What is a Compensation Committee?

This refers to a board of independent directors who set the level of compensation and decide the payment rate for managers at the senior level. The committee also helps in the choosing of other compensation like profit sharing, bonuses, and stocks. The creation of corporate objectives, goals, and grants is sometimes the work of the committee.

What Does the Compensation Committee Do?

Generally, the compensation committee serves as advisors, strategists, and administrators for the organization. As advisors, they should demonstrate best practices, and know the trends regarding compensation. In addition, they should come up with targets and performance measures, and also evaluate the performance of the executives. Also, in their role as strategists, the committee should show the board and stakeholders how they are going to achieve corporate goals. In their capacity as administrators, the compensation committee is required to research on the most appropriate ways to plan for compensation. However, the plans should meet the set ground rules and regulations. The committee must ensure that their plans reap the desired results.

Compensation Committee Components

Compensation committee members choose what to include in compensation packages, together with the amount to allocate. The compensation plan mostly consists of the components below.

• The basic salary for the chief executive officer
• Pluses that comprise of short-term goals with incentives which are on a cash-basis.
• Long-term bonuses for creating value for the organization
• General benefits such as; eye and dental insurance, life insurance, time for holidays and vacations, plans for investments, and savings plan.
• Privileges that constitute usage of office phones, allocation of company cars, and use of other properties owned by the organization.

Generally, the committee does have the upper hand when deciding these compensations for senior management. However, the pressure from investors is a lot, and it forces the committee to come up with clear targets for measuring the executives performances. A benchmark is set to measure this.

The people who serve in the compensation committee

The organizations board members are the ones who sit and select compensation committee members. The nature of the work of the committee requires the board to choose members who are directors independently. Appointed members should have a level of industry expertise, and also have business skills to run the committee. The committee needs to understand that skills and independence are vital. The board generates the job description for the committee and highlights their roles and responsibilities.

Roles and responsibilities of the compensation committee

The board has assigned the following duties to the compensation committee;

• Create the philosophy of compensation for the organization based on the organizations values and mission. It includes the proportion of base salary to benefits, which drives an increase in salary, and the ways in which the philosophy affects the confidence of employees.
• The committee comprises of independent executives. Therefore, they need to approve all the compensation plans that the directors and the Chief Executive Officer will take part in. It is an overwhelming task for the committee as both the board and stakeholders vote on it to decide if they are appropriate.
• The committee, as board advisors, gives errors, recommends, and gives the go-ahead for the stock option awards. They may also be needed to approve incentive, benefits, and employment contracts with approvals from the board and shareholders.
• The compensation committee serves as a link between the Chief Executive Officer and the board on issues related to human resources and administration.
• Approves and recommends compensation for the reports that the CEO submits directly, as well as other packages that the CEO receives.
• Ensure there is enough money available to cater to the organizations compensation plan. They sit with the finance and audit team to evaluate the budget and approve the plan for compensations.
• Make changes, if need be, to the compensation packages for the CEO and the board members. The changes need to be approved by the board.
• Employ any external professional assistance that they require to assist them in achieving their goals. The support team includes the legal team, accountants, and consultants.
• Recommend performance evaluation metrics, and approve them concerning their set targets for establishing the awards for compensation.
• Identify the faults in compensation matters and discuss it with the board to find timely solutions to the oversights.

The compensation committee need not be too involved in the daily compensation plan that includes approving compensation for non-managerial positions. It is wrong for the committee members to engage in such processes. They should concentrate on forming the philosophical, and budgetary niche, and other executive plans. The committee must be transparent in all the matters they handle and ensure they carry out matters professionally and ethically.

Conclusion

The committee members should aim to carry out all their roles and responsibilities and help the board members identify errors in the plans. They should, however, be careful while undertaking these roles so that they do not micromanage the compensation plans of the executives. In todays market, the recruitment of compensation committee members is a task the board members, and shareholders take seriously. To ensure that they implement the compensation plans carefully, the committee members need to be ethical, accountable, transparent, and professional.

