What is a compensation committee: Roles, responsibilities and best practices

Sep 12, 2022

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Compensation committees provide specific duties and committee members bring specific skills to the table. We examine their roles and responsibilities.

A compensation committee is the portion of a corporate or nonprofit board that selects and reviews salary and other forms of compensation. It must balance the organization’s financial realities with investor expectations and ultimately create competitive retention strategies. Compensation committee responsibilities include advising the board and strategically selecting what to include in a compensation package. 

What is a compensation committee?

A board of directors’ compensation committee is a set of independent directors who set pay rates for senior management. But a compensation committee oversees more than just the number on a paystub. It is responsible for all the pieces that make up overall compensation, like profit sharing, bonuses, stocks, and so on. It must use these to predict and stay in line with an organization’s future goals. 

The work of a compensation committee is broken down into three primary functions: 

  1. Advisory. It must stay abreast of industry best practices and guide the board and organization to the best action 
  2. Strategic. It needs to intertwine the compensation strategy with corporate growth strategy 
  3. Administrative. As a means of transparency, the compensation committee needs to share its sources with the rest of the board. What research did it use to craft its compensation plan?  

These three areas can serve as general guidelines for a compensation committee’s tasks and responsibilities. If it can divide its time equally between each aspect, it will succeed. 

Who serves on a compensation committee?

Compensation committees function best with independence from the rest of the board. Today, independent compensation committees are standard practice to keep everyone away from unethical boundary-crossing. Appointed members need to have at least a bit of industry knowledge or business skills in order to function effectively. The compensation committee directors should also be assessed for biases before an appointment. 

What does a compensation committee do?

So now you have an independent compensation committee selected and its high-level duties outlined. But what does a compensation committee do? 

Committees in corporate governance need to include compensation committees to develop compensation packages and identify ways to measure and evaluate the success as a result of those compensation packages. It is important for the committee to ask questions like: 

  • What are the KPIs for the performance of executives?
  • How can senior management show it is actively achieving its goals? 
  • What results are directly measurable and what results are part of larger business objectives? 

Setting up systems to define and measure success can help the organization reach its desired future state. 

What does a compensation plan include?

Compensation is far more than a number. Retention of strong leaders requires a holistic compensation plan. Creating a robust compensation plan shows your organization values more than just output from your senior leaders; it shows commitment to them as people. A compensation committee can create an objectively balanced plan. 

A compensation plan includes: 

  • C-suite baseline salaries 
  • Bonuses based on short-term goals 
  • Bonuses based on long-term wins 
  • Benefits like the different types of insurance, vacation time, retirement plans and parental leave 
  • Access to perks that have fiscal value, like using a company car or travel discounts. 

Compensation plans are not limited to this list. They are the backbone of your leadership retention. A compensation committee should always be horizon-scanning to find the most competitive offerings and ways to make life for employees more sustainable. 

Roles and responsibilities of a compensation committee

Developing a compensation philosophy is a day-one priority for a compensation committee. Members need to agree how people should be paid and evaluated, the values of the organization and its review strategies. If one director believes in bonuses as an incentive for work and another sees raises as the best means of reward, then the committee will need to reconcile its philosophy of compensation. 

A compensation committee needs to have a well-balanced understanding of well-being. Its work controls everything from future planning for employees (like retirement) to their immediate needs. It’s the responsibility of a compensation committee director to know that salary is just as important as benefits, and it might be different for each employee. Listening and a willingness to try new things is a vital role for committee members. One constant is true for all compensation committee members: their decisions contribute greatly to the mental and physical well-being of employees. 

It’s also the duty and responsibility of a compensation committee to reflect the organization’s values. It needs to translate often abstract ideals into tangible action. For example, if an organization says ‘upward mobility’ is one of its core values but doesn’t offer significant raises and promotions, then it’s up to the compensation committee to alter the course. When an organization can point to specific things it’s doing to uphold its values, it’s able to lay the foundation for a strong company culture. 

It is also the responsibility of a compensation committee to ask for outside counsel when necessary. It is common for a compensation committee to request audits from a finance committee or for legal to review its work. The committee’s role as an adviser does not mean that it is the absolute authority; rather, it has the wisdom to supplement and check its own work. Similarly, it’s the role of compensation committee members to provide their opinion and review to the larger board when necessary. Professional expertise should be sought on all sides when needed. 

Compensation committee best practices

A compensation committee has a unique and independent focus compared with other board committees. It must have strong guidelines in place for governance and, in turn, how it governs. Below are a few best practices in each.

Best practices for the governance of compensation committees: 

  • Function as an independent force 
  • Require rotations or limited terms of service 
  • Chairman maintains control of meetings 
  • Comply with fiscal and legal transparency requirements 
  • Report processes to board of directors 
  • Hold frequent meetings 
  • Adhere to ethical guidelines. 

Best practices for compensation committee governance: 

  • Manage compensation for all executives and leadership 
  • Oversee equity awards 
  • Create repeatable processes for compensation review 
  • Actively monitor risks in compensation practices 
  • Set up systems of measurement for senior leadership 
  • Adhere to the agreed philosophy of compensation. 

The bottom line on compensation committees

Understanding compensation management is perhaps the most important function in your organization. Compensation is more than salary; it covers the holistic wellness of senior leadership and, therefore, the future of your organization. Compensation committees are your trail guides to growth and retention. 

Compensation committees, like all board committees, require assessment. Using an organized board management tool makes this process thorough and efficient. With OnBoard, you can visualize your board data, track progress in real time and assign tasks instantly. OnBoard is also the active, real-time platform that allows compensation committees to set agendas, vote and manage their always-ahead-of-the-curve research. 

 

 

This content is provided by OnBoard Meetings and did not involve IR Magazine journalists. For further information on OnBoard Meetings please click here.

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