Comp Committees: More Than Just Pay

First up on the meeting agenda was a review of the leadership pipeline. Then environmental and social impact goals for bonus awards had to be determined. After that, five-year’s worth of data tracking executive performance had to be finalized for the company’s proxy filing with the SEC. 

But this wasn’t an end of year meeting among the entire board of directors. It was a standard, regularly scheduled meeting of the compensation committee. Over the last few years, the role of compensation committees has changed dramatically, moving far beyond just pay issues. Indeed, the duties can range from assessing the firm’s future talent, to its handling of ESG issues and succession, and even to carrying out stakeholder outreach. “Boards are using the comp committee to get people at the top to pay more attention to other matters, like culture and talent,” says Michelle Lowry, academic director of Drexel University’s Gupta Governance Institute. 

Increasingly, the committees have moved beyond reviewing CEO and top leadership pay only to digging deep into the talent pipeline. Don Lowman, leader of Korn Ferry’s Global Total Rewards practice, says he’s seen committees evaluate the top 50 or even 100 high potential leaders in a company from a pay standpoint. The deeper look, says Lowman, is driven by several factors, among them the ongoing talent crunch, an internal focus on succession planning, pay equity issues, and more. 

He also says the committees are now working more collaboratively with other board committees. Normally, individual committees meet separately and simply report back to the entire board. Now, however, it is common for the compensation committee to meet with the CHRO, Chief Diversity Officer, and other board committees to get a more holistic picture of the company’s talent needs and operations before determining pay and incentive goals or rewards. 

The reshuffling has some experts suggesting renaming the comp committee all together. To be sure, Robert Hallagan, a vice chairman at Korn Ferry and co-leader of the firm’s board services practice, proposes boards eliminate compensation as a standalone committee and instead establish a new “Leadership and Talent Committee.” All of this, of course, has boards rethinking who should be on the committees. “They are very specifically looking for people with more than just a financial background or perspective for the compensation committee,” says Lowman. 

To be sure, finding directors with the skill sets needed to address the expanding responsibilities of the committee is a challenging, says Drexel’s Lowry. She points to the move to incorporate ESG metrics into bonuses and incentives as an example. “There are few people with director-level expertise that have experience in modeling such rewards,” says Lowry. The lack of experience heightens the chances of “getting it wrong,” she says, which when it comes to compensation could be very costly.

Another challenge is that potential directors may be wary of the time and effort to add such remits. What’s more, the shift comes just as the U.S. Securities and Exchange Commission is pressing for more pay disclosure. Under new rules, companies will now have to track executive pay against certain financial metrics—creating more transparency for investors and watchdog groups but also adding data-tracking duties to comp committees. “Compensation committees should be involved in talent and strategy, but collecting all this other data could overwhelm them,” says Dennis Carey, a vice chairman at Korn Ferry and co-leader of the firm’s board services practice.