What Does the Compensation Committee Do?
Designing an executive compensation program is among the board’s core responsibilities, and this is often owned by the compensation committee (also called remuneration committee). The goal of this committee is to develop an executive pay package that incentivizes the right behavior and moves the company towards its business goals. At first glance, this committee’s responsibilities seem straightforward; however, a modern executive compensation package is quite complex, often requiring a lot of judgement during its design and attracting much scrutiny across stakeholders.
Compensation Committee's Impact on Corporate Governance
Throughout the last few years, we’ve seen a significant emphasis on transparency across the executive compensation landscape. Shareholders want to know how the board is approaching its compensation design—a story that the compensation committee is expected to tell in the Compensation Disclosure & Analysis (CD&A) section of the proxy statement. Investors are also pressing boards to think about how compensation decisions can impact the company’s long-term strategy for growth, whether negatively (e.g., Wells Fargo, Persimmon) or positively (e.g., talent acquisition, sustainability initiatives).
The 2010 Dodd-Frank Act instituted significant reform within the executive compensation process, including mandates around committee member independence, disclosure, and consultant relationships. Another key Dodd-Frank reform was “Say on Pay,” an opportunity for shareholders to cast an advisory vote on whether they agree with the company’s CEO pay practices. While Say on Pay has elicited historically high support levels across companies, today’s compensation committees must continue to balance a medley of stakeholder interests and business factors (e.g., evolving tax regulations, increasing focus on ESG, and heightened media scrutiny of CEO pay).
Compensation Committee Best Practices
Disclosure & Engagement: Whether a company’s CEO compensation is high or low is always relative. Peer group selection is a critical part of the compensation committee process; proxy disclosure should (1) detail how the peer group was selected and (2) visualize where the company falls within the peer group. Today’s boards must use the CD&A to tell their company’s pay story. Compensation committee members should also be prepared to engage with shareholders on the topic of CEO pay.
Compensation Consultants: Compensation consultants typically play an important role in both the compensation strategy and disclosure; they advise compensation committees on peer group selection and incentive design, often through the lens of investors and proxy advisors. A recent episode of “Inside America’s Boardrooms” reviews key criteria for selecting and evaluating a compensation consultant.
Compensation Data: The success of today’s compensation committees relies on whether they have the right data at their fingertips. Not only must they have access to the same data their investors have, but they should have access to tools that enable peer group modeling.
Compensation data providers like CGLytics (providers of the NACD/DIligent Nom/Gov application) equip boards with advanced peer group modeling tools, which allows boards to analyze their executive compensation in the same way investors and proxy advisors do. Learn more.