Compensation Committee 101: What Does It Do?

Aug 1 11:21 2005 Paul R. Dorf, Ph. D., APD Print This Article

Upper Saddle River, N.J. – June 8, 2005 - The increased focus on the size of Executive Compensation Packages and their apparent disconnect with the realities of company performance have placed tremendous concern on a company’s decision making process. Add to that the issues of corporate governance, and you now have placed the Compensation Committee very much in the limelight. But what is the role of the Compensation Committee?

The Compensation Committee is appointed by and serves in an advisory role to a company’s Board of Directors. It makes the important final decisions on many executive compensation matters,Guest Posting including the types and particulars of the pay plans themselves, the amount of compensation, and even the performance measures and specific targets upon which the executives will be judged for purposes of calculating incentive awards. In its capacity, the Committee is responsible for functioning both in a strategic role, as well as serving in an administrative capacity. Strategically, the Committee must consider how the achievement of overall corporate goals and objectives can best be supported through the use of specific compensation programs that will support a pay-for-performance environment. From an administrative standpoint, the Compensation Committee must undertake the necessary studies, evaluate alternatives plans, recommend elements of the Executive Compensation Package including, salary programs, short-term and long-term incentives, and supplemental benefits and perquisites for the Corporate Officers. Ultimately, the Committee ensures that these programs are installed and administered in such a way as to achieve the desired results.

The following are the primary duties and responsibilities typically assigned to the Compensation Committee by the Board:

·Develop the Compensation Philosophy for the Company and ensure that it is consistent with the company’s business strategy, mission, and culture.

·Approve any compensation plans in which Officers and Directors are eligible to participate, subject to the review of the full Board and shareholders, as appropriate.

·Responsible for recommending, providing oversight, and approving awards of stock options and other equity, perquisites and other benefits, and employment and change of control contracts, subject to Board and shareholder approval, as required.

·Act as liaison between the CEO and Board on all Compensation and Human Resource issues.

·Recommend and/or approve the CEO's compensation to the Board, as well as the compensation for his/her direct reports as a whole.

·Recommend the compensation package for Board members, subject to approval by the entire Board.

·Recommend performance criteria and specific annual and long-term performance targets for salary increases and/or awards under the various Executive Compensation Programs.

·Review Company's performance in relationship to established targets and to peers, as appropriate.

·Approve the company’s overall compensation budget and plan concepts. However, it is inappropriate for the Compensation Committee to become involved with the specifics of compensation design or planning covering non-officer personnel, unless they carry over from the executive plans, or require Board or shareholder approval.

The Committee should not operate in the day-to-day matters of compensation plan administration, including setting compensation for non-officer positions, other than from a budgetary and philosophy standpoint.

The Committee can and must provide the meaningful oversight within the organization, by providing a “check and balance” on compensation matters, to ensure that the compensation paid is competitive and appropriate given the level of performance attained, and that such plans are consistent with the organization’s strategy and business plan. The Committee must also provide the transparency required in today’s more open and highly legislated business environment; furthermore, it must ensure that compensation matters are conducted in a completely ethical and highly professional manner.

As the pressures and scrutiny on the Compensation Committee continue to mount, it becomes even more apparent that the Committee’s responsibilities must be clearly defined, in order that there is no question as to what it must do, and the authority with which it can carry out its duties.

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Paul R. Dorf, Ph. D., APD
Paul R. Dorf, Ph. D., APD

Compensation Resources, Inc. provides compensation and human resource consulting to mid-size and Fortune 500 clients as well as public, private, family-owned and emerging companies. CRI specializes in Executive Compensation, Salary Administration, Performance Management, Sales Compensation, and expert witness services. Our reference library boasts over 4,800 surveys.

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