Compensation Committee - Explained
What is a Compensation Committee?
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What is a Compensation Committee?
This refers to a board of independent directors who set the level of compensation and decide the payment rate for managers at the senior level. The committee also helps in the choosing of other compensation like profit sharing, bonuses, and stocks. The creation of corporate objectives, goals, and grants is sometimes the work of the committee.
What Does the Compensation Committee Do?
Generally, the compensation committee serves as advisors, strategists, and administrators for the organization. As advisors, they should demonstrate best practices, and know the trends regarding compensation. In addition, they should come up with targets and performance measures, and also evaluate the performance of the executives. Also, in their role as strategists, the committee should show the board and stakeholders how they are going to achieve corporate goals. In their capacity as administrators, the compensation committee is required to research on the most appropriate ways to plan for compensation. However, the plans should meet the set ground rules and regulations. The committee must ensure that their plans reap the desired results.
Compensation Committee Components
Compensation committee members choose what to include in compensation packages, together with the amount to allocate. The compensation plan mostly consists of the components below.
- The basic salary for the chief executive officer
- Pluses that comprise of short-term goals with incentives which are on a cash-basis.
- Long-term bonuses for creating value for the organization
- General benefits such as; eye and dental insurance, life insurance, time for holidays and vacations, plans for investments, and savings plan.
- Privileges that constitute usage of office phones, allocation of company cars, and use of other properties owned by the organization.
Generally, the committee does have the upper hand when deciding these compensations for senior management. However, the pressure from investors is a lot, and it forces the committee to come up with clear targets for measuring the executives performances. A benchmark is set to measure this.
The people who serve in the compensation committee
The organizations board members are the ones who sit and select compensation committee members. The nature of the work of the committee requires the board to choose members who are directors independently. Appointed members should have a level of industry expertise, and also have business skills to run the committee. The committee needs to understand that skills and independence are vital. The board generates the job description for the committee and highlights their roles and responsibilities.
Roles and responsibilities of the compensation committee
The board has assigned the following duties to the compensation committee;
- Create the philosophy of compensation for the organization based on the organizations values and mission. It includes the proportion of base salary to benefits, which drives an increase in salary, and the ways in which the philosophy affects the confidence of employees.
- The committee comprises of independent executives. Therefore, they need to approve all the compensation plans that the directors and the Chief Executive Officer will take part in. It is an overwhelming task for the committee as both the board and stakeholders vote on it to decide if they are appropriate.
- The committee, as board advisors, gives errors, recommends, and gives the go-ahead for the stock option awards. They may also be needed to approve incentive, benefits, and employment contracts with approvals from the board and shareholders.
- The compensation committee serves as a link between the Chief Executive Officer and the board on issues related to human resources and administration.
- Approves and recommends compensation for the reports that the CEO submits directly, as well as other packages that the CEO receives.
- Ensure there is enough money available to cater to the organizations compensation plan. They sit with the finance and audit team to evaluate the budget and approve the plan for compensations.
- Make changes, if need be, to the compensation packages for the CEO and the board members. The changes need to be approved by the board.
- Employ any external professional assistance that they require to assist them in achieving their goals. The support team includes the legal team, accountants, and consultants.
- Recommend performance evaluation metrics, and approve them concerning their set targets for establishing the awards for compensation.
- Identify the faults in compensation matters and discuss it with the board to find timely solutions to the oversights.
The compensation committee need not be too involved in the daily compensation plan that includes approving compensation for non-managerial positions. It is wrong for the committee members to engage in such processes. They should concentrate on forming the philosophical, and budgetary niche, and other executive plans. The committee must be transparent in all the matters they handle and ensure they carry out matters professionally and ethically.
The committee members should aim to carry out all their roles and responsibilities and help the board members identify errors in the plans. They should, however, be careful while undertaking these roles so that they do not micromanage the compensation plans of the executives. In todays market, the recruitment of compensation committee members is a task the board members, and shareholders take seriously. To ensure that they implement the compensation plans carefully, the committee members need to be ethical, accountable, transparent, and professional.
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