Boardroom Insider - Compensation Committees - Four Best Practices

Aubrey Bout

While the challenges and knowledge required in serving on your board’s audit committee are well known, demands on the compensation committee have been catching up, particularly at larger and public companies. Exec pay plans have grown hugely complex, compliance laws much tighter, and investor activists and proxy advisors are watching closely. How should the comp committee manage its newly high-stakes, high-risk pay-setting role?

  • Start with the right chair. “[Compensation committee] chairs today really have to know a lot of things,” observes Aubrey Bout, managing partner at consultants Pay Governance. Aside from a working knowledge of terms like EVA, LTIPs, SERPs, qualified vs. non-qualified, and of tax law, the chair must also be an able politician and communicator. Ability to engage with the chief executive (while pushing back as needed), work closely with outside pay advisors (see the next article), and shape a solid committee work plan are crucial skills. Also, the comp chair is now expected to act at the company’s outside spokesman with investors and proxy advisors on why the pay plan is well thought out and boosts performance. “They have to engage with investors, and really understand what the top investors want,” says Bout. “It’s a hot seat job today.”
  • In the U.S., compensation committees are now required by the SEC and listing bodies to spell out far more of their processes and assumptions than a few years ago. Disclosure starts with a narrative description of the scope of the committee’s authority; its working processes, how it delegates to comp consultants or others, and details on the work and independence of these consultants. Your Compensation Disclosure and Analysis (CD&A) digs into detail on pay philosophy, performance linkages, and risks. Comp advisors and company compliance staff offer plenty of boilerplate language for this, but leading-edge committees will use disclosure as an opportunity for a top-down rethinking of what and why they pay.
  • Comp committees are naturally fueled by paperwork, reports, tables and numbers, and this tends to corral meetings into a rigid, checklist model. Having too much to do in too little time aggravates this. Pre-meeting preparation is vital, both for preparing info, and for committee member review. “The most effective chairs really set a tone on what they expect of the committee ahead of time,” notes Kyle Lamport, a manager with Longnecker & Associates comp consultants. Lamport finds that dashboard displays for data, a growing boardroom power tool, are particularly effective for visualizing comp committee biz. “I see a lot more use of graphs to effectively display material.”
  • This effort should do more than just speed through the committee agenda. Freeing up committee time for discussion and debate beyond number crunching makes for better results. David Swinford, CEO of comp consultants Pearl Meyer & Partners, finds compensation committees “are typically unwilling to do something different unless they have a serious problem. They’re always time constrained, and have to deal with so much info that there’s no time for any brainstorming.” As a comp committee chair, how about sitting down with your legal staff and compliance people for a searching review of the committee agenda? What items could be condensed through the use of consent agendas, or presentations trimmed or eliminated? Then, how could your committee best use the freed-up time for discussion of pay trends, investor concerns, or fresh ideas?

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