How to run a Compensation Committee

In addition to running my own board meetings, I am active on two public board compensation committees (one of which I chair) and I’ve come to realize that what goes on in these meetings is often not well understood – and needs demystifying.

The Compensation Committee – I’ll call it the CC from here on – is responsible for all aspects of compensation in the company, and in particular for executive compensation. This means putting the programs and guidelines in place for general employee compensation, and determining and reviewing specific executive compensation.

Running an effective CC is a partnership between the HR team who prepare the programs and models for discussion and the CC members. A CC typically has a chair and two other members – all three should be independent directors – and often the board Chair and other interested board members will sit in and participate.

There is a tremendous quantity of material that the CC has to review and so there are a couple of keys to setting the CC up for success:
First set up an Annual calendar and make sure all major areas of responsibility are covered at least once a year.
– Committee charter
– Employee compensation and benefits programs: base pay guidelines, stock option guidelines, health benefits, ESPP etc.
– Annual bonus program and the company objectives the bonus program is going to be paid against
– Executive compensation: base pay levels, option and RSU levels, objectives and annual bonus
– Executive promotions: discuss and review with the CEO
– CEO compensation – this is often proposed by the CC but finally approved by the board
– Board compensation: Cash and stock compensation plans for board members, the chair and committee members
– Peer group: What other companies does the CC use to compare compensation levels against to make sure the company’s compensation is fair and competitive
– Stock plan, stock pool requirements, overhang levels etc.
– CD&A preparation and review
– Committee self assessment
– Plus any number of administrative items that come up through the year

Because there is such a quantity of material to consider and programs to review it’s important to run the CC meeting in a very organized and transparent way. Make sure every board member is always welcome, ensure that every member of the committee has a chance to speak and contribute and that management and the HR team are also given plenty of opportunity to express their views. And make sure that the minutes of each meeting accurately reflect what’s been covered since they are the legal record of the meeting.

Also, because executive compensation can be very contentious both with employees and with shareholders it is important to make sure the CC is getting good advice on the latest laws, what other companies are doing, and what the latest shareholder concerns are for your type of company. This usually means hiring an outside consulting firm that specializes in compensation and that consults only to the CC and not to the company. This is an important distinction – that way the consulting firm is never conflicted by wanting to curry favor with management because they may not consult to management while consulting to the CC. This is not a hard rule – but I think it’s good business practise to separate out the advice the CC gets from the advice management gets.

And finally, make sure management gets the materials out enough in advance that the committee members can prepare. As the CC chair this usually means I am prepping with the management team and the consultants well in advance so when the materials go out a week in advance they are complete are cover the topics we need to cover.