What makes a best-in-class compensation committee.

AuthorMalafis, Kelly
PositionBOARD EFFECTIVENESS

As most calendar fiscal year companies have completed their annual compensation cycles, it is a good time to revisit the factors that are important to have an effective compensation committee. With the continued focus on executive compensation and the evolving regulatory environment, the role of compensation committees and their members has transformed. Increased transparency, mandatory say on pay votes on executive compensation, and more active shareholders have also led to increased responsibilities. Given this, it is more important than ever for the compensation committee to work effectively to satisfy shareholder objectives. We highlight three keys--composition, planning, and process for having an efficient and best-in-class compensation committee.

Key 1: Committee Composition

Composition is the first step toward achieving an effective committee. Below are some tips to keep in mind when determining which board members should be on the committee:

* Compensation committees are typically composed of 3-5 board members with different, yet complementary, backgrounds and skills.

* The committee should have representation from an active senior executive, an academic, an industry expert, etc., as appropriate. Members with different backgrounds allow for more comprehensive and fully vetted discussions.

* The chair of the committee should be a strong facilitator who pushes forth open discussion and is willing to hear opposing viewpoints, while being an effective communicator and consensus builder.

Key 2: Planning

A second important factor for having an effective compensation committee is proper planning. Providing committee members with a road map of what is going to happen at each meeting and throughout the year allows for a more thoughtful approach to topics. Some planning tips include:

* Annually review the compensation committee charter to ensure that the committee complies with their responsibilities and to see if any changes are required based on regulatory and legislative changes or evolving practices.

* Review the annual calendar at the beginning of each fiscal/calendar year and highlight any key priorities for the year (e.g., long-term incentive plan redesign).

* Provide committee member education on key and emerging topics on an ongoing basis so they can make informed decisions. Recent emerging topics include the risk assessment process, SEC disclosure rules, shareholder red flags, and the voting policies of the two main proxy advisory...

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