The Role of Compensation Committees Decoded
‘Tis the season for large bonus payouts collected by CEOs and executives across the globe that often garner attention and often unsolicited scrutiny. And although the “jelly of the month club” is the legendary gift that keeps on giving, performance-driven bonuses and incentives are at the top of every executive’s Christmas list. Working behind the scenes year-round like Santa’s little elves, are the countless directors and members of compensation committees.
Compensation committees have become more mainstream due to the Dodd-Frank Act in 2010 which required regulators to demonstrate a link between executive pay and the performance of a corporation. Additionally, in 2011, shareholders acquired the right to vote on a company’s executive compensation program. “This right, a so-called “say-on-pay,” gives shareholders and their advisors greater influence over executive pay and governance matters and raises the profile of compensation committees,” says Brink. It’s also evident that the role of compensation committees is continuing to evolve along with greater transparency and attaching executive compensation to sustainability and ESG.
The Role of Compensation Committees
By definition, compensation committees are a committee consisting of independent directors appointed by the board of directors and responsible for carrying out their duties specifically determining and approving the executive compensation plan. Compensation committees also have a variety of advisory, strategic, and administrative duties:
Advising the board in matters such as the components of pay packages, amounts of each component, and the value of the total compensation package
Establishing performance measures and targets
Evaluating executive performance in accordance with the targets and determine executive compensation and awards
Considering how the achievement of goals and targets can be supported through compensation programs
Undertaking the development, implementation, and effectiveness of all pay and benefit programs while meeting and managing regulations
Specifically, the primary duties and responsibilities of well-appointed compensation committees help the board by:
Developing a compensation policy for the company
Approving compensation plans that are subject to review by the board and shareholders
Recommending, overseeing, and approving awarded stock options, benefits, employment, and contracts
Acting as a liaison between the board and human resources
Recommending and approving performance metrics and evaluating the performance of executives to determine eligibility for awards
Selecting and employing additional assistance including legal counsel
Collaborate with the finance and audit committees to approve the company’s compensation budget
Diverse Talent Aquisition, Gender Pay Equality, and Sustainability
The responsibilities of compensation committees are also extensive and continuing to develop. “Historically, most compensation committee charters focused on approving compensation and the benefits for the CEO and senior executives,” explains Peter R. Gleason for Forbes. “Recently, and again this reflects outside market forces as well as inner corporate dynamics, we’ve seen more and more compensation committee charters expanding to include responsibility for the oversight of the organization’s talent strategy.”
This also refers to combatting diversity and gender-pay gap issues. “A number of compensation committees, because they are reading the same media that we’re all reading, have been asking management, “What are we doing about gender pay equality?” And we certainly see from our clients, where we’re dealing with the compensation committee, that they’re coming to ask us for help to assess this as a broader employment issue,” continues Teresa Bayewitz in Brink. Tying sustainability and ESG support to executive compensation is also burgeoning issue gaining popularity with compensation committees.
The question regarding sustainability and ESG targets tied to executive compensation is what to quantify. “The dilemma for directors, however, is determining what aspects of sustainability, or ESG performance, should have priority- and should be linked to pay incentives,” says Harvard Business Review. “What’s a better approach? Have bonuses depend largely, or solely, on executives’ success in tapping big strategic opportunities related to sustainability.”
These opportunities can be related to the UN’s Sustainable Development Goals or specific goals set by the organization regarding sustainability and ESG. For every step of the sustainability ladder, compensation committees should be present to outline these targets and evaluate executives when the goal is met.
Why Companies Need Compensation Committees
One of the primary reasons companies should implement compensation committees is their independent approach to executive compensation. Compensation committees act as the liaison between the board, human resources, and executives when vetting bonuses and award packages. In the BoardBookit webinar featuring industry experts Francis H. Byrd, Donna Anderson, Jannice L. Koors, and John P. O’Grady compensation committees are key when handling sensitive negotiations. Compensation committees also work collaboratively with other committees, such as the audit committee, to designate budgets. While working collaboratively with departments, the compensation committee can create a sound compensation package for all executives.
Board Portals For Compensation Committees
The gift that compensation committees are asking for this year is BoardBookit; board portal software built and architected for the growing and the evolving role these directors are tasked with all year long. BoardBookit’s collaborative features such as Voting and Discussions allow for secure communications between board and committee members. Robust reporting features such as attendance and polls allow for proper evaluation across the board and committees.
Most importantly, however, is the ability to set 3 levels of security permissions. Admins have the ability to improve efficiency while controlling how much information users and other admins can view. BoardBookit allows for groups, committees, and the board to see as much, or as little information required. This way, the sensitive information and reporting conducted by compensation committees stay in the hands of only those that have access.
BoardBookit’s secure, collaborative features and reporting functionalities are highlighted by allowing unlimited access for all users. Compensation Committees who use BoardBookit are always up to date, informed, and providing the best governance possible of their organization.
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