The Compensation Committee Chair
The best compensation committee chairs understand that while they are in a leadership role, their job is not to make decisions on the compensation matters for the committee as a whole. Instead, their role is to facilitate the process around making those compensation decisions by ensuring the committee has 1) the right information and external advice to make informed decisions; 2) enough time to consider decisions; and 3) input from all committee members.
Unlike other committee members who primarily participate in the meetings themselves, the chair needs to be proactive in interacting with management and consultants throughout the year, establishing the committee’s annual calendar, and preparing for each individual meeting. It is up to the chair to determine what areas management will take the lead on and, alternatively, where the committee will assert itself. The chair will decide what analyses fall under management’s purview and what should be done by the committee’s consultant or external legal advisor.
When special circumstances arise (e.g., a CEO transition, a merger, or a major acquisition), it is up to the committee chair to schedule special meetings to address the issue and to work with the committee’s advisors and management to complete the required analyses. In the business-as-usual mode, the workload of the chair may only be two or three times as heavy as that of other committee members. However, when special issues arise, particularly with a CEO transition, the workload of the compensation committee chair can be very intense for a significant period.
1. Keys to Success for a Chair
a. Communicate Effectively with Management: While the chair needs to be independent from management in their decision-making, it is important that the committee chair has open lines of communication with the head of HR and the CEO. Frequent communication with the head of HR is necessary to ensure that the calendar for the year addresses the committee’s needs and that the agenda and materials for each meeting are in place to support the committee’s activities. Jill Kanin-Lovers pointed out that this can be a challenge for the head of HR: “The head of human resources is in a tough spot in terms of being between their boss and the committee. They need to try to be balanced in their views and objective.” Open communication with the head of human resources about the committee’s expectations may help to strengthen this relationship. According to Lois Juliber, former chair of the Human Resources Committee at Mondelez, because “compensation is not black or white,” both parties “really need to make the relationship work and understand who is responsible for what.”
The committee may be solely responsible for approving the company’s compensation program, but it is critical to remember that the compensation program is a valuable management tool to focus management on achieving the company’s business strategy. If the committee chair does not have adequate communication with the CEO, the compensation committee may end up pushing for a compensation design that is ineffective in addressing the company’s needs, or management may advocate a compensation design that is going to be unacceptable to the committee. In the best-run committees, the chair has frequent communication with the CEO to understand how the CEO is trying to use compensation to motivate and reward employees. Without this communication, the compensation committee may be making its decisions in the dark. Furthermore, management must be able to readily update the board on news — “especially on bad news,” emphasized Lois Juliber. As such, soliciting conversation throughout the year to understand the thinking and concerns of management and the head of human resources is invaluable. “Find common ground, and remember it is a partnership,” said Juliber.
To reach consensus between management and the HR function, David Lilley stated that it is important to “deliver the same message to the CEO and the CHRO after each compensation committee meeting,” to solicit feedback and understand how all parties feel on certain issues. “All board members should be engaged, and decisions should adhere to a ‘no surprise’ rule,” said Lilley.
b. Solicit Input from the Committee: Effective committees do not exist when the chair functions as a near dictator and the rest of the committee blindly follows the chair’s lead. “The culture on the board carries over to the committee,” said Ed Campbell, former chair of the Compensation and Organization committee at KeyCorp. If the board is generally assertive in challenging management when there is a difference of opinion, that will likely carry over to the committee. If the board tends to defer to management, it is likely that the committee will tend to defer to management on compensation issues as well. Still, according to Jill Kanin-Lovers, “The committee chair has a lot to do with the culture of the committee.” The committee chair can influence the culture of the committee by choosing to be either directive or inclusive with other committee members in moving through the agenda and making decisions; our view is that effective chairs lean more toward inclusivity. According to Lee Higdon, “as the person that both management and committee members look to,” the chair must “develop trust from colleagues that you are on top of the issues and will reflect the views of the committee.” To that end, it is important that the chair fosters “a culture that is open and collaborative” and manages meetings effectively with “ample time to discuss topics, to explore various insights and perspectives on how to treat certain issues, and to unpack decisions.”
