Planning to Improve the Effectiveness of Your Compensation Committee

Planning to Improve the Effectiveness of your Compensation Committee

Wilkening & Company believes that it is essential that the Compensation Committee (or any other Committee) of the Board of Directors plan and allocate its resources to address those issues or decisions that they will regularly face each year. In addition, the Committee must leave time for those last-minute emergencies that always arise. This is a challenge that any Committee or Board can successfully address if it looks ahead.

By planning ahead, we mean that the Board should:

  1. Establish or identify all known annual agenda items for the Compensation Committee to consider or act upon each year; and
  2. Place each on an appropriate Committee meeting agenda.

Agenda items can either require action or merely provide background, information or updates to the Board or its Committee.

As an example of what we suggest, let us assume that the Board of (a fictitious) XYZ Corporation establishes four meetings each year for its Compensation Committee. This is a common meeting practice and frequency that is often tied to the meeting schedule of the full Board. Then, let us create a possible draft 2011-12 planning calendar for the Compensation Committee arranged by meeting. That example is shown below.

Draft Compensation Committee Planning Calendar for XYZ Corporation
2011-2012

Committee Meeting
Action Items Planned
Subjects for Board Consideration or Briefing

November 2011
  • Approve goals for 2012 annual and long-term incentive plans
  • Approve salary structure and pay increase budgets for 2012
  • Approve benefit plan structure for 2012
  • Review year-end 2011 incentive forecasts and projected profit reserves
  • Review of HR budgets, staffing & investments
  • Review HR and compensation “dashboard”

February 2012
  • Approval of 2011 incentive payouts
  • Approval of profit-sharing/benefit contributions for year past (distributed) in 2012
  • Selection of Board advisor(s) for 2012
  • Evaluation of current incentive plans versus best practices & select benchmarks

June 2012
  • Establish CEO compensation plan for coming 12 months
  • Approval changes to 2013 compensation strategy or incentive plans, as recommended
  • Report on officer succession planning by CEO
  • Report on CEO succession planning by Chair
  • Annual evaluation of CEO performance
  • Review HR and compensation dashboard

August 2012
  • Re-approve and acknowledge all compensation contracts (non-LTI) over pre-set limit
  • Compliance briefing on all federal, state or local regulations impacting people or pay
  • Informational briefings, as selected by Board

Note that in the proposed November meeting subjects for Board consideration and briefing (last column); we include an agenda item called: “Review the HR and compensation dashboard.” In our example it occurs in both November and June. This falls into the category of reviewing standard information and metrics regarding productivity, cost or risk. We find it helpful for management to discuss these metrics with the Committee at the opening of every (or every other) meeting. In our experience, such a report is brief (one page) and contains such matters as—

  • Trends in employee retention or turnover;
  • Trends in employee productivity—sales per, units per, profit contribution per;
  • Trends in compensation and benefit costs in aggregate and per employee;
  • Open and unfilled positions in key job titles; and
  • Known and imminent risks to company impacting employees, pay or benefits.

Some may consider this too much detail for a Compensation Committee to see. Maybe, but I would suggest that a bit of forewarning could be an actual cost and time saver for the Board, and the company.

The proposed planning calendar presented above does not leave much time for the unknown issues that arise and will require the rapid attention of the Compensation Committee. In our experience, 25% or more of the Committee’s time can be taken by those unknown problems that always seem to roll in over the transom. There is no way to plan for this other than to allocate extra meeting time. In short, more time than planned may be (will be) needed to conduct all of the Board’s business. At least your planning calendar will determine the baseline requirement of work to be done at each meeting.

Does your company have a planning calendar somewhat like the one we have drafted for XYZ Corporation? If so, I am sure you will agree that it helps in improving the productivity of the Committee. If not, put one together before the next meeting and see what the Board thinks—bet they like it.

Clearly, a planning calendar can have benefits for all Board Committees, or the Board as a whole. I use one just like this for a Board on which I sit. Sure helps the Chair (me) be sure the Board and management are getting everything done—as agreed and on time.

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