Episode Transcript
[00:00:00] Speaker A: Hi, everybody. Ani Huang here with HR Policy association. And welcome to the first of our series, Lessons from the Field. I have with me today Charlie Tharp, who is our senior advisor at the center on Executive Compensation, but who is also the chro, former chro of Bristol Myers Squibb and Saks Fifth Avenue, has taught graduate level executive compensation courses at multiple universities and is just generally an all around guru of executive compensation. So. So, Charlie, thank you so much for being with me here today.
[00:00:32] Speaker B: Thank you, Ani.
[00:00:34] Speaker A: So we are going to discuss the current state of executive compensation and maybe offer up some thoughts for chros and heads of total rewards based on Charlie's decades of experience in the field. So first question I want to ask you, Charlie, is just why exec comp. I mean, what drew you to the field? What keeps you going?
[00:00:53] Speaker B: Yeah, I think a lot of things turn different people on. I have what used to be in McClellan and others studied theories of motivation. Mine's one, I have a high need for mastery. So when I like something, I like to really go deep in it. And I had a chance to study it in law school, had a chance to study it in some graduate work I did in tax. And so it just keeps speaking to me. And the nice thing, now it's so important for chros, it's so important for, you know, various practitioners because companies and boards worry about it. And for me in my career, having done it in companies, having done it as a consultant, the real icing on the cake was when with Tim and Rich Flourish, we founded the center. And that gave me a chance to really kind of leverage all that, you know, experience and interest to helping a lot of companies. And it's just been a wonderful journey since we started this in 2008.
[00:01:53] Speaker A: Been our gain, Charlie.
So, okay, so moving on then to Chros. I mean, what do you see from your position now, your bird's eye view as the two biggest challenges that CHROs are facing with Execcom today?
[00:02:06] Speaker B: Yeah, so I think one is this whole issue of balancing the various sort of stakeholders or people that have an interest in pay. You know, when I first started doing this, it was during the era and many, many years of it was all a shareholder centric model. And of course that's been changing. And we use the phrase stakeholder centric. And so I think really determining the, you know, which stakeholders are most important.
How do you want to reflect that in compensation? How do you want to communicate, disclose? And so I think now it's become much more complex, not so much the technology of comp, that's pretty settled in. And maybe we'll talk about how I think it needs to progress, perhaps change. But. But I think in terms of communicating, balancing the interests and appealing to a variety of stakeholders, that's a really huge challenge and, you know, getting it right, especially in the anti ESG and DEI sort of world that, you know, how. How do you balance all those different interests?
[00:03:10] Speaker A: What do you do if two stakeholders disagree, which I think we're increasingly finding.
[00:03:15] Speaker B: Yeah. So as I talk with committees and you and I spend a lot of time doing that, I always like to start with, you know, given the nature of your business, which stakeholders are most important and what are those interests of those stakeholders, and how can you incorporate that either in your incentive program or how you communicate and maybe develop people and put an emphasis within your company on those sort of areas of performance that are most interesting to your highest priority stakeholders and then try to communicate it in a way that kind of bridges the different interests. But again, always remembering that you can't please everybody. And what you want to do is make sure that whatever you're putting in your incentive programs or setting objectives, that it really is addressing the interests of the people that are most important to your business. Of course, shareholders, but then the. Perhaps employees, perhaps various vendors or regulators, you really have to look at your own business and say, at the end of the day, if I have these four or five different voices that are trying to influence what I do, which is really most important for my mission, my strategy, and how do I do that in a way that satisfies them, but at the same time being careful not to, you know, alienate or have a sort of a red flag in front of the other stakeholders? But. But you can't please, you know, can't please everyone.
[00:04:43] Speaker A: Yeah, yeah. And to your point, Charlie, about DEI and ESG measures in pay, there was an interesting Glass Lewis blog that was talking about a company and sort of did this analysis to say they had, you know, opposing shareholder proposals on the topic of dei. What should they do? And they kind of went through a very similar analysis to what you've just done to say this particular company is a federal contractor, so they might not have the pressure of individual consumers that another company might have. So does that change the calculus of how they would, you know, react to a specific shareholder proposal? But, I mean, what are your thoughts on this, for example, topic of do DEI metrics belong and pay plans, or a company that, you know, wants to keep them but is feeling pressured to take them out now?
