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Gunning for Goliath

When employees complain about the size of their CEO's compensation package, HR must tread carefully to protect everyone's integrity.

Monday, October 16, 2006
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The grousing on the Internet message boards and Web logs makes it clear -- some Home Depot employees are unhappy with the compensation given the retailer's chief executive. They don't like how much he's paid compared with their own compensation, and are equally unhappy with the company's flagging stock price.

"The less paid out to workers, the more he reaps when the board decides to give him a bigger bonus for saving money," writes one person on the Home Depot forum on www.retailworker.com.

A Home Depot spokesman says that anonymous complaints on Internet forums and chat rooms can be hard to combat, but the Atlanta-based company works hard to communicate with its employees.

Some shareholders and employees, he says, simply misunderstand the approach that was taken in awarding $124 million in compensation to Home Depot chief executive Bob Nardelli since he was hired in 2000.

"There are a variety of ways we communicate with our associates," says company spokesman David Sandor. "A key example is face-to-face communication between our store managers and associates. If there are concerns, we want to answer them. We want them to know we take their concerns seriously. The more we can do to speak candidly about the metrics used to calculate the compensation, the more it helps."

Home Depot isn't unique, though. A growing number of corporations are increasingly criticized by employees, rightly or wrongly, for the compensation packages given their chief executives. And these payouts are coming under a microscope just as the Securities and Exchange Commission is about to require still more disclosure of pay packages, including such items as supplemental executive retirement programs. Translation: Expect still more scrutiny of CEO pay.

"This anger is only going to grow when the SEC disclosure rules kick in," says Daniel Pedrotty, counsel in the Office of Investments at the AFL-CIO in Washington, which has been active on behalf of unionized workers in the growing debate over executive compensation. "Next year, we're going to see a lot of Holy Cow! moments when everyone sees what the chief executive is really paid."

Consider that the gulf between chief executives and typical workers has been steadily widening. The ratio of chief executive pay to the average production worker increased to 411-to-1 in 2005, from 301-to-1 two years earlier, according to United for a Fair Economy, a think tank based in Boston. And between 1990 and 2005, the average executive's compensation rose by more than 300 percent, while the average production worker took home an annual average raise of less than 5 percent.

For the human resource professional, these pay issues represent a dicey dilemma. What happens when employees react with complaints, criticism and anger over their CEO's compensation package? To what extent, if any, should HR leaders get involved in defusing the tension? And if so, what exactly should they do? And how can an HR professional succeed without jeopardizing his or her job, let alone a constructive role within the corporation?

To manage the situation, experts say, the best approach is to constantly communicate, build trust and, most of all, resist the temptation to put one's head in the sand. For the moment, human resource specialists have to assume the issue isn't going to go away or remain confined to the annual proxy season. Instead, the idea is to attack the problem so employee anger doesn't build to a crisis, which can easily disrupt morale, loyalty and productivity.

"It's very important for human resources to lay the groundwork with executives to address these issues," says Nenette Kress, senior vice president for national communications at The Segal Co., the human-resource consulting firm in New York. "There's a need to be proactive and point out that no one is immune from being exposed in the newspapers. You have to be at the table [when pay packages are negotiated] and you have to be armed with answers."

Expert Advice

Unfortunately, she says, many senior executives are disconnected from their own organizations. They may be so focused on strategic matters or specific corporate doings that they're not aware of a lightning-rod issue being discussed by employees around the proverbial water cooler.

Hence, they only address the issue with employees when there's a torrent of publicity. But by then, a vacuum has been created and filled with negative thoughts. At this point, Kress says, it's highly likely that only trouble will result and the company is reeling.

"Human resource [professionals] must say to the corporate leadership that they represent them, and that they represent employees, too. Look at it this way -- the human resource department must address employee needs in the same way that the investor relations department addresses shareholder needs," she says. "There may be some overlap there, but there are very real differences between these two groups. Both require care. Employees must feel they're respected, regarded and valued."

Some offer more challenging advice: Try to eradicate the differences in pay scales. Of course, this may be nearly impossible, given that a board's compensation committee is likely to benchmark a pay package against peers, and not make comparisons with staffers. A survey by Washington-based Watson Wyatt found that 79 percent of directors believe the executive pay model has hurt corporate America's image, but 65 percent also say the pay system has "contributed to positive U.S. economic performance."

