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Should the Compensation Committee's Mandate Cover All Employees?

June 19, 2020
by Andrew Maletz

The role of the Compensation Committee already has expanded beyond executive compensation to cover talent development programs including succession planning, leadership development, performance management and talent acquisition, but should it be expanded further?  A recent Bloomberg opinion piece by noted governance experts calls on Compensation Committees to oversee the full range of human resources policies in order to address increasing income inequality. 

Current compensation standards tying executive pay to shareholder returns have driven income inequality, according to the authors, the Honorable Leo Strine, the former Chief Justice of the Delaware Supreme Court, and Kirby Smith, a Wachtell Lipton attorney.  The COVID-19 crisis has highlighted problematic elements in the U.S. employment landscape, the authors say, including share buybacks and dividends leading to reduced corporate cash cushions.  When the pandemic hit, job losses disproportionally affected lower- and middle-income employees while those that did not lose their jobs were often in frontline roles with increased virus exposure risks.  The authors contend that this period of market and political volatility represents an opportunity for Compensation Committees to take a central role in balancing shareholder returns with workforce development and economic opportunity.

The authors highlight several potential actions Compensation Committees could take in expanding their oversight functions: 

  • Develop metrics to track the workforce’s share of gains in productivity and profitability;

  • Identify across business lines the mean and median pay and benefits package of each quartile of employees, with corresponding data about their function, educational level, skill set and business relevance;

    • Identify racial and gender disparities from this data and insist management work to fix them; and

    • Consider the same data points for any contract employees to ensure they are fairly treated.

  • Understand how management sets employee compensation (including which metrics are considered) and whether the company bargains with workers or gives them any other meaningful form of leverage;

    • Compare to the approach used to establish senior management pay; and

    • Ensure the workforce is similarly motivated with fair participation in profitability and opportunities for increased earnings.

  • Approve company policies to ensure that employees have safe working conditions and reliable and family-friendly schedules, are treated with respect and dignity, and have a welcoming and inclusive workplace that is free from discrimination and harassment.

Outlook:  The article, which is similar to an op-ed this week by Senate Banking Committee Ranking Democrat Sherrod Brown (D-OH), proposes a seismic shift in corporate governance that would greatly expand the role of the Compensation Committee, necessitating an enhanced skillset for directors serving on the committee.  Further, some of the proposed actions call for datapoints that are not as easily accessible as many would assume, generating a cost to ensure data viability prior to implementation.  While some institutional investors have advocated for improved social benefits, are shareholders comfortable with the increased mandate and potential reduction in returns these proposed changes may bring?  Compensation Committees, or boards in general, may wish to consider some of this data and these discussions with management without committing to wholesale revision of the Compensation Committee's mandate.

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