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The Annual Committee Process

In order to ensure that the committee effectively executes its responsibilities under the charter, it should establish an annual calendar outlining the timing of key activities over the course of the year. The committee calendar is typically a joint product developed by management and the compensation committee chair, as the timing of committee decision-making needs to fit into the annual compensation cycle of the company. The compensation committee will typically have 4–6 scheduled meetings over the course of the year, so part of the function of the calendar is to logically allocate the committees’ activities across the different meetings.

The outline below lays out what the compensation committee calendar could look like for a sample committee operating on a calendar fiscal year and holding five meetings per year. There is a great deal of variation in committee calendars across companies, depending on the number of meetings held each year and the responsibilities under the charter. The example below focuses on core activities that all committees will address over the course of the year. There are other activities that the committee will have more flexibility in scheduling, and these issues are typically assigned to meetings where the agenda is lighter (e.g., employment agreements, the committee charter, the committee self-evaluation, the consultant’s evaluation, etc.). A best practice is also to include an executive session of the committee at each meeting.

a. Sample Committee Calendar

Meeting 1

Timing: January / February

Location: Company Headquarters

  • Close out compensation for prior year:
    • Review financial performance results for annual and, if any, long-term incentive plan cycles
    • Approve overall annual incentive plan funding and individual payouts for select executives
  • Preliminary review of proxy statement including the Compensation Discussion and Analysis (CD&A)
  • Approve program design changes in annual incentive and long-term incentive design

Meeting 2

Timing: February / March

Location: Company Headquarters

  • Establish opportunities for current year:
    • Approve individual salary increases for executives
    • Approve annual incentive design including:
      • Individual incentive opportunities
      • Performance measures and weightings
      • Performance goals
    • Approve long-term incentive design including:
      • Individual incentive opportunities
      • Vehicle mix
      • Design features (e.g., vesting, term)
      • Long-term performance plan design:
      • Performance measures and weightings
      • Performance goals
  • Final review of proxy statement and CD&A

Meeting 3

Timing: April / May / June

Location: New York City

  • Review actual compensation and performance for prior year relative to the peer group
  • Review pay-for-performance relationship for prior year, relative to peers
  • Review compensation philosophy
  • Review Compensation Committee Charter
  • Review executive share ownership vs. guideline requirement

Meeting 4

Timing: July / August / September

Location: Company Headquarters

  • Review of executive compensation trends
  • Review compensation peer group
  • Receive update on financial performance for in-progress incentive plan cycles

Meeting 5

Timing: October / November / December

Location: Company Headquarters

  • Review executive compensation programs:
    • Competitiveness of pay levels
    • Annual incentive design
    • Long-term incentive design
    • Other program features, as necessary (e.g., stock ownership guidelines, clawbacks, executive agreements, severance / CIC arrangements, etc.)
  • Review tally sheets
  • Approval of base salary increase budget for next year
  • Risk assessment of compensation programs
  • Performance updates on performance incentive plans
  • Committee self-evaluation
  • Annual review of external advisors

Committees try their best to plan for all activities that they know they will have to address over the course of the year. That said, it is important to leave room for time to cover unexpected events. Changes in senior management, major transactions, and regulatory developments are just some of the unanticipated events that may need to be squeezed into the committee’s calendar. While specific issues are difficult to foresee, it would be surprising if nothing unanticipated arose during the year. A certain degree of flexibility is therefore necessary to address these potential events. In some cases, the committee may need to convene for additional meetings or conference calls to address special topics. It is also important to give committees ample time to make decisions. The committee may react adversely when management asks the committee to approve major changes the first time a topic is presented to them at a meeting.

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