The Times, They are a Changin’ for Compensation Committees
Sitting on a board is no picnic. The primary responsibility for board members has evolved from its focus as a shareholder fiduciary over the last few years. In addition to this role, public, private and nonprofit boards must now also share the company’s responsibility to be a good community partner through environmental, social and governance (ESG) initiatives.
Every board and committee member in the U.S. is discussing how best to tackle these dynamic topics, and the approaches are as varied as the companies themselves. Although we are seeing a variety of oversight practices emerge across companies and industries, we have found that pressing human capital and related social issues are often rolled under the stewardship of the Compensation Committee (in many cases with a new name to boot).
This timely Harvard Business Review article caught our attention on this very topic. The article highlights a solid study conducted by the HR Policy Association which shares how compensation committees are responding to this elevated focus on human capital matters by expanding in size, demographics, time commitment, responsibility, and interaction with other committees to adequately address oversight of these matters.
We fully appreciate the ever-expanding board and compensation committee responsibilities emerging in response to ESG initiatives. Given our vantage point working across management teams and compensation committees, we see certain themes emerging that enable compensation committee members to successfully navigate the growing list of responsibilities.
Organize the growing list of responsibilities.
Compensation committee calendars are changing to make sure committees carve out the appropriate amount of time for all responsibilities. This calendar approach can help a compensation committee not just organize its efforts, but balance what is important to ensure the committee is spending the proper amount of time on all key matters. The following list provides several of the most common compensation committee responsibilities of today by priority:
- Executive compensation
- Human capital management (HCM) such as: recruiting, hiring, turnover and retention, employee wellness, and employee engagement
- Diversity, Equity and Inclusion (DEI)
- Pay Equity
- Other social or human capital agendas that may extend to the company’s community
As a result of this expanded list of responsibilities, we see more boards taking advantage of the summer “slow season” to find time to devote to some of the emerging topics.
Develop acceptable baselines.
Every company is different in mission, purpose, performance, culture, etc. While many HCM-linked initiatives are in their infancy having been recently launched, a path to improvement cannot be mapped out without first identifying a starting point. It may be tempting to try and plan out progress that keeps up with the masses on trending issues, but each company must determine what is reasonable for them.
Consider what you are disclosing.
Whether the company is public, private or a nonprofit, legal disclosure compliance is crucial. Over the past 10 years, legal disclosures on ESG, executive compensation, and HCM have tripled the number of disclosure pages.
While these new disclosure regulations can be helpful to key stakeholders and investors, many companies are going well beyond the required letter of the law. This over disclosure may help some companies in some corners of their community, but it’s important compensation committees and boards identify the difference between required and voluntary, and to review any disclosed information for complete accuracy.
We believe accurate, crisp, and easy to read disclosure both improves transparency and trust with the broader investor and stakeholder community and helps protect against potential litigation risk in the future. With broader disclosure changes coming in the next few years, we find it’s often better to comply with what is required today rather than what could be down the line.
CHRO dotted line report to the compensation committee.
Good process is as important as good results. When determining what HCM programs to review and when to see it, of equal importance is who prepares it and how it’s reported. Like how a Chief Financial Officer has a direct report to an audit committee regarding company financials, the Chief Human Resources Officer should have a direct report to a compensation committee.
This will provide the compensation committee the opportunity to peel back critical layers of internal and external human capital programs.
Utilize independent advisors.
The vast amount of change in such a short time can make it difficult to keep up. Independent advisors thrive on staying tapped into the shifting trends. Additionally, strategic advisors can assist companies in distilling the material from the immaterial so committees don’t have to contend with unnecessary noise.
Finally, independence matters. The committee will often need the independent view of an outside advisor to understand both what is working well and what isn’t, and how those efforts and rates of success compare relative to other companies’ progress on their respective journeys.
As we work closely with some of the best companies and boards in the U.S., we are reminded how judiciously they serve. Board members are not tasked with micromanaging company strategy, performance, operations, or culture. That is the role of management. They are also not tasked with curing many of the global environmental, social, or governmental challenges of the day. That is the role of society and governing bodies.
However, we do see boards continually getting profiled as the standard bearers for company performance with respect to shareholder returns and ESG initiatives. While the list above may provide a few helpful steps to maintain balance, we are grateful to see so many directors do their homework, ask the right questions, and deliberate thoughtfully to be a constant governing guide that adds meaningful value to their companies and stakeholder communities.