A compensation committee is a committee within the board of directors tasked with setting executive compensation packages and incentive plans. They must balance the organization’s financial realities and investor expectations, while creating competitive retention strategies. Read on for an overview of the roles and responsibilities of a compensation committee, and how board portal software streamlines those duties.
What Is a Compensation Committee?
A compensation committee is a group of independent members from a company’s board of directors and is responsible for designing, overseeing, and optimizing executive compensation packages. By meticulously evaluating executive compensation, incentive plans, and alignment with company goals, they play a pivotal role in ensuring a balance between motivating leadership and safeguarding the company’s financial health.
Compensation Committee Roles and Responsibilities
A compensation committee plays a key role in ensuring the leaders of your organization receive a fair and reasonable amount of compensation, incentives, and other benefits. However, a compensation committee oversees more than just the number on a pay stub. Their key roles and responsibilities include the following:
Executive Compensation Oversight
An organization’s managers and senior leaders are generally responsible for determining salaries and other forms of compensation for most of the company’s employees, but they cannot ethically set their own salaries. For this reason, responsibility for determining appropriate compensation for these leaders typically falls to a neutral compensation committee. This committee also determines other types of compensation for the same high-level leaders, such as bonuses, stock options, and benefits.
Performance evaluation plays a key role in helping your team members understand what they are doing well and what areas they most need to improve, and your high-level leaders should not be exempt from this aspect of improving the entirety of your organization. However, it’s important to have your compensation committee or another neutral party conduct these evaluations to avoid creating a conflict of interest.
Incentive Plan Management
Much like monetary compensation, other types of incentives that may ultimately motivate your team members should be decided fairly. This includes any extra incentives your high-level leaders may be eligible to receive. Incentive plans should be designed around achieving specific strategic goals and enhance long-term value for the company.
The compensation committee collaborates with the board to identify and develop potential successors for key executive positions. By cultivating a pipeline of capable successors, the compensation committee ensures that the company is equipped to navigate leadership transitions seamlessly, maintaining continuity in strategy execution and upholding stakeholder confidence. Think the opposite of what happened in HBO’s “Succession.”
Compensation Disclosure and Governance
Many organizations choose to make compensation public to help maintain transparency among the people they serve. Your compensation committee can determine whether compensation disclosure is an appropriate choice for your organization and determine the details of how you will share this information.
Compensation Committee Pay and Notoriety
Like your board of directors, the amount your compensation committee should be paid (if anything) is largely unique to your organization. Your compensation committee may receive additional compensation for their services, but some organizations prefer for these board member positions to be voluntary. Your organization’s budget and the amount of work a committee’s services require in addition to their regular responsibilities are important factors in determining whether your compensation consultants and other board members should be paid.
OnBoard Powers Effective Committees
Keeping track of the various committees that make up your board of directors is an important step in ensuring everyone stays on top of their responsibilities. This can be particularly important for your compensation committee because these individuals may not be as consistently involved in the everyday operations of your organization.
OnBoard provides a wide range of options for powering effective committees. Popular features include:
- Tools for creating, distributing, and storing your board’s agendas and minutes
- Secure messaging system
- Limitless system of record for document storage
Download our free board meeting agenda template for a glimpse into how OnBoard enables better board business.
Frequently Asked Questions (FAQs)
What is the Role of a Compensation Committee?
A compensation committee determines an appropriate salary and other types of compensation for your CEO and other senior leaders of your organization.
What is Required of a Compensation Committee?
Your compensation committee must balance the organization’s financial realities and investor expectations while creating competitive retention strategies.
How Should a Compensation Committee Be Structured?
Each compensation committee should consist of a minimum of three directors, at least two of which are independent directors.
About The Author
- Josh Palmer serves as OnBoard's Head of Content. An experienced content creator, his previous roles have spanned numerous industries including B2C and B2B home improvement, healthcare, and software-as-a-service (SaaS). An Indianapolis native and graduate of Indiana University, Palmer currently resides in Fishers, Ind.
- Board Management Software2023.09.12What is a Nondisclosure Agreement? (Overview, Definition, and Examples)
- Board Management Software2023.09.085 Best ESG Funds in Australia
- Board Management Software2023.09.075 Best ESG Certifications in Australia
- Board Management Software2023.08.18Articles of Association vs. Memorandum: What’s the Difference?