Compensation Committee Powers

Dr. Earl R. Smith II
Managing Partner, The Federal Circle
DrSmith@Dr-Smith.com
Dr-Smith.com

The performance of a company’s compensation committee is critical to the long-term retention of corporate talent. The scope of the compensation committee ensures its decisions will affect several key areas of the company including, financial performance, employee morale, talent retention and leadership development. The compensation plan is approved by the board and in most cases by the shareholders of the company. The compensation committee must be composed of independent directors and to the largest extent possible non-employee directors. It may find it prudent to employ advisors or organize an advisory committee. The large impact the compensation committee’s decisions have on financial performance, executive retention, and leadership development, means that the committee must have broad powers to carry out its official duties.

The compensation committee may choose to form sub-committees. These advisory committees are duties as appropriate to assist the compensation committee in developing the strategic compensation plan. The compensation committee may delegate power and authority to the sub-committee as the compensation committee decides, provided such delegation does not give it any power or authority required by any law, regulation, or listing standards to reside in the compensation committee as a whole. The compensation committee may also delegate specific authority to one or more of the company’s officers, such as the committee’s chair.

The compensation committee also has the power to authorize investigations into issues within the committee’s scope of responsibilities. The committee may also retain at the company’s expense, independent counsel, consultants, and advisers as the committee deems appropriate to conduct an effective assessment of compensation standards. The committee’s strategic plan should address the company’s need to retain high performing corporate directors and executives, and the committee should have the ability to rely on compensation consultants, advisory committees and other advisers to structure a plan to meet corporate objectives. The charter of most compensation committees gives the committee the sole authority to hire a compensation consultant, the sole authority to approve the consultant’s fees, and to terminate the consultant should the committee deem it necessary. It is also good governance structure to prohibit any compensation consultant from engaging in any other consulting work for the company without the prior approval of the compensation committee or a member of the committee holding delegated authority.

Good governance practices in establishing advisory committees will assists the Board of Directors in its responsibilities of increasing long-term shareholder value. The charter of the compensation committee should enumerate its powers and duties; however, the board may decide to assign specific issues to the compensation committee beyond its charter. All actions of the compensation committee should be reported in writing and in oral form to the board as a whole to ensure compliance to regulations by the committee. All actions and decisions of the committee should be consistent with the committee’s charter, the company’s by-laws, governance structure and listing standards. The compensation committee should also ensure its decisions, once approved by the board and shareholders when necessary, are reported, posted and published as required.

The compensation committee is a critical advisory board to achieving the goals and objectives of the corporate board of directors. Management should be well aware of the process the compensation committee will undertake in the assessment of executive management performance. The compensation committee should understand its role in leadership development and should critically evaluate its own performance. The Audit Committee should ensure the compensation committee’s compliance with regulations and corporate ethics. The establishment of a compensation committee’s with a sound governance model is critical to the overall performance of the company. The members of the compensation committee should strategically assess the issues surrounding appropriate compensation for senior management, compliance with regulations, developing a challenging incentive plan and guarding corporate ethics.

© Dr. Earl R. Smith II

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