Compensation Committee Responsibilities and Best Practices-Chapter 6 Summary

Chapter Summary
The responsibilities associated with serving on the compensation committee of a company’s board have increased significantly in recent years with the enactment of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 and mandated “say on pay,” governance reform and enhancements, and increased shareholder activism. With the increasing complexity of the executive compensation landscape, effective management of the ongoing operations of the compensation committee has become increasingly challenging. An understanding of the fundamental responsibilities of the compensation committee and some “best practice” guidelines for committee procedure is essential to effective and responsible committee operations.

Key Points
•    Identifying and formally stating the responsibilities of the compensation committee is one of the cornerstones to effective committee operations. The starting place for the statement of responsibilities should begin with relevant stock exchange listing requirements
•    Building on these required responsibilities, a full of listing of compensation committee duties may be developed. This will vary by company and therefore should be tailored to meet the needs and practices of the company. Compensation committee responsibilities can be categorized in 3 broad categories:

1.    Strategic oversight of compensation programs (e.g., develop and maintain the compensation strategy/philosophy; review and approve all compensation and benefit plans designed to support compensation strategy; ensure regulatory, accounting and listing compliance; review programs relative to corporate governance best practices and approve appropriate modifications to programs, etc.)
2.    Pay administration (e.g., review major organizational changes with CEO; review and approve compensation adjustments for CEO and executive officers; ensure competitiveness of executive compensation; supervise the administration of, and review any material changes to, the Company’s compensation and benefit plans, etc.)
3.    Other (e.g., develop/review committee charter; review and recommend inclusion of the CD&A in the company’s annual report or proxy statement; oversee executive and director stock ownership guidelines; CEO succession; oversee director compensation; etc.)

•    To help ensure the committee executes its duties responsibly and effectively there are a number of procedural “best practices” that may be employed; these include:

1.    Member Selection Committee effectiveness can be greatly enhanced if membership includes at least one director with executive compensation experience and/or a director with related, albeit not direct, subject matter expertise
2.    Committee Charter Companies should adopt a written compensation committee charter to serve as the governing document for committee responsibilities and operations
3.    Executive Compensation Philosophy Companies should develop a compensation philosophy that serves as the foundation for the administration and design of the executive compensation program
4.    Annual Calendar An annual calendar of items to be covered at meetings throughout the year should be developed to allow committee members ample time to prepare and formulate questions in advance of meetings
5.    Meeting Agendas Meeting agendas should be developed jointly between management and the committee to ensure all matters that require the committee’s attention are covered
6.    Pre-Meetings with Committee Chair Management should plan to meet in advance of scheduled committee meetings with the committee Chair to review proposals, agenda items, and any controversial topics
7.    Advanced Mailings of Materials The meeting agenda and associated materials should be sent to committee members at least one week in advance of meetings to allow committee members time to review and formulate questions. More substantive meeting agendas should be mailed as far in advance as practical
8.    Time Management Committee meetings should be scheduled so that all items on the agenda may be covered and that adequate time is provided to discuss each item fully and to the satisfaction of the committee
9.    Regular Distribution of Executive Pay Program Information Executive compensation information should be provided as reference material at each meeting (e.g., as an appendix to the committee book)
10.    Executive Sessions The committee should hold regularly scheduled meetings at which non-management directors and selected other individuals (e.g., compensation consultants) are invited to participate to permit private and candid discussions of relevant issues
11.    Minute Taking and Distribution Detailed minutes should be taken at every meeting and should be drafted promptly after meetings and distributed to participants in a timely manner, well in advance of subsequent meetings
12.    Executive Compensation Consultant The committee should have sole authority to retain and terminate an independent compensation consultant. Ideally, the consultant should attend a majority of committee meetings (preferably in person but phone participation may also acceptable in certain instances) and be available to the committee chair as needed
13.    Regular Review of Executive Compensation and Market Trends The committee should regularly review executive compensation levels and delivery to ensure the program remains aligned with business and compensation objectives
14.    New Member Orientation and Continuing Education The company should provide a new director orientation program to facilitate the assimilation of new members onto the Board and committees
15.    Committee Annual Performance Evaluation The committee should review its performance annually, which should include a comprehensive review of key functions of the committee, including committee structure and operations, meeting process, committee effectiveness, management support, and individual committee member performance

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