Overview of a Compensation Committee’s Basic Responsibilities
The listing requirements of both NASDAQ and the New York Stock Exchange mandate that a committee of independent, nonemployee directors must have principal responsibility for the compensation of CEOs and other executive officers. Accordingly, as part of their basic responsibilities, compensation committee members regularly will be engaged in assessing the performance and determining the pay levels of executive officers, the design of the compensation programs applicable to them, and the contractual arrangements governing their employment. The compensation committee members typically also are responsible for formulating share ownership guidelines, compensation clawback policies, insider-trading and anti-hedging policies, and approving compensation-related proxy disclosure.
The compensation committee also is tasked with assessing the link between compensation and enterprise risk management. In that regard, since 2009 the SEC in Item 402(s) of Regulation S-K under the Securities Act of 1933 (as amended) has required a company to disclose whether “risks arising from the registrant’s compensation policies and practices for its employees are reasonably likely to have a material adverse effect on the registrant” and, if so, to disclose the compensation policies and practices as they relate to risk management. As a practical matter, this has led companies to engage in a careful risk assessment of their compensation programs, not limited to those applicable to executive officers. Given the ultimate oversight duties of a board of directors, and the specialized knowledge possessed or developed by members of the board’s compensat
“Risky Business”: The Expanding Risk-Oversight Responsibility of Compensation Committees
IN BRIEF
- In the United States, the past 15 years have witnessed a parade of corporate crises and scandals in which the conventional wisdom holds that poorly designed compensation incentives played a major contributing role.
- Accordingly, significant pressure has been placed on boards of directors and, in particular, compensation committees to ensure that incentive compensation features and overall plan design do not promote excessive short termism and risk-taking that could harm the long-term interests of the corporation and its shareholders.
- The result: independent directors serving on compensation committees are burdened with more responsibilities than ever before, and many compensation committees are burdened with risk-mitigation-based oversight responsibility for the design of incentive compensation not just at the executive officer level, but further down in their organizations.
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