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We published the first version of this guide in 2015 — soon after Dodd-Frank was implemented. At the time of the initial publication of the guide, the most immediate focus for compensation committees was reacting to the new environment of “Say on Pay” where co...

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...

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 compen...

The compensation committee charter is a legal document that lays out the responsibilities of the committee and is required under the listing standards of the NYSE and NASDAQ, two of the largest stock exchanges. Companies are further required to make the charte...

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 de...

While the actual committee meetings tend to be more informal, having effective processes in place is critical to the success of each meeting. Without adequate preparation prior to each meeting, things can easily go awry. A best practice is for the compensatio...

Yesterday’s compensation committees are, in many cases, today’s human resources or human capital committees. Many companies have expanded the charter of the compensation committee beyond compensation. The most common expansion of responsibilities is in the fol...

Under Dodd-Frank and the listing standards for the NYSE and NASDAQ, compensation committees are empowered to hire external advisors to assist them in managing their responsibilities. The legislation requires companies to provide funding for the committee to pa...

Most public companies share the same core compensation objectives in some form or another: Align the interests of management with those of shareholders Pay-for-performance Ensure that compensation functions as an effective incentive Attract and retain re...

To help achieve a company’s compensation objectives, compensation committees will typically develop a compensation philosophy to guide their decision-making. The compensation philosophy describes high-level principles rather than prescribing specific design de...

Building off the definition of the competitive market in the compensation philosophy, most compensation committees use a peer group to benchmark pay and/or performance levels for the most senior executives in the company (CEO, CFO, and three other highest-paid...

Annual incentive or bonus design is a complicated topic that could easily serve as the basis for an entire book on its own. For our purposes, we will focus on the information necessary to ask informative questions about the annual incentive design and to help ...

If annual incentive design could serve as the basis for a book of its own, then long-term incentive design could be a multi-volume set. Long-term incentive design raises complicated questions about accounting, tax treatment, shareholder approval, plan administ...

In the past, executive perquisites were viewed as an acceptable form of recognition offered to the most senior executives of a company. Perquisites signal to executives that they have “made it” and provide in-kind compensation that makes an executive’s life ea...

Most companies have qualified retirement plans to provide employees with a source of income when they retire. These plans are “qualified” in the sense that they receive preferential tax treatment that is not available to other forms of compensation, provided I...

Traditional deferred compensation arrangements provide executives with an opportunity to defer taxation on a portion of compensation for a pre-established period of time. Under the IRC, in order for compensation to be deferred, the executive may not have “cons...

No discussion of deferred compensation would be complete without touching on IRC Section 409A, which governs the treatment of deferred compensation. This provision was developed in response to Enron’s bankruptcy, one of the largest corporate bankruptcies ever....

The employment of many senior executives is governed by an employment agreement. Employment agreements normally define the terms and conditions governing an executive’s employment, including: Term of employment and contract renewal provisions Position, tit...

Since the financial crisis of 2008, U.S. public companies have made great efforts to improve corporate governance. The corporate governance reforms included in the Dodd-Frank Act of 2010 accelerated this movement by requiring shareholders to approve executive ...

One of the most significant responsibilities of compensation committees is to establish CEO compensation packages. In our experience, committees work hard to strike a balance between the need to offer attractive compensation opportunities and the need to appea...