Ed. Note: Compensation Advisory Partners, an independent executive compensation consulting firm, has released a new book, A Practical Guide to Compensation Committee Service: Lessons from the Field. “We wrote this book to provide compensation committee members with information to help make them be more effective in their role and make their job a little easier,” said Eric Hosken, a partner at the firm and lead author of the book. The guide was developed in part based on interviews with current and former compensation committee chairs at major U.S. public companies. Following is an excerpt from the chapter on “Joining the Compensation Committee.”
Joining the compensation committee is very much like taking on a part-time job in a new professional field. Most compensation committee members have been exposed to compensation as a topic over their professional careers, at the very least as a participant in executive compensation programs. In the case of CEOs or other managers, they may have had more in-depth knowledge based on experience making compensation decisions, but much of their experience may be specific within the context of their own company.
Like anyone coming into a new role, there is a certain amount of education that a new committee member will have to take on. At the bare minimum, any new member of the committee should do a thorough review of the company's proxy statement to get a baseline understanding of how the company's compensation program works and how the company describes the compensation program to shareholders. Beyond the baseline understanding of compensation, new members (particularly new board members) need to make sure they have a clear understanding of the company's business and business strategy. Only with this foundational knowledge, can a committee member begin to assess if the compensation programs that the company has are effective in supporting its business objectives.
Directors interviewed highlight the importance of understanding the “unwritten rules” of how the committee operates. Does the committee directly confront difficult issues with management in the room or wait until the executive session to address them? Does the committee chair encourage free form discussion among the members or does he limit discussion to the specific agenda item? Where do different committee members make the greatest contribution? Tony Coelho, chairman of the compensation committee at Warren Resources, emphasized that new directors “really need to listen and ask questions” as they work to understand the committee dynamics.
Two key points of contact can make the onboarding process run smoothly: the head of Human Resources (or a designee from the compensation function) and the compensation committee chair. It is critical that management assist in the onboarding process by providing the new member with background material and context on the executive compensation programs and past committee meetings. Some companies will also include a meeting for the new member with the committee's external advisors.
Required reading/homework
When joining the committee, Human Resources should provide the new member with the following information:
1. Company's Proxy Statement: Reading the Compensation Discussion & Analysis provides the new member with an overview of the compensation program and a view to how the company describes the program to its shareholders
2. Overview of Executive Compensation Program: Management should have a summary document or documents that lay out the following key pieces of information:
a. Compensation philosophy
b. Executive salary structure
c. Annual incentive design
d. Long-term incentive design, including termination provisions
e. Executive perquisites and benefits
f. Executive contracts
g. Change in control agreements
h. Stock ownership guidelines
i. Stock trading rules, including anti-hedging
j. Incentive compensation clawbacks
3. Summary of Executive Compensation Benchmarking: Results of any external studies of the competitiveness of executive compensation program vs. market, including information on the peer group
4. Compensation Committee Charter: Publicly available document that lays out the purpose, responsibilities and functions of the Compensation committee
5. Compensation Committee Annual Calendar: Schedule of meetings and key activities by meeting.
The head of Human Resources should schedule a meeting with the new compensation committee member to walk through the compensation philosophy and program. Ideally, the management representative will be a regular participant in the compensation committee meetings so he/she will be able to provide broader context on how the company arrived at the current compensation philosophy and program.
Your role on the committee
New members have a unique opportunity to make a contribution to the committee. A critical advantage that new members have upon joining the committee is that they can provide fresh perspectives, based on their own experiences and points of view. A new member will not be invested in the current approaches to compensation and may be more inclined to question the status quo.
Beyond a different perspective, each new member of the committee brings unique experience to the committee. You need to figure out how you can best add value to the committee. If you have a finance background, you may want to focus extra attention on the company's selection of performance metrics and the goal-setting process. If you have spent a lot of time managing a large organization, you may offer a strong perspective on leadership development and succession planning. If you have functioned as the CEO of a public company, you may have ideas to offer up about differentiating individual pay with performance. If you have industry expertise, you may be able to offer up views about which compensation practices fit the industry best or information about what the competition is doing. As Charlie Hinkaty, chair of the compensation committee at Prestige Brands said, as a new member you should be “willing to assert yourself, but with the support of facts and data.”
A Practical Guide to Compensation Committee Service is available as a free download for e-book readers such as iPad, iPhone, Android devices, Kindle, Nook, and other e-readers at the firm’s website.