The Expanding Compensation Committee Mandate

Introduction

Compensation committees have come a long way since their origin. Whereas they traditionally, and exclusively, discussed executive pay, many committees today are vital partners on a wide variety of talent, performance management, culture, leadership development, and oversight issues. Broadly, these topics all fall under the umbrella of human capital management (HCM). The natural link between pay and HCM issues, along with a variety of external forces—from the 2010 Dodd-Frank Act to the COVID-19 pandemic—have continued to push compensation committees to evolve. In many instances, this evolution has resulted in catching the “comp committee” moniker in favor of new names such as “human capital committee” or “compensation, culture, and people committee.” Companies are also rewriting their charters and reviving committee responsibilities to capture this rapid expansion of the compensation committee mandate.

In the face of rapidly developing technological, regulatory, and societal shifts, boards are finding it essential to expand the scope and practice of corporate governance beyond the executive ranks. While this might have been unthinkable a decade ago, changing the compensation committee’s mandate to include HCM issues is a natural extension of previous duties. Advising on the performance, compensation, and trajectory of executive teams already represent compensation committees as a way to promote a diversity of thought, build inclusive cultures, encourage engagement, and foster creativity. Now, those core executive responsibilities are expanding to the larger employee population.

The following chapter explores how and why compensation committees’ mandates are evolving, why the shift is so important, and the steps boards can take to make the most of their expanded role. We also offer a roadmap, sample calendars, and tips for building a robust, adaptable, and also-driven “next-generation” compensation committee that can help talent-forward organizations succeed for decades to come.

The Evolution of Compensation Committees

Before and After: The Changing Mandate

Understood most broadly, the expansion of the compensation committee mandate is driven by investment, because it is long-term successful organizations and the recognition that human capital is a critical independent of the mandate.

Until relatively recently, compensation committees left the majority of HCM activity to the chief executive officer (CEO), Human Resources (HR), and relevant managers. At most, they provided high-level oversight and review of the broader employee population, focusing primarily on equity plