Dr. Earl R. Smith II

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

After doing a board assessment and dealing with the strategic issues as organization, resourcing and population, my board advisory practices tend to turn to the committees. One of the most sensitive tends to be the compensation committee. If management has been in a dominant position relative to the board, this committee has operated under their control and in their interest. Management can be shocked that directors now intend to operate with the interests of the shareholders in mind – and that change of direction can lead to some significant conflict.

The compensation committee is a key governance advisory committee for any public corporation. The board staffs a productive and effective committee knowledgeable corporate directors, well resourced and in compliance with an established charter. The committee defines and enforces company compensation guidelines and employee benefit plans and practices. The committee should meet regularly with corporate senior management and strategically plan the company’s compensation plan. The analysis should be included in the company’s annual proxy statement or annual report on Form 10-K filed with the Securities and Exchange Commission and comply with listing requirements. The Compensation Committee must also prepare the Compensation Committee Report as required by the rules and regulations of the SEC.

The compensation committee’s charter should be flexible enough to allow the committee to direct the compensation affairs of the company. The charter should reflect all applicable laws, regulations and listing requirements. The charter should also reflect the intent of the Company’s Certificate of Incorporation and by-laws, in establishing operating parameters for the compensation committee. The committee’s management assessment should include a plan for personal growth on the part of corporate leadership, especially the CEO and should consider leadership styles and coaching as well as people management skills.

The compensation committee should be composed of independent corporate directors as judged by the board of directors as a whole. The company’s Corporate Governance Guidelines should determine independent directors. A good governance model will ensure the advisory committee has a majority of non-employee directors. The advisory board directors should be nominated by the nominating committee and should be appointed and serve at the pleasure of the board. The Chairman of the committee should frequently communicate with the Chairman of the Board, the CEO and serve at the pleasure of the committee directors.

The compensation committee should conduct a periodic assessment of the goals and objectives of the company’s executive compensation plan. The committee should take into consideration the board’s strategy regarding executive compensation and evaluate the effectiveness of the current compensation plan at meeting the board’s strategy. It should recommend the changes it believes necessary to meet the goals and objectives of the board’s strategy.

The compensation committee should conduct an annual assessment of the performance of the CEO, and set the CEO’s compensation, benefits, and incentives based upon compliance of the CEO in achieving corporate finance objectives, leadership development, and overall corporate governance. In determining long-term incentives, the committee should consider all operating strategies, financial performance goals, shareholder return, and make comparisons to other similar company compensation packages. The advisory committee considers past compensation packages and the performance assessment of past CEO’s determining the appropriate compensation to be awarded.

The compensation committee should also annually assess the performance of corporate management of the company. The committee may consider as a part of the evaluation the recommendations of the CEO and other officers, and factors similar to the comparison made for the CEO’s assessment and compensation package.

The committee should also review and approve any employment, severance or termination decisions made regarding executive officers of the company. The committee should review reasons for the termination or severances as it relates to the compensation packages and the strategies for performance of the company’s senior management. The compensation committee should not confine its efforts to the assessment of the current executive officers, but should review the company’s compensation plan with consideration given to executive retention and the recruitment of new corporate leadership talent. It should adopt a personal growth plan for corporate management, the CEO, and the board of directors.

The compensation committee should be composed by directors knowledgeable of compliance management practices and the regulations of the SEC regarding reporting of its activities in the company’s annual statement or annual report on Form 10-K. The committee must ensure accuracy of corporate finance reports and disclosures, corporate management compensation and incentive packages.

The compensation committee is a key advisory committee charged with recruiting and retaining talent and continuity of company operations. The committee must be composed of professionals knowledgeable of industry standards of compensation, and the goals and strategies of the company’s board regarding corporate performance. The board of director’s advisory committee should be composed wholly, where possible, of independent and non-employee directors to ensure compliance with Sarbanes-Oxley and listing regulations. Good governance models involve assessment, coaching and a leadership style committed to personal growth of corporate management.

If you have come to the opinion that the compensation committee has a lot on its plate and is the center of many heated debates – conversations between the board and management – you are correct. Compensation is one of the points where shareholder and management interests are in dynamic tension. The shareholders want the company to be able to recruit and retain top talent – but not to overpay or over incentivize it. Management wants to get all that it can.

At times, I have found it prudent to install a truly independent review process – a mediator or, if necessary, an arbitrator – between the committee and management. That approach has worked as a kind of safety valve. It has helped to avoid all out warfare and saved companies from very costly internal conflicts. If you are interested in learning more about my board advisory services, send me an e-mail and we will arrange a time to talk.

© Dr. Earl R. Smith II

Related Articles:

• Board Assessment – A Critical Part of Good Governance
• Corporate Talent – Coaching and Retaining the Best
• Board of Directors Responsibilities – Compensation Committee
• Lessons of Complacent Boards
• Compensation Committee Powers
• Board of Directors – Evolution through Devolution

Dr. Smith is Managing Partner of The Federal Circle. The Federal Circle partners with teams and existing companies. We help them up their game and win big in the Federal space. We also arrange funding for acquisitions and expansion by acquisition. Our model is based on the belief that, if you select the very best and work with them in a highly professional and focused manner, the results will be truly amazing. He is the author of Amazing Pace: Turbo-charged Business Development – a book that shows how Advisory Boards can dramatically increase revenue. Dr. Smith is also the author of Dream Walk: Parables for the Living – a book of Raven Tales and exploration.

This entry was posted on Tuesday, October 28th, 2008 at 9:07 AM and is filed under Governance. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.