Effective chairs recognize the need to get input from all the members of the committee. During committee meetings, the chair should pause before any votes or approvals to solicit input from members of the committee. While most committee members are not shy about expressing their views, discerning chairs do not confuse silence with consent. Some members of the committee are vocal, and others are more withdrawn. The active committee chair will work to ensure that each member has an opportunity to ask questions and provide opinions before a vote is taken. Gary Heminger, former human capital and compensation committee chair at Fifth Third Bancorp, said the committee chair can “draw people out” and know where particular committee members are likely to be able to make a valuable contribution to the discussion based on their experiences or background.
For any decisions that are particularly difficult, it is generally a best practice to take the vote during executive sessions without management present to facilitate an open discussion among the committee members. And as Charlie Hinkaty emphasized, “On all important matters, keep talking until the committee achieves unanimity.”
c. Complete Committee Self-Evaluations: As part of the annual process, the committee is required to do a self-evaluation. The committee chair should take advantage of this opportunity to understand the effectiveness of its current processes and gain insight into ways that they could be improved. A sample committee self-evaluation is provided on the following page.
Sample Compensation Committee Self-Evaluation
Rating Scale: 1 = Strongly Disagree; 2 = Disagree;
3 = Neither Agree nor Disagree; = 4 Agree; = 5 Strongly Agree
|
Evaluation Statement |
Rating/Comments |
|---|---|
|
1. The committee understands its role and responsibilities. |
|
|
2. Information provided by management, our consultant, and our counsel allows the committee to effectively make decisions. |
|
|
3. The length and frequency of each committee meeting allows the committee to meet its objectives in a timely fashion. |
|
|
4. The committee is comfortable with the compensation committee charter. |
|
|
5. The committee agrees with the actions taken in the last 12 months. |
|
|
6. The committee understands and is comfortable with the compensation philosophy. |
|
|
7. The committee is comfortable with the executive compensation program and believes it will continue to attract and retain top-tier talent. |
|
|
8. The executive compensation program aligns executive pay with shareholder interests. |
|
|
9. The committee is comfortable with the type and level of compensation and benefits the CEO receives. |
|
|
10. Management, our consultant, and our counsel keep the committee apprised of key legislative developments and trends in executive compensation. |
|
d. Use the Consultant Effectively: Most compensation committees have a consultant, but not all committees get the most out of them. Some committee chairs use their consultant primarily as a source of market data and technical knowledge about the arcane rules governing executive compensation. Effective committees engage a consultant that they view as a trusted advisor. Peter Haje, chair of the Compensation Committee at Time Warner Cable, added, “The committee needs an independent advisor with whom it can communicate well.” Most compensation committee members are business experts with a broad understanding of management practices. They may have had a career where they worked for several different organizations across multiple functions. Despite all of this business experience, however, few directors have knowledge of compensation design and technical issues comparable to that of a compensation consultant.
Compensation consultants have the advantage of spending most of their time focused on the area of compensation. While committee members may have experience with compensation programs at a handful of companies, a typical consultant will have worked with hundreds of companies over the course of their career. The chair should be willing to admit when the committee may be out of its depth, and to ask the consultant not only for information, but also for his or her opinion on issues under consideration. Elevating the relationship to a more advisory capacity requires a strong relationship of trust between the committee and the consultant. If the committee does not feel it has this kind of relationship with its consultant, it should address this immediately.
e. Prepare for Meetings in Advance: Effective committee chairs make it their business to avoid surprises in committee meetings. The key to success is ensuring that there is a clear and shared understanding between management and the committee about what will be on the agenda in advance of the meeting. These days, with few exceptions, chairs make sure that the management team has walked them through the meeting materials before sharing the materials with other committee members. The pre-meeting often includes the participation of outside advisors and ensures that the materials will effectively address the agenda for the meeting and facilitate any required discussion or approvals.