know she included Kraemer in Comebacks or that he would be in attendance.

Kraemer was beyond the person I imagined and I was thrilled when he released his own book this year -- From Values to Action.

He is one of the rare business leaders who truly value human resource leaders, especially senior executives such as Mike Tucker and Karen May, with whom he worked at Baxter.

Kraemer says HR is "one of the most important operational functions within a company" and has a big impact on company and shareholder value.

"In order to create value, you have to be successful at two things," Kraemer says. "First, you'd better have great people.

"How do you get great people? You'd better be doing the right thing because people want to feel good about the organization.

"Second," he says, "you'd better have customers.

"Customers are human beings and, if two products are close in price and quality, the customer will choose the company they like better."

Top leadership, Kraemer says, needs to own the people process and "HR executives bring the intelligence, education and knowledge needed to help operational leaders make the people process work" -- a process that ranges "from attracting and recruiting talent to training and delivering feedback."

But executive compensation and perquisites can put a crimp in creating a "phenomenal workforce," he says.

"The pay levels have gotten out of hand," he says. "These are big jobs with enormous responsibilities and 24/7 demands, which should be well-compensated. But, where do you draw the line?"

The AFL-CIO's Executive Paywatch website, which tracks CEO total compensation, shows the ratio of average-CEO-pay to average-worker-pay increasing from 42 to 1 in 1980, to 263 to 1 in 2009. It hit a peak in 2000 at 525 to 1.

While the union's latest figures show a nine-percent decrease in average total CEO compensation for 2009, the last reported year, executive-retirement benefits increased 23 percent.

Many people recall the media-grabbing headlines in 2002, when the perks included in Jack Welch's post-retirement package were revealed. The incident left the General Electric Co. and its board scrambling to explain a package seen by the public, as well as by GE's employees and shareholders, as excessive.

While perks are often seen as a way to reward and retain top talent, Kramer says HR leaders should consider carefully whether they should be part of an executive's total compensation package. And if they are part of that package, they should be "totally transparent," he says.

Executive comp, Kraemer says, should be comprised of salary, bonus and stock options.

While the executive-compensation process is flawed, "we have to be careful in how we make changes," he says.

The "say-on-pay" rules allowing shareholders a non-binding vote on executive compensation are precipitating some of those changes, according to the Wall Street Journal, which recently reported that some companies are scrambling to make last-minute changes in their packages to better link executive comp to total shareholder return.

One change that, Kraemer says, is unworkable is companies "putting caps in place when determining what is reasonable for executive compensation," noting that even socially responsible Ben & Jerry's -- before it was purchased by Unilever -- dropped a decade-long executive-pay cap of seven times the salary of the lowest-paid worker in 1994 when it was searching for a CEO replacement for co-founder Ben Cohen.

So, what should an HR executive consider when weighing in on executive compensation? He always comes back to the theme of simplicity: "What is the right thing to do? What is reasonable?"

Kraemer often returns to this diagram -- a series of parallel lines encased within a circle -- which allows him to step back to consider an issue's intricacies as well as the larger picture.

When evaluating executive compensation, each line within the circle can represent an element, such as each component of an executive-comp package, benchmark information, current or pending federal regulations, and recommendations by organizations such as Institutional Shareholder Services.

The outer circle then represents how these components impact overall shareholder value.

Ultimately, Kraemer says, an HR leader should discuss an executive-compensation package with the company's leadership that is reasonable. They should be able to explain how it will impact the company's value. And, most importantly, they should be certain it is the right thing to do.

Carol Harnett is a widely respected consultant, speaker, writer and trendspotter in the fields of employee benefits, health and productivity management, health and performance innovation, and value-based health. Follow her on Twitter via @carolharnett and on her video blog, The Work.Love.Play.Daily.

May 9, 2011
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