Top Compensation Committee Issues

Nicholas J Price
With the increased scrutiny on compensation, committees have the challenging task of reviewing how the company has structured plans in the past compared to how they've been structuring them recently. They're also looking at how compensation should take shape. For the near future, compensation will continue to remain on board agendas, and scrutiny over it may intensify. Committees will continue to try to straddle the fence between offering attractive compensation packages to attract the best talent and holding the line on reasonable compensation by shareholder standards. This is the best time to review past practices and make adjustments that meet modern governance standards.

Top 10 Compensation Committee Issues

Here's a list of the top 10 compensation committee issues that boards need to be prepared for:
  1. Expansion of the role of the compensation committee.

The role of the compensation committee will broaden to encompass oversight over a greater set of issues, in addition to developing compensation plans and packages. Part of the new focus will center around talent development to help fill in gaps in skills and experience for companies looking to prepare their current employees for future leadership positions. To fulfill all their duties, compensation committees will need to streamline their agendas to free up ample time for important strategic discussions.
  1. Getting better acquainted with non-financial metrics.

Today's investors are looking for additional criteria to enhance financial metrics. Research has shown that several other non-financial drivers help to create long-term value creation. Investors are interested in what the non-financial metrics are, how much influence they have and how they integrate with the financial metrics. The combined results provide a more holistic picture of how to inform and reward long-term performance. The reports that leaders produce provide an indication to shareholders and others about the types of information the committee deems important.
  1. Reviewing and revising shareholder return plans.

About half of S&P 500 companies used rTSR in their long-term incentive plans during the 2018 proxy season. Some companies feel that rTSR helps to reflect the impact of the volatility over several years in ways that other metrics fail. Some boards believe that rTSR is simpler than other metrics and that it's easy to defend by showing how pay outcomes align with shareholder experience. Committees will need to review their plans and balance the concerns of external stakeholders with the incentives they offer.
  1. New issues prompting changes in director pay.

Boards and compensation committees have been pressured to consider board diversity, education, refreshment and additional programs, and these issues call for changes in director pay. Institutional investors are reviewing director compensation as part of their 2019 voting guidelines. ISS plans to release its methodology for its assessments in the 2020 proxy season. Boards should be aware of these changes and that they could stand to increase shareholder activism.
  1. Anticipating unexpected impact on compensation plans.

The volatility of the marketplace means that a multitude of issues could impact compensation plans. New challenges should signal compensation committees to review their adjustment policies so they can respond quickly to unprecedented and unforeseen issues. Committees need to consider how they've structured things in the past and what could happen if they don't change anything. They need to consider which issues have become the 'new normal' and how strong any potential impacts could be.
  1. Considering the impact of AI and big data.

Technology disruption is a major factor that will affect how companies operate over the next five years. The rise of artificial intelligence and big data may require new additions to the C-suite such as a CAIO, or Chief Artificial Intelligence Officer. This is a fairly new concept, but one that boards may be forced to entertain over the next few years. The overall pay structure may need to change to account for a new executive structure.
  1. Taking a comprehensive look at the compensation committee's charter.

In light of the expanding role of the compensation committee to consider new issues like culture and talent strategy, boards will need to update their charter accordingly. This will require re-thinking some of the more fundamental elements of their charters for the 2019 proxy season and making necessary amendments.
  1. Recognizing the increased competition for talent.

There's always been a slight competition for the best board and executive talent. Competition within industries, combined with expectations for higher pay, will increase the corporate leadership talent wars. Compensation committees will need to devise new ways to balance how to attract quality talent while leaving a protective financial cushion for situations in which things don't work out.
  1. Preparing for a downturn in the market.

The market has bounced back some from dealing with previous crises; however, it's not inconceivable to believe that a stronger downturn could be looming in the near future. While it's not an issue that board directors want to talk about, a downturn would impact the compensation strategy materially and the better committees are prepared for it, the better they will endure it.
  1. Re-evaluating clawback policies.

In light of highly public, popular issues like reputational risk, cybersecurity and the #MeToo movement, compensation committees would be prudent to evaluate and expand their clawbacks so that definitions have a broader lens.

Technology Helps to Address Top Compensation Issues

Compensation committees will need to rely more intensively on digital tools such as those provided by Diligent Corporation to adequately address the challenges and demands of compensation committees. Nom Gov is the modern approach to effective board recruitment because it empowers boards with analytics that support highly effective and diverse boards.

Governance Intel is another digital solution that helps compensation committees get and stay ahead of the times by eliminating the barriers to open web news, subscription news and proprietary data.

This program combines and aggregates subscription sources and internal data with over 70,000 authoritative open-web business news sources using one powerful research and discovery tool. At the same time, this digital tool can help your board better research and prepare when reputational, governance and shareholder activism risks do arise.

These tools and other digital software solutions by Diligent Corporation represent the modern governance approach to dealing with the many challenges that modern boards face every day.

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Nicholas J. Price
Nicholas J. Price is a former Manager at Diligent. He has worked extensively in the governance space, particularly on the key governance technologies that can support leadership with the visibility, data and operating capabilities for more effective decision-making.