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. They must balance the organization’s financial realities, 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. However, a compensation committee oversees more than just the number on a paystub. They are responsible for all the pieces that make up overall compensation, like profit sharing, bonuses, stocks, etc. They 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 3 primary functions:
- Advisory. They must stay abreast of industry best practices and guide the board and organization to the best action.
- Strategic. They need to intertwine the compensation strategy with corporate growth strategy.
- Administrative. As a means of transparency, the compensation committee needs to share its sources with the rest of the board. What research did they use to craft their compensation plan?
These 3 areas can serve as general guidelines for a compensation committee’s tasks and responsibilities. If they can divide their time among each aspect, they 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 their high-level duties outlined. But what does a compensation committee do?
Committees in corporate governance need 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 them to ask questions like:
- What are the Key Performance Indicators (KPIs) for the performance of executives?
- How can senior management show they are actively achieving their 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 Changed for Boards in 2021?
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 leadership; it shows commitment to them as a person. 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 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 their philosophy of compensation.
A compensation committee needs to have a well-balanced understanding of well-being. Their 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. They need to translate often abstract ideals into tangible action. For example, if an organization says that “upward mobility” is one of their 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 council 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 advisors does not mean that they are the absolute authority; rather they have the wisdom to supplement and check their 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 to 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 the 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 trailguides 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.
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