Historically, the selection of a new compensation committee chair was something that the lead director worked on with the corporate secretary or general counsel.
But nowadays, says Ani Huang, President of the Center On Executive Compensation, chief human resource officers (CHROs) are playing a much heftier role in this process. The change is coming as executive compensation is being used to connect payment rewards to strategy.
Amid these changes, the Center On Executive Compensation worked with a number of compensation committee chairs to create an onboarding guide for this increasingly vital committee. Huang talked with Corporate Board Member about best practices for onboarding a compensation committee chair and the increasing public awareness of executive compensation.
Huang’s colleague, Tim Bartl, CEO of Center On Executive Compensation, will talk about compensation committee trends at Building Better Boards: Committee Series in Chicago on September 10-11 on the Governance Track during a panel titled, “The Compensation Landscape: Regulatory Updates and Investor Trends to Watch.”
Below are excerpts from our conversation with Huang.
What are some of the reasons the compensation committee chair has become so important?
The risks for a compensation committee and the workload is obviously intensive. The amount of material they’re expected to understand, their fiduciary responsibilities, the risk of not understanding, or not having a constant education process. They need to really understand the importance of connecting the business and the reward strategies. All those things have come into play. Investors expect compensation committee chairs and directors in general to just really have a deep understanding of how company strategy and the rewards programs are connected and whether or not they’re really paying for performance. I think that’s part of why we’re seeing the CHROs so heavily involved.
CEO and executive compensation are under a bright spotlight these days. Has that factored into the work the compensation committee is doing nowadays?
Obviously, it’s the job of the compensation committee to determine the pay of the CEO. We’re finding that the library of reading material that’s necessary for a new comp committee chair is just extensive to be able to understand all of the internal and external factors that come into play with executive compensation. Charlie Tharp, [senior advisor for Center on Executive Compensation] frequently likes to say that executive compensation is unique because it’s a tool of communication in addition to everything else. And you’re really communicating to investors, to the media, to employees, to competitors when you publish your executive pay and your proxy.
When proxy advisors and investors find their ongoing pay for performance concerns are not being addressed, they’re increasingly voting against companies’ say on pay proposal and they will start voting against individual compensation committee members. That’s a very serious concern for any director.
What are some best practices for onboarding a compensation committee chair or member?
There was a cutting-edge practice that a couple of companies told us about. They described it as sort of a board buddy program. They pair a board director with high-potential executives or another company pairs new directors with more experienced directors, like two different types of board buddy programs. But the one where they are pairing directors with high-potential executives, that was something where they’re really getting to know executives below the C-suite level. They’re visiting sites, they’re experiencing the business without the CEO. They’re talking about the executives’ strategy and leadership and where they’re taking the business.
Those directors found that it really helped them understand the company and give them some reassurance that they’re doing their own due diligence essentially. They’re not just hearing what the CEO or the C-Suite is telling them, but they’re actually digging a little deeper into the culture of the business and the strategy of the business in a way that really helps them understand. Because without that, I think it’s difficult to look at things like compensation. It’s hard to understand an executive compensation strategy, if you don’t really understand what’s happening in the company. It’s hard to know what the risks are in a company, if you’re not seeing the culture for yourself. So that was a one, one cutting edge practice.
Then the other one was this sort of a mentoring buddy program where you pair a new director with a more experienced director to provide coaching and feedback. That was something that directors thought was extremely valuable, especially understanding context and sort of the history of how the pay decisions or strategic decisions were made. Another practice that we found interesting, we had a small number of companies that said they proactively send new directors, especially ones that have never been on a public board before, to two corporate governance seminars at the company’s expense. And I thought that that was interesting.