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In a publicly-traded company, the answer is fairly simple.  The Committee consisting of “Independent” Directors is appointed by the Board of Directors. It is responsible to the Board (and ultimately to the shareholders) for carrying out their duties. They are – determining and approving the Executive Compensation Package etc.

Overall responsibility

The compensation committee has many responsibilities relating to the company’s overall compensation philosophy, structure, policies and programs.  The advisers’ independence should be assessed under applicable law and stock market rules. Also, they should feel confident & comfortable that its advisers have sound ability. It should be free from any competing interests.

Compensation Process

CEO and senior management compensation

A major responsibility of the compensation committee is establishing performance goals and objectives relating to the CEO. Then,  measuring performance against those goals and objectives is important. Also, determining and approving the compensation of the CEO. is a major task of the committee. The compensation committee also generally approves or recommends for approval the compensation of the rest of the senior management team.

heed to shareholder’s interests.

Executive compensation should be designed to align the interests of senior management, the company and its shareholders.  It should foster the long-term value creation and success. Compensation should include performance-based elements that reward the achievement of goals tied to the company’s strategic plan. But, they are at risk if such goals are not met. These performance goals should be clearly explained to the company’s shareholders.

Compensation costs and benefits

The compensation committee should understand the costs of the compensation packages of senior management.  And they should understand the maximum amounts that could become payable under multiple scenarios . Such as retirement; termination for cause; termination without cause; resignation for good reason; death and disability etc. The committee should ensure that the proper protections are in place that will allow senior management to remain focused on the long-term strategies. Moreover, take care of business plans of the company even in the face of a potential acquisition, shareholder unrest.

Stock ownership requirements

To further align the interests of directors and senior management with the interests of long-term shareholders, the committee should establish stock ownership.  Also, they should maintain holding requirements that require directors and senior management to acquire and hold a meaningful amount of the company’s stock. It is for the duration of their tenure and, depending on the company’s circumstances, perhaps for a certain period of time thereafter. The company should have a policy that monitors, restricts or even prohibits executive officers’ ability to hedge the company’s stock.  It should require ongoing disclosure of the material terms of hedging arrangements to the extent they are permitted.

Review and align with long term goals

The compensation committee should review the overall compensation structure and balance the need to create incentives that encourage growth and strong financial performance with the need to discourage excessive risk-taking, both for senior management and for employees at all levels. Incentives should further the company’s long-term strategic plans by looking beyond short-term market value changes to the overall goal of creating and enhancing enduring value. The committee should oversee the adoption of practices and policies to mitigate risks created by compensation programs, such as compensation recoupment, or clawback, policy.

Director compensation

The compensation committee may also be responsible, either alone or together with the nominating/corporate governance committee, for establishing director compensation programs, practices and policies.

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