Nonetheless, one expert says, it's important to remember employees and shareholders don't share all of the same goals. With this in mind, Bob Bruno, an associate professor of labor and industrial relations at the University of Illinois in Chicago, suggests HR professionals should actively try to give a badly needed voice to employee frustration.

"There seems to be a wall separating labor relations from the top-level executive decision-making," he says. "And it's left to the human resource folks to deal with it. But you can't do anything about this problem if you're not legitimately trying to eradicate the differences in pay that exist . . . even if that's not going to happen. You have to be candid. If not, any explanation will be politely listened to by employees, but then roundly bashed in restrooms and wherever else employees congregate."

As Bruno readily acknowledges, many employees are also shareholders these days -- they hold stock directly or in retirement accounts. In his view, this group reacts to sky-high CEO pay as if were a double whammy. The notion that these employees will be more reasonable is unlikely, he says. Instead, he adds, they're likely to be twice as mad if three things happen: a chief executive gets an outsized package, they feel underpaid and the stock is lagging.

The antidote is to tie pay to performance, Bruno says, and then carefully explain every component. That's not a novel idea, of course. A growing chorus of shareholder-rights groups say the same thing. To reinforce the point, the Watson Wyatt survey found that just 22 percent of institutional investors believe the current CEO pay system has improved U.S. corporate performance.

Bruno suggests human resource professionals join the choir. Otherwise, he says, they run the risk of undermining their credibility and, consequently, becoming less effective within the organization. And when that happens, he says, the human resource department diminishes its own value, ultimately putting itself at risk.

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"I would caution the human resource person against doing anything that's perceived as just a dog-and-pony show," he says. "I don't think human resource people would like to hear this, but they're perceived as a tool of executives to squeeze more value out of the workforce. Unfortunately, they can't change that perception by themselves."

Become an Open Book

Maybe not. But the human resource leader can make a start. Doug Fiske, a managing principal for the global practice in executive compensation at Towers Perrin in Chicago, says the best way to avoid such negative stereotypes and build a level of trust is to aim for transparency. Operate on the belief that you can't please everyone, but be sure to talk about the realities of the marketplace and the steps the company took to set the chief executive's package.

"Human resources has to be the conscience of the organization -- and the ears and eyes of the chief executive," says Fiske. "[HR professionals] need to have the strength and the conviction to at least raise the issue" of employee anger over CEO pay with top management and the board. "In fact, in my discussions with chief executives, many say that's what they want. Most chief executives will listen."

As far as Fiske is concerned, a human resource team must carefully lay out the details of a pay package, and not simply point to a proxy statement or annual report when employees ask for details or explanations. By painstakingly explaining that CEO pay is tied to performance, and illustrating how those links are made, the human resource team should at least be able to generate credibility.

"You must be as transparent as possible about pay programs and their rationale, and that pay is grounded in market practices," says Fiske. "And explain that it's about competitive pay, not equality of pay. Another step to take is to explain each piece of the program -- the options, the SERP -- figure out how to communicate those pieces. You need to explain the purpose of each of those items."

Indeed, John Budd, an industrial relations professor at the University of Minnesota and author of Employment with a Human Face: Balancing Efficiency, Equity and Voice, says it's extremely important to provide complete information and discuss it thoroughly. Otherwise, human resource professionals are fighting the whispers and rumors around the water cooler.

"Let's face it. The human resource person isn't going to challenge his or her chief executive in the local paper. There's some contradiction in the HR role," he says. "But there's a big difference between telling employees how compensation is determined and composed, and crossing the line and saying it's all justified and reasonable. It's typical to be managing multiple constituencies and bridging gaps between different groups. The best thing to do is to stick to the facts. The goal should be to shed light and answer questions."

Of course, some chief executives can make that difficult. Segal's Nenette Kress relates how she's seen more than one chief executive stand in front of a town hall meeting with employees and attempt to mollify angst over compensation by discussing donations to charities. The effort almost always fails, she says, because employees are generally comparing their debts with the amounts the chief executive is doling out -- and for which a tax break is awarded.

So, in this instance, human resource professionals would be wise to sit down and talk to the chief executive. Let the CEO know what employees are concerned about and suggest they choose their words carefully.

"In the end," she says, "it's all about leadership."

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