Related Topics

• Corporate Governance Law (Intro)
• What is Business Governance?
• Berle-Means Thesis 
• Corporate Governance Rating Definition
• Who are the members of a corporation?
• Corporate Charter
• Shareholder Register
• Common Stock
• Preferred Stock
• Par Value
• Authorized Shares
• Issued Shares of Stock
• Unissued Shares of Stock
• Outstanding Shares
• Institutional Shares
• Dual Class Shares
• What is a closely-held corporation?
• Close Corporation Plan Definition
• What is a Private Company vs a Public Company?
• What is the role and purpose of the corporation?
• What is the Agency theory of corporate governance?
• Shareholder-Centric Perspective
• Shareholder Value
• What is the Stakeholder theory of corporate governance?
  
• What is the role & rights of Shareholders in the corporation?
  
• Shareholder Democracy Definition
• Quorum Definition
• Information Circular
• Straight and Cumulative Voting
• Statutory (Straight)
  
• Cumulative Voting
• Plurality Voting
• Class Voting Shareholders
• Changing the Voting Rules
• Supermajority (Voting)
• Shareholder Sponsored Proposal 
• What are the variations on attributes of Ownership structure?
• Stock Split
• What are the fiduciary duties owed by shareholders?
• When is a shareholder personally liable for corporate obligations?
• Appraisal Rights
• Dissenter's Rights
• Say on Pay Rights
• How can shareholder enforce their rights (direct and derivative actions)?
• Amotion
• What is the process for bringing a Derivative action?
• What are corporate vote Proxies?
• Proxy Statement
• Proxy Fight or Contest Definition & Explanation 
• What is Shareholder Activism and the significance of Institutional Investors?
• Activist Investor
• Overview of Board of Directors
• Board Decision Making
• Advisory Board (Observer Directors)
• What is the role of the Board of Directors?
• Board of Trustees
• Board of Governors
• What is the composition of the board of directors?
• Chairman of the Board
• CEO as Chairman of the Board
• Inside Director
  
• Outside Director
• Outside Director or Non-Executive Director Definition
• Independent Outside Director
• Budget Committee
• Audit Committee
• Compensation Committee
• Nomination Committee (Corporate Board)
• What standards govern the actions of the board of directors?
• Duty of Candor Definition
• Duty of Care (Board of Directors)
• Duty of Loyalty (Directors) 
• Self-Dealing
• Board Evaluation Definition
• What is the Business Judgment Rule?
• What is D&O insurance?
• Codetermination (Foreign)
• What is the role of Managers of the corporation?
• What standards govern manager actions?
• Chief Executive Officer (CEO)
• Chief Financial Officer
• Chief Information Officer (CIO)
• Chief Investment Officer (CIO)
• Chief Legal Officer
• Chief Operating Officer
• Chief Risk Officer
• Chief Security Officer
• Chief Technology Officer (CTO)
• What are the primary state and federal corporate governance laws?
• What is the role of the state in corporate governance?
• What is the role of Securities Laws in corporate governance?
• What is the role of the Foreign Corrupt Practices Act in corporate governance?
• What is the Sarbanes-Oxley Act (SOX) effect on corporate governance?
• Sarbanes-Oxley Act (SOX)
• What is the Dodd-Frank Wall Street Reform and Consumer Protection Act effect on corporate governance?
• Corporate Monitors
• What industry organization standards affect corporate governance?
• How do proxy advisory firms affect corporate governance?
• What is the role of ethics in corporate governance?
• What are the major causes of corporate governance issues?
• What are the access to information issues?
• What are decision-making structure issues?
• What are the power struggle or competition issues?
• Holding Company
• What are hostile takeovers and defenses to hostile takeovers?
• Williams Act
• Staggered Board
• Shark Repellent Defenses?
• Poison Pill Defenses?
• Flip Over Poison Pill Definition
• Flip In Poison Pill Definition
  
• Voting Poison Pill Plan
• Delay-Tactic Defenses?
• Legal Lockup Defenses?
• White Knight and Pac Man Defenses?
• Jonestown Defense
• Lady Macbeth Strategy
• Macaroni Defense
• Yellow Knight
• Back-end Plan Definition
• Backflip Takeover Definition
• Dead Hand Provision Definition
• Kamikaze Defense
• Operating Company Property Company Model
• Whitemail
• Scorched Earth Policy Definition
• Revlon Rule
• What are benefit-alignment issues?
• Cadbury Rules Definition