CEO pay is a hot-button issue that gets a lot of attention, and it’s easy to compare since every company is required to report what its top executive earns each year in public filings. For other roles in the C-suite, however, it’s inconsistent as to whether an executive will be included among the top five highest-paid employees listed in the proxy statement, and as a result comparison and benchmarking is murkier.
The top legal and HR roles—usually the general counsel (GC) and chief human resources officer (CHRO)—have seen expanded responsibilities in recent years as they bring more value to the executive team and the boardroom. Equilar delved into pay trends for these two roles, enlisting commentary from executive search firms Allegis Partners and BarkerGilmore that specialize in placing HR and legal/compliance executives, respectively. The results show two executive roles expanding in terms of visibility, especially at larger companies, which have led to notable changes to their pay structures tilting toward more long-term incentives.
General Counsels are expected to handle a wide variety of legal, compliance, risk and strategic issues, and the complexity of these responsibilities has grown with an increasingly complicated business landscape. More than ever before, GCs are part of the executive management team, and their compensation is reflective of influence on operations, especially at high-revenue companies. According to the Equilar report, General Counsel Pay Trends 2016, featuring commentary from BarkerGilmore, median pay for GCs was about $2.5 million for companies above $15 billion in revenue, vs. approximately $725,000 for companies below $1 billion (Graph 1).
“Both the influence and status of GCs continue to rise as their roles and responsibilities expand, reflected by a median pay increase of 6.9% overall inclusive of all GCs in the Equilar study,” said Bob Barker, managing partner at BarkerGilmore. “Additionally, more companies are elevating the title from General Counsel to Chief Legal Officer to reflect their stature on the executive team.”
Part of the reason higher-revenue companies grant more in pay is due to the fact that they offer more value in long-term incentive plan (LTIP) awards to GCs. The relationship between various long-term incentive grant prevalence and company revenue is consistent with the expectation that larger companies are more likely to utilize equity awards, and performance-based awards in particular, than their smaller company counterparts (Graph 1).
The awards received by GCs are reflective of increased shareholder and proxy advisor scrutiny of companies’ pay practices not only in regards to guaranteed vs. at-risk compensation, but also cash vs. equity compensation. A greater number of GCs at companies with higher revenue received more equity and long-term incentive awards as a percentage of their total compensation on average. However, this trend only appeared in the form of long-term performance incentives. Time-vested equity awards remained a fairly steady component across each revenue range (Graph 2).
The most significant difference in pay mix across revenue ranges was for long-term performance incentive awards and base salary. Higher-revenue companies relied much more heavily on long-term performance awards when compensating their GCs. As GCs become more involved in company-wide governance issues, their compensation is more likely to be tied to company performance results.
With recent SEC regulations stipulating that companies include a pay ratio calculation comparing CEO compensation to that of the median employee in their proxy filings, internal pay equity is a hot-button topic in the corporate governance space. However, shareholders are interested in comparing CEO compensation not only to the median employee compensation, but also to the pay levels of other executives.
Internal pay equity within the executive team is considered a good governance practice for multiple reasons. If the CEO receives substantially more compensation than other executives, it is possible that each executive’s pay level is not commensurate with their contributions to the company, suggesting compensation programs should be adjusted accordingly. Alternatively, if a CEO’s comparatively large compensation level accurately reflects his or her relative influence on the company, there may be concerns that the company is not sufficiently prepared for potential CEO succession.
Though unsurprising that median GC pay increases with revenue, examining the median ratio of CEO to GC total compensation is indicative of which position’s compensation varies more by revenue. The CEO-to-GC pay ratio increased over each revenue range, suggesting CEO pay increased with revenue at a higher rate than GC pay. At companies with revenues below $1 billion, the median CEO to GC pay ratio was 2.7-to-1, compared to 4.3-to-1 at companies above $15 billion in revenue.
This is not to suggest that GCs are not instrumental in the success of a company, and according to a report from BarkerGilmore and NYSE Governance Services, the top counsel role has increased in prominence over the years.
“Over the past 15 years, the number of companies that considered their GCs members of the executive management team has grown from 55% to 93% today,” said John Gilmore, managing partner at BarkerGilmore. “GCs are increasingly viewed as having similar clout as the CFO, with their role requiring them to navigate complex and ever-changing laws, regulations and public policies.”
The role of Chief Human Resource Officers (CHROs) has become further intertwined with overall company strategy at public companies in recent years. Many CHROs are expected to manage their human resource responsibilities while maintaining a “big-picture” focus on the long-term outlook of the company. This expanded responsibility affects how companies seek to compensate their top HR executives.
Companies with higher revenues, which are often larger companies with more complex operations, award substantially more long-term performance compensation to their top HR executives than lower-revenue companies. As the role of CHROs has grown, a higher proportion of a company’s performance falls within their control. It has, therefore, become more attractive for shareholders to tie pay outcomes to overall company performance that CHROs are increasingly able to influence directly.
According to the Equilar report, HR Executive Pay Trends 2016, featuring commentary from Allegis Partners, in 2015, the highest-paid HR executives at companies over $15 billion in revenue received nearly twice as much in performance incentives at the median than those at companies with revenues between $5 billion and $15 billion. The majority of companies with revenues below $1 billion did not grant long-term performance awards to their top HR executive.
Similarly, long-term incentive compensation was not only higher in an absolute sense at higher-revenue companies, it also represented a bigger piece of the compensation pie on average. While companies with lower revenues relied heavily on base salary as a pay vehicle, the relative value of performance incentive compensation supplanted base salary as revenue increased.
On average, HR executives at companies below $1 billion in revenue received 42.6% of their total compensation in the form of base salary, versus 23.5% at companies over $15 billion in revenue. This was a direct contrast to the allocation of long-term incentive compensation, which made up only 12.8% of CHRO pay at companies with revenues below $1 billion and 29.9% at companies with revenues above $15 billion.
“Today’s HR leaders possess a broader and deeper skill set than was expected or seen 10 years ago,” said Mike Bergen, managing partner, Allegis Partners U.S. and global practice leader, Human Resources. “The most effective CHROs have a strong general management orientation and approach their roles and responsibilities from a more strategic bottom-line oriented framework.”
By tying compensation levels to company performance outcomes, boards are acknowledging the contributions of top HR executives to a company’s broad business goals. It is worth noting that these goals seem to place overall company performance at the forefront, as reflected by the prevalence of performance metrics included in long-term incentive plans. Relative total shareholder return (TSR) was the most commonly featured metric, used by 29.8% of companies, consistent with an industry-wide governance focus of aligning executive interests with those of shareholders. And beyond relative TSR, all of the most common metrics were notably based on company financial results, and not HR-specific, non-financial achievements. Following relative TSR, the most commonly utilized LTIP performance metrics were EPS (15.4%), ROC/ROIC (13.7%) and revenue (11.4%) (Graph 3).
“CHROs should no longer be compensated by traditional measures—the number of employees, composition of the workforce, size of the company—but rather by the complexity of the organization and the challenges it is facing,” said Bergen. “This shift has resulted in a need for a CHRO that has the agility to execute in this type of environment—a CHRO who can look at both the competitive and global landscape and understand how these changes will affect human capital requirements and adjust accordingly, rapidly.”
Colin Briskman is a research analyst with Equilar. For more information on the research cited in this article, please visit www.equilar.com/reports.
ALLEGIS PARTNERS U.S.