How to Improve Executive Compensation Committee Effectiveness – Membership Selection and Committee Structure
In a previous blog entry, I talked about improving Executive Compensation Committee Effectiveness by setting up an annual Committee calendar to balance workload, set priorities, and ensure timely and effective decisions.
This follow-on blog highlights four important elements for effectiveness from the standpoint of Committee membership, structure, and decision-making authority:
- Characteristics of effective committee members
- Appropriate committee size and turnover
- Balancing other committee assignments
- Assigning sufficient authority
Characteristics of Effective Committee Members
Some Director backgrounds are more appropriate than others for the Compensation Committee. Candidates with formal corporate management experience or service as professional directors tend to have a better perspective for dealing with complex compensation issues. Directors with entrepreneurial or smaller company experience may not have faced these kinds of issues before.
Appropriate Committee Size and Turnover
Our experience shows that the Compensation Committee needs at least three independent members but typically not more than five. Decision-making is streamlined with a smaller committee; but don’t get so small that you limit important interaction and having a range of perspectives that ultimately builds strong consensus. Also, you should change no more than one-third of the committee’s members in a year. Otherwise, you lose “institutional memory” and valuable experience and expertise that takes a while to develop.
Balancing Other Committee Assignments
Because of the importance placed on the governance of executive compensation, membership on the Compensation Committee should be a director’s primary committee assignment. If at all possible, don’t place directors on both the Compensation and Audit Committees. While you want your best directors on your most critical committees, you don’t want to stretch them too thin.
Assigning Sufficient Authority
And finally, all Boards of Directors should take the time to determine what level of authority the Compensation Committee will hold. We believe that Compensation Committees are most effective when the Board assigns them specific decision-making authority. Where full Board voting is desired or required, the Committee should always bring a specific recommendation that the Committee has developed and fully supports.
If you would like a sample Compensation Committee Membership Profile, we would be happy to send you one. Complete the following request form: