Best Practices for the Modern Compensation Committee

Compensation committees now meet an average of 6 times a year, according to a new PwC report called “Serving on – and Chairing – the Compensation Committee.” The report, which aligns with several pieces the Center has developed recently on board practices, takes a “peek behind the curtain” at the complicated inner workings of the compensation committee and examines the structure, key duties, critical partnerships, and best practices for informed and successful committee members.

Composition. The report notes that experience in risk, human resources and talent management is increasingly desirable among candidates to serve on the compensation committee. The need for boards to possess different skills than traditionally sought has resulted in many boards reviewing their refreshment practices and onboarding new directors. Strong onboarding and education programs will allow directors to contribute quickly and offer new and valuable insights to the conversation. The Center’s Guide to Compensation Committee Chair and Director Onboarding provides leading practices in this area.

Additionally, many of the responsibilities of the compensation committee overlap with other board committees, so cross-committee planning between chairs is critical. It is recommended that at least one member of the compensation committee also serve on the audit committee and one overlap with the nominating and governance committee. The Center’s CHRO’s Guide to the Expanded Role of the Compensation Committee provides insights for how to re-evaluate roles and meetings to address new and interrelated topics.

Partnerships with independent advisors. The report points out the important and complex relationship between directors and the compensation consultant, noting that 71% of directors agreed consultants have too much influence on executive compensation, according to their 2021 Annual Corporate Directors survey. The Compensation Chair must build trust with the consultant and ensure he/she provides a balanced problem-solving approach and is comfortable pushing back on the committee’s thought processes and decisions. A best practice to formally evaluate the performance of the consultant annually and consider a rotation periodically. The Center recently interviewed CHROs, Chairs and leading compensation consultants to inform its new guide, Selecting an Executive Compensation Consultant, which will be published on May 31. A webinar  will be hosted on the same day to discuss best practices in the RFP process.

Tips and Tricks. The report provides a number of practical suggestions for effective compensation committees:

• Committee documents should include all material terms of binding decisions that must be made before the meeting.
  
  
• Give the committee “two bites at the apple” for complex decisions such as CEO pay changes.
  
  
• Provide additional education for directors, including through external advisors and training.

The report also provides a helpful sample compensation committee calendar.