For nonprofit organizations, the role of the compensation committee largely depends on the bylaws and the compensation committee's charter. Both sets of rules determine if the committee has the authority to determine components for executive compensation packages and amounts, or if they merely make recommendations to the board.
Corporate boards are more highly regulated and have more pressure by investors regarding say on pay, so their compensation committees require clearer definitions along with clearly defined duties and responsibilities than their nonprofit counterparts. Publicly traded corporations must appoint all independent directors to the compensation committee because they are ultimately responsible to the shareholders, who are looking for assurance that executive pay correlates to performance.
The definition of the role of the compensation committee requires having a good understanding of the composition of the compensation committee, the authority of the committee, and the committee's duties and responsibilities.
How Can We Define the Compensation Committee?
In general terms, the compensation committee functions in advisory, strategic and administrative roles. Compensation committees should be an authority on best practices, trends and regulations regarding executive compensation. In this capacity, they serve as advisors to the board. In the capacity of their strategic role, compensation committees must be able to demonstrate to the board and shareholders how achieving corporate goals correlates with and supports executive compensation packages. In an administrative capacity, compensation committees must perform much research, including identifying studies, evaluating alternatives and designing the most appropriate components for executive compensation plans. Their plans must meet the specifics of industry rules and regulations. The committee also takes on the primary responsibility for making sure that compensation plans produce intended results.Who Serves on the Compensation Committee?
The current environment around executive compensation requires boards to appoint compensation committees comprised solely of independent directors. The appointees should collectively encompass general business skills and industry expertise. Independence and skills are important and it's also important that the committee understands exactly what the board needs from them. It's imperative that boards develop a written description of the committee's role, duties and responsibilities, leaving nothing to chance.What Authority Does the Compensation Committee Have?
In general terms, compensation committees select the components for executive compensation packages, along with the corresponding amounts. They also specify the value of the total compensation packages for executives. The components of compensation plans, as well as how those components are structured and implemented, vary substantially between corporations. Most compensation plans consist of one or more of the following components:- Base salary
- Bonuses: typically short-term goals with cash-based incentives
- Long-term incentives: often come with corporate equity
- Benefits: components such as health, dental or life insurance; vacation time; or company-sponsored savings and investment plans
- Perquisites: grants or privileges such as company cars, business cell phones and use of corporate properties