[00:05:30] Speaker B: Yeah. You know, I reflect back to a briefing we did with the comp committee, we did it jointly, where we were talking about the small percent of total pay that's often reflected in these. And I made sort of the bold comment that, you know, it's probably not enough to really change behavior. And the comp committee chair said, well, I beg to differ. When we put this metric in, we saw a big change in what we were trying to accomplish in terms of representation.
And so I think each company has to step back and say, look, how important is it in pay?
Or. And we have a colleague that was actually on one of our panels at a center meeting that said, yeah, it's important to us, but we don't put it in pay. But it's part of our culture. And if you want to get promoted at our company, if you want to be on the senior team, this is something you're going to pay attention to and show progress.
So I think each company will take a little different approach.
Some may be with the pressure from either a state attorney general, where they happen to, you know, either be headquartered or have a very large group of people. They might. May want to really kind of downplay their communication and visibility of it. That doesn't mean they're abandoning what they're doing.
So I think always stepping back and again saying, how do I accomplish what I want with the least burn from those who don't really agree with what I'm trying to do. And, you know, there are ways to maybe communicate it in a different way, to maybe present it in a different way in terms of the context, but at the end of the day, if it's a value and if it's important to your business, I think as we've experienced, most companies aren't backing away from it, but perhaps they're changing the way they talk about it.
[00:07:14] Speaker A: So maybe leading from that, since this is lessons from the field, would love to hear about, you know, where are the areas or the touch points where you've seen chros and heads of total rewards maybe lose their footing when it comes to exit comp? It's such a scrutinized area. Where. Where are those footfalls likely to occur, do you think?
[00:07:36] Speaker B: So the big one's working with the compensation committee.
And I'll reflect back to my own experience in the 1980s when I was really pretty new in the corporate world. And I can remember presenting to the compensation committee at the time at the Pillsbury company, and I asked them to approve something I recommended quite a Dramatic change in the incentive plan, the long term incentive plan.
And it was kind of death stare at me. They obviously weren't ready for that. And I hadn't warmed it up. I hadn't sort of presented the theory of the case, let it marinate and come back in another meeting. And so I learned the lesson of what's a sort of a two bite at the apple issue.
You can't go in necessarily with something's new or a dramatic change and expect the committee to not only understand it, but have time to think about it before you ask for approval. And my CEO came down to my office as I was kind of deciding if I was going to get the exit and gave me some coaching on that. And it's really helped me in my career. But I think being careful not to misunderstand the, the need for compensation committees to have a chance to really internalize or socialize a big change. So that's one and I think the other that I did witness with the company that I was helping, that the Chro came across as really being an advocate of management, which is problematic because Chro is also management. So it didn't feel very good to the committee and the person didn't kind of get the body language and the tone in the meeting and it didn't end well. But you know, being careful that you work for two people, you work for the committee and you work for your Chro. But I'm sorry, CEO, but you have to be careful not to come across as trying to just advocate for management as opposed to being the presenter of sort of facts and truth, so to speak, and always looking credible. And this was a case where someone came across as not being sort of even handed in how they were presenting material to the committee.
And I will tell you another one that we know from experience with our colleagues is if you're not an expert in exec comp, you better make sure you have an awesome head of Exec Comp or total rewards because you can't fake it with the committee.
Most of them have experience with CEOs or sitting on other boards and, and they know what, what good is. And so having someone who's really an expert resource in house, there's no substitute for that.
[00:10:24] Speaker A: Yeah, and I think that's shifted some over time, Charlie, that committees have become more comfortable, at least I think they have in maybe having one or two more people in the comp committee room. I feel like years ago, you know, there was an expectation that it could only be the Chro and now you Know, we have a lot of companies where the head of Total Rewards is in the committee, which can be really helpful if the chro is not a deep expert.
