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 the course of their professional careers — at the very least, as a participant in executive compensation programs. In the case of chief executive officers (CEOs) or other managers, they may have had more in-depth knowledge based on experience making compensation decisions, but much of their exposure may be specific to the context of their own companies.

Like anyone coming into a new role, new committee members will have to educate themselves about their position. At the bare minimum, new members of the committee should conduct 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 its compensation program to shareholders. Beyond the baseline understanding of compensation, new compensation committee members, and particularly those who are entirely new to the board, need to make sure they have a clear understanding of the company’s business objectives, strategy and operations. 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.

However, there is only so much director orientation that can be accomplished by self-education. Directors we spoke to said that there is, by necessity, going to be a period of acclimation upon joining the committee. “New members need to get the lay of the land,” according to Jill Kanin-Lovers, former chair of the compensation committees of Dot Foods and Heidrick & Struggles. Even directors with extensive experience dealing with compensation or serving on other committees need to get a sense of the new committee’s culture. Directors we 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 does it wait until the executive session to address them? Does the committee chair encourage free-form discussion among the members, or does the chair limit discussion to the specific agenda item? Where do different committee members make the greatest contributions? Tony Coelho, chairman of the board at Esquire Financial Holdings, emphasized that new directors “really need to listen and ask questions” as they work to understand committee dynamics.

Two key points of contact can make the new member onboarding process run smoothly: the head of human resources (HR) or a designee from the compensation function, and the compensation committee chair. Lee Higdon, former chairman of the Compensation and Human Resources Committee at Citizens Financial, emphasized that “early exposure to management is a key area for any new compensation committee member to focus on,” so that new members are acquainted with current issues as well as people and the internal culture of the committee.

It is critical that management assist in the onboarding process by providing new members with background material and context on their respective executive compensation programs and past committee meetings. Some companies will also set up a meeting between new members and the committee’s external advisors.

Some activities a new member should complete before their first day on the job are listed below:

a. Required Pre-Reading

When joining the committee, HR should provide new members with the following information:

1. Company’s Proxy Statement: Reading the Compensation Discussion & Analysis (CD&A) provides the new member with an overview of the compensation program and a snapshot of how the company describes the program to its shareholders.

2. Overview of Executive Compensation Program: Management should have a summary document or documents that detail the following key pieces of information:
   • Compensation philosophy
   • Executive salary structure
   • Annual incentive design
   • Long-term incentive design, including termination provisions
   • Executive perquisites and benefits
   • Executive contracts
   • Change in control agreements
   • Stock ownership guidelines
   • Stock trading rules, including anti-hedging
   • Incentive compensation clawbacks

3. Summary of Executive Compensation Benchmarking: It is essential to review the results of any external studies on the competitiveness of the company’s executive compensation program relative to the market, including information on the peer group.

4. Compensation Committee Charter: This is a publicly available document that lays out the purpose, responsibilities, and functions of the compensation committee.

5. Compensation Committee Annual Calendar: The calendar includes the schedule of meetings along with key activities of each meeting.

The head of HR should schedule a meeting with each new compensation committee member to walk through the compensation philosophy and program. Ideally, the management representative will be a regular participant in compensation committee meetings so they will be able to provide broader context on how the company arrived at the current compensation philosophy and program.

b . Debrief with Compensation Committee Chair

Spending time with the current compensation committee chair prior to the first committee meeting is a great opportunity to get a more practical understanding of how the committee functions. While the written record of the committee minutes provides a high-level summary of what the committee has been working on, the chair can supply a more comprehensive context to the new member. As every committee has its own history and dynamics, the chair can describe the main issues that the committee has struggled with over time and provide an expectation of what topics the committee will address in upcoming meetings.

Every committee has its own working style. Most committees have a supportive and advisory relationship with management, but depending on the history and the players involved, there could be a more confrontational dynamic over compensation levels or the pay-and-performance relationship. The company may have legacy compensation practices that the committee is trying to move away from over time. The chair can give the new member perspective on what the committee’s collective view on the compensation program is. What works well in the compensation program? What doesn’t work in the committee’s view? Where have they heard “noise” around the compensation program from shareholders and/or shareholder advisory groups? The committee chair can also provide some basic background on how the committee members interact with one another and with management. Generally, the compensation committee chair is the point person for interaction with management, the other committee members, the board, and the external advisors. The chair is responsible for setting the agenda for the year and each meeting and making sure that the committee moves through the agenda in a timely manner during the meetings.

The chair has unique insights on the strengths and styles of the different committee members (e.g., who is vocal, who reads the materials in advance, who has strong points of view, etc.). They can also highlight general meeting structure and dynamics such as relaying which topics are discussed in front of management or reserved for executive sessions, as well as participation of external advisors in executive sessions.

c . Formal Training

Some new committee members find it helpful to participate in formal board education programs. Training for committee and board members is provided by associations of directors (e.g., Board Prospects, The National Association of Corporate Directors or Corporate Board Member). Their training sessions geared toward compensation committees are generally conducted by seasoned compensation consultants, attorneys, and corporate heads of executive compensation or human resources. These training programs serve a dual purpose. First, they allow committee members to receive formal education on the topic of executive compensation. Second, they allow directors to network with compensation committee members from other organizations to share their experience and best practices.

d. Your Role on the Committee

Unless you are the compensation committee chair, you will not have specific responsibilities assigned to you on the committee aside from reading the materials and actively participating in the committee meetings. Based on our discussions with committee members and our own observations, we would say that new members nevertheless have a unique opportunity to contribute 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 approach to compensation and may be more inclined to question the status quo. As such, according to David Lilley, former Organization and Compensation Committee chair at PSEG, new members can make the most out of this opportunity by being “ready to engage the committee promptly, but with a full understanding of the long-term strategy and short-term goals, and with the overall aim of leading the committee to a consensus.”

Beyond novel perspectives, each new member of the committee brings unique experience and you should tap your expertise in order to 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 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 about differentiating individual pay with performance bonuses. If you have industry expertise, you can offer views about which compensation practices best fit the industry or provide information about what the competition is doing. As Charlie Hinkaty, former 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.”