The CHRO’s Role in Designing Executive Compensation packages is less scrutinized than Elon Musk’s
CHROs can be crucial to executive pay negotiations, often working closely with the head of the compensation committee and an outside compensation consultant.
In the world of executive compensation, the stakes are high. The upcoming Tesla shareholders’ vote on June 13 is a stark reminder of this. The vote will decide whether to restore a pay package previously valued at $56 billion, granted to CEO Elon Musk in 2018. This package was rescinded earlier this year by a Delaware judge, who argued that Musk was overpaid and investors were misled about the board’s independence.
Ani Huang, president and CEO of the Center on Executive Compensation, a division of the HR Policy Association, points out a simple reason for the scrutiny: “Because it’s $56 billion,” she said. “I think a lot of these conversations, we may not have been having if the pay package had been smaller.”
As companies design pay packages for executives, Chief Human Resources Officers (CHROs) often play a critical role, working closely with the head of the compensation committee and an outside compensation consultant. With increasing scrutiny surrounding CEO pay, companies may soon need to justify their executive pay packages.
Huang offers three tips for HR leaders navigating the complex world of executive pay:
Ensure Board Independence: One of the central issues with Musk’s pay package was that it was negotiated by Tesla board members with close ties to the CEO. Huang advises, “Make sure that to the extent that you’re saying you have an independent board, you really have an independent board.” Most companies would be careful about having personal friends or family members of a CEO serve on their board, and would ensure an independent compensation consultant advises on an executive pay package.
Avoid CEO-Designed Compensation Packages: Another unusual feature of Musk’s pay package was that he proposed it himself. Huang emphasizes, “That’s not how it’s supposed to work. It’s supposed to be that a compensation expert or the compensation committee is really formulating this award…and negotiating it with the CEO.”
Be Prepared to Justify the Compensation Plan: Criticism of executive pay packages can easily circulate on social media. To withstand scrutiny, Huang recommends HR leaders clearly lay out the negotiating process they went through to land on a particular package. This should include the advice received from the compensation consultant, benchmarking on pay and performance against peers, and the rationale behind the goals and amounts decided upon.
As the world watches the outcome of the Tesla vote, these tips serve as a guide for HR leaders to navigate the high-stakes world of executive compensation.
Stay tuned, to PropleManager.co.in for further updates on the evolving workplace paradigm.
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