New Challenges, New Roles: The Evolution Of The Compensation Committee

Diverse business group having a meeting in boardroom
Three key areas for directors to consider when assessing a broader compensation committee mandate.

What do human capital management, succession planning, employee engagement, diversity, equity, and inclusion and leadership training and development all have in common? They are common new responsibilities and areas of oversight under the purview of today’s compensation committees, expanding their mandate beyond executive pay and benefits.

Since 2016, the percentage of S&P 500 company compensation committees with a title signaling a mandate broader than just compensation has risen from roughly one-third to just over 50 percent, according to Mercer’s research. Given this now-majority trend among larger U.S. companies, here are three key areas for directors to consider when assessing a broader compensation committee mandate:

1. Treat human capital as a strategic asset.

Increasingly, both internal and external stakeholders are asking companies how their human capital initiatives will enable the successful execution of the company’s strategy. Simply collecting data on various human capital-related factors is only part of the answer; the real value comes from how the compensation committee and management operationalize and optimize the data over time. To use the data effectively to help successfully transition to its expanded role, the compensation committee should adopt a philosophy and governance processes for managing human capital.

  • Adopting a philosophy related to human capital like one used for a traditional hard asset is essential. Human capital must be invested in, developed and deployed in a thoughtful and strategic manner for it to become a differentiator for the company.
  • Establishing a structured governance process embedded in the committee’s annual calendar is critical to facilitate collaboration between management and the committee, ensure alignment of key priorities, collect relevant information and track progress toward agreed-upon goals
2. Understand what your workforce values.

Today, committee members must do more than just know the facts about their company’s workforce—such as demographics and turnover rates—they need to understand what the workforce values. While traditional pay elements, such as salary and bonus, remain key, compensation committee members have increasingly encouraged companies to provide additional offerings that employees value in the current environment, such as expanded benefit programs, career development opportunities, training courses and employee resource groups.

When selecting these additional offerings, it is important to note that seemingly similar companies may have varied workforce profiles and demographics that will drive differences in what their employees value. As a result, compensation committees and management need to understand that Company A’s playbook will not necessarily work with Company B.

Furthermore, during periods of significant innovation or economic challenges, workforce preferences and needs will morph and evolve. The pace of change will likely accelerate with the increasing adoption of artificial intelligence and other technological advances. Ensuring the committee has an appropriate understanding of the pulse of the workforce via employee surveys and regular updates from management will enable the committee’s decisions to keep pace—or at a minimum, significantly reduce the time lag—with these evolutions.

3. View deep bench strength as a need versus a want.

Given their broader mandates, committee members are increasingly requesting more information on succession planning for future company leaders who are two or more levels removed from the C-Suite. Typically, the immediate replacement for a particular executive will receive the most airtime, but the attention given to succession planning for the successor to the current executive is growing.

Committee members often take an active role in meeting and engaging with the identified “successors of successors” to help ensure that they are ready for the executive role when their time comes. The process of elevating the importance of strong bench depth can help anticipate areas of talent strength and weakness, opportunities for employee development and where special retention awards may be beneficial.

Continued expansion and evolution

These three key considerations provide a starting point for addressing a broader committee mandate, but likely supplemental focal areas will also emerge as the role of the compensation committee continues to expand and evolve. Addressing all three areas concurrently can create a compounding effect whereby they complement and amplify each other, creating a smoother transition to the committee’s new role.

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