The compensation committee of the board of directors in a public company has several critical responsibilities. Most importantly, the committee establishes the goals and objectives that apply to the chief executive officer, evaluates the chief executive's performance against these criteria and determines the appropriate compensation to reward performance. The committee also approves each element of the compensation of executive officers. In executing its responsibilities for senior executive compensation, the committee sets the tone for the entire organization and contributes to creating a culture of achievement and accountability. In addition, the compensation committee administers cash and stock incentive plans. Succession planning may also fall under the purview of the compensation committee.
What distinguishes highly effective compensation committees from less effective, or even dysfunctional committees? Our work as executive compensation consultants to many compensation committees at major companies gives us a bird's eye view on what works. The seven most important characteristics are detailed below.
An Effective Chairperson. The best compensation committee chairs have vision. If the compensation program needs to change, they define the end game and work to manage the transition. We have worked with a number of effective committee chairs who see change management as a critical skill. They acknowledge that a multi-year process of phase-in may be required when significant change is a priority. The most effective chairs regularly seek input from other members, or from the full board when appropriate, and build consensus among members.
Effective committee chairs also are sensitive to the perspectives of various stakeholders--shareholders, employees, regulatory bodies, the community, the press and the general public. They support the chief executive officer's agenda, but are willing to push back and confront the issues head on. They are also willing to engage with shareholders or the proxy advisory firms if necessary to explain, and defend, the committee's point of view.
Balanced Committee Membership. A good compensation committee is composed of committee members with diverse backgrounds. Board members with experience as a chief executive officer provide great value, as they have likely participated in compensation decisions and have a clear understanding of how compensation fits into the larger organizational context. Different...