[00:10:50] Speaker B: Yeah, I think that plays to two things that boards in general are becoming more aware of. First, they want to know who the really up and comers and the senior team is and not just one sort of spokesperson for a functional area. So even with the CFO maybe bringing in the controller, the treasurer, getting a feel for sort of the talent in the organization and this is a good way to do it in the HR area and, and I hope that we'll see more and more heads of Total Rewards becoming chros so it is a good chance for exposure. Secondly, the area of exec comp, as you pointed out, so much scrutiny, but also it is fairly technical and there are some deep questions that either in terms of the expense impact, the accounting, the share utilization, or how different proxy advisors or investors are going to view it, there's a lot of complex questions that the committee will make sure that they're on top of. Having an expert resource in there is really just a wonderful idea for a chro.
[00:11:54] Speaker A: All right, last question for you, Charlie. This is the question we always get looking forward.
What are the developments in exec comp that you are anticipating? Where are we headed? Is there anything new on the horizon that chros and heads of Total Rewards should be on the lookout for?
[00:12:09] Speaker B: Yeah, I think one area perhaps over the last few years we've become maybe a little lax in is our hobby sort of focus on new thinking.
And so, you know, one area is, as we've been talking about at the center and hopefully there's getting more interest is this whole issue of simplification.
You know, purposeful complexity is great, but I think at times we get pushed into complexity to try to satisfy various sort of stakeholders, be they proxy advisors or the latest information from consultants. And so I think that's one, and I think a companion idea with that is helping your committee get a little more comfortable with doing things that not everyone else does. The, you know, compensation committees seek a lot of comfort from being right down the middle of the fairway because everyone else is already doing something, but that might not be best for your firm. And a lot of research now is starting to point out that companies that perhaps take a different path in the design of incentives perform awfully well. So I think the whole idea of experimentation and thoughtful, challenging, sort of the status quo and not necessarily doing what the rest of the PAC does, I think that's going to be something we're going to see more of. I think secondly, we're coming to the realization that part of the internal pay equity within companies and society in general is that most executives have benefited very nicely from what's been going on in the, the equity markets until the last couple weeks. But over the last, you know, couple decades, we've seen tremendous growth in the value of companies and the, you know, the Dow Jones S&P 500, the, the levels that it's reached. Well, you know, executives and senior management get a lot of their pay in equity and they benefited from that.
Not so much down in the organization. You know, we used to before the accounting Rules changed in 2005 in terms of having to expense options. And so I think some new thinking about how we let various people in the company, hopefully all employees participate as we build value for shareholders and other stakeholders and it's reflected in the equity plans, the extent to which we can push that down. And I know Ana, you've been doing some work thinking about how we help with, with either some legislation or changing in the tax treatment or regulatory environment around that. And the more we can bring people under the big umbrella of benefiting the equity markets and the shareholders, I think that'll help a lot. Not only with pay inequality and wealth creation, but also allowing people to feel like they're an owner of the company and get that discretionary effort. So, so I think that's something we should think about. It's a little off track with the exact comp focus, but, but I think it's hand in hand because some of the criticism of exec comp has been around the, the difference in terms of the earnings of CEOs and how that's grown over time versus perhaps the lag in what we've seen with the average worker.
[00:15:20] Speaker A: Absolutely, Charlie. And we've seen some really creative approaches from companies from using equity grants for individuals that would not normally be equity eligible to kind of really statement about performance and potential reserving a certain amount of equity to award to non equity eligible employees every year to founders grants to, you know, companies that have equity grants for hourly workers. I mean there's, there's been a lot of creativity around this and that. Yeah, that'll be so interesting to see how that develops.
All right, well Charlie, this has been fantastic. Thank you, thank you to our listeners. And stay tuned for the next in the Lessons from the Field series which will be with our friend former McDonald's Chro Rich Flourish on the perils and pitfalls for the Chro in CEO succession. Thanks for watching, everybody. Bye.
[00:16:12] Speaker B: Thank you.
