Executive Compensation and the Role of the Compensation Committee

Governance & Oversight

As part of the Board of Directors, compensation committees have governance, oversight, and fiduciary responsibilities inherent in their roles. Having a continuous process view of their responsibilities is helpful and will generally follow this pattern:

• Assess the current state of the business to facilitate an understanding of planned changes in business strategy.
• Evaluate the compensation package for alignment with business strategy and adjust plans accordingly.
• Review and monitor performance based on that package during the year.
• Evaluate the results of Year 1 relative to expected outcomes and then review Year 2 goals. Adjust and realign accordingly and report to the full board.

The compensation committee will submit any recommended changes to the board of directors for approval. If the board members accept these changes and then submit some of their own that are accepted by the compensation committee, the new package is finalized and approved by the committee. If, however, changes are made by the board and the committee does not agree with these changes, then the board signs off on its changes and they become the official compensation package. When this occurs, the disclosure statements regarding the final executive compensation program will generally list the names of the board members, not the committee members.

Here are some of the specific things that the board members want in the report:

• What was the rationale for including each of the items in the executive compensation package?
• How are bonuses determined (both the performance measure and the reward-performance relationship)?
• What was the basis for the amount and type of equity awards granted?
• Were past equity awards considered in the new grants?