What is a Compensation Committee: Overview & Best Practices

Executive pay is one indication of a company’s core values on compensation. In a 2021 survey, 82% of company directors agree that there is negative media attention on executive compensation, while 58% agree that executives are overpaid.

With this, it is best to have an independent committee that oversees executive compensation packages and assesses their alignment with the objectives relevant to the company and employees.

To effectively establish an impartial committee, this article gives an overview and best practices of compensation committee, including its key function, roles and responsibilities, and frequently asked questions.

What is a compensation committee?

The compensation committee is a set of independent members from a company’s board of directors responsible for planning, supervising, and refining all executive compensation packages.

Since this committee is independent, they have control over the components included in executive compensation packages and the specific value of the total compensation package.

Adding Salary.com’s compensation consultants to your committee could be beneficial. They can design and implement a Compensation Management Strategy that enhances the strategic value of your compensation programs and arrange competitive pay packages that uphold your business objectives.

Key compensation committee functions

The committee has 3 key functions: support company goals and objectives, manage compensation plans, and advise compensation decisions and developments.

1. Support company goals and objectives

   The committee must guarantee that the company’s executive compensation plans and programs are aligned with the organization’s goals, objectives, and compensation philosophy.

2. Manage compensation plans

   The committee manages executives’ incentive compensation plans, as well as the equity compensation plans for employees and directors. This involves doing research and assessing alternatives to craft the proper components of the compensation programs.

3. Advice compensation decisions and developments

   The committee is responsible for the executive and director compensation, so they give guidance on the decisions and developments concerning their packages. They make sure that there is a balance between executive incentives and upholding shareholders.

   To align your business objectives and incentive programs for your executive compensation, Salary.com’s Compensation Consultants will assist you in achieving company goals and motivating employees through well-crafted compensation plans.

Roles and responsibilities of compensation committee

The roles and responsibilities of the committee are vital in making sure that the executives get fair pay and benefits while securing the company’s objectives and financial realities. Here is a list of its duties:

• Evaluates performance

  Since the committee is composed of independent board directors, their evaluation of executive performances is objective and free from conflict of interest. This makes them suitable for the responsibility since leaders also need to be accountable of their job.

• Oversees executive compensation

  Executive officers of a company are not in-charge of their compensation to promote impartiality. The committee decides on the compensation and benefits of high-level leaders, like stock options and bonuses.

• Collaborates for succession planning

  Executive positions need a pipeline of successors to continue the execution of company success. The committee participates in succession planning to ensure that the company can have a smooth leadership transition and stakeholder confidence.

• Decides on compensation disclosure

  The committee is tasked to determine if public disclosure of the compensation structure is appropriate or not, depending on the organization. They will also direct the specifics on how the company shares the compensation details.

• Develops compensation philosophy

  The committee develops, reviews, and updates the organization’s compensation philosophy to help maintain the company’s core values when it comes to compensating employees.

  Compensation Philosophy Facilitation will help you in crafting a comprehensive compensation philosophy statement that effectively explains the how and why of your pay structures, aiding in retaining and motivating employees.

Best practices of compensation committee

Being part of the committee plays a key role in setting the tone and achieving company success in terms of executive pay. It is only right to perform best practices to maintain its integrity. Here are some of them:

• Prioritize independence

  For the committee to function objectively and free of bias, it needs to carry out its roles and responsibilities independently from the board.

• Create open communication

  To monitor that both the board and the committee are doing their respective functions that are aligned with the company’s best interest, they need to maintain transparency through clear and open communication.

• Center on disclosure

  The committee must engage in compensation discussion and analysis to provide disclosure to the shareholders regarding the design and implementation of the compensation package and its correlation with the company’s goals and performance.

• Perform regular risk assessments

  Annual risk assessments of the company’s compensation policies and practices will give the board and the committee insights into the hazards and risks to prevent and reduce their consequences.

• Collaborate with consultants

  Compensation consultants can help and advice committees about navigating through compensation planning, strategy, and design.

  Salary.com’s Executive Compensation Consultants will analyze peer company executive compensation offerings, collaborate to design pay packages that retain top talents, and craft programs aligned with your business goals.

FAQs

Here are some frequently asked questions about the board compensation committee:

What is the purpose of the compensation committee?

A compensation committee determines, supervises, and refines all executive compensation packages.

This includes developing compensation philosophy, evaluating executive performance, overseeing executive compensation, collaborating for succession planning, and deciding on compensation disclosure.

What is the composition of the compensation committee?

A compensation committee composition is a minimum of three directors, and two of them are independent. The board elects the committee members during the annual meeting.

What are the qualifications of compensation committee members?

Committee members must have relevant skills and experience to be qualified for researching, analyzing, and advising executive compensation plans. They must have experience in compensation, human resources, management, and employee benefits.

Members must also be included as independent directors under the listing exchange rules and non-employee directors under Rule 16b-3 under Securities Exchange Act of 1934.

Are public companies required to have a compensation committee?

Yes, publicly held companies are required to have a compensation committee according to Securities and Exchange Commission (SEC), New York Stock Exchange (NYSE), and NASDAQ stock market.