How to Improve Compensation Committee Effectiveness
Finding the time and resources for board and committee development is an ongoing challenge. But enhancing the effectiveness of your Compensation Committee can be done with a few key actions. This blog and ones that follow will address:
- Setting a workable Committee calendar
- Selecting membership
- Continuing education on executive compensation
The beginning of the year is a great time to update or set up a calendar for your Compensation Committee. Committee responsibilities and activities need to
be spelled out in advance and scheduled throughout the year to:
- Balance the Committee’s workload
- Allow sufficient time for review before decisions are required
- Ensure that decisions are well-timed for effectiveness as well as meeting any regulatory requirements
The first step in building the calendar is listing and grouping activities. You may be surprised at how many issues need to be addressed when you write them all down. Our basic categorized list includes:
- Compensation Philosophy Statement
- This roadmap for guiding Committee decisions should be reviewed at least annually.
- If you don’t have one, you would be surprised how helpful having written principles can be.
- Market and Peer Group Review
- Update the peer group for relevancy.
- Gather compensation data from surveys and proxies.
- Monitor performance versus peers.
- Performance and Salary Review
- Board/Committee review of CEO performance; and CEO review and report on other senior officers.
- Committee review of CEO salary and adjust based on market/peer pay levels and executive job performance.
- Committee review of CEO recommendations for other senior officers.
- Annual Incentive Plan
- Update plan in terms of participation, payout ranges, objectives, weights, and performance ranges.
- Review performance and potential payout levels at mid-year.
- Complete end-of-year review and approve payouts.
- Long Term Incentive Plan (if you use stock)
- Review existing grants and remaining share reserve.
- Determine any need for updating plan and/or share reserve.
- Determine new grant (type of grant, total shares, terms, CEO allocation).
- Review and approve CEO recommendation for grants to other officers.
- Compensation Risk Assessment
- Conduct at least annually – ideally just after the end of the year so the Committee can look back at the prior year and plan for the year just beginning.
- Director Compensation
- Determine frequency of review (we recommend an annual review; but at least every third year as a minimum).
- Conduct review and recommend changes to Board.
Of course, companies participating in government programs like TARP or those who are required to report to the SEC have a number of other requirements and activities that we won’t try to cover here. Suffice it to say that these requirements are a significant expansion of the previous list.
Filling out the calendar is best done using a grid with the major categories of work down the left side of the calendar, and the months across the top. This approach allows you to schedule the items in each category in logical order as well as look at the volume of Committee work in each month.
Finally, this is a task best completed by the Committee Chair, CEO, and outside compensation consultant if you have one. You may also want your CFO and Chief Human Resources Officer involved if they interact directly with the Committee.
Please add comments below, and if you want to know more about how we can help, call me at 919-644-6962 or ask us to contact you at http://matthewsyoung.com/contact.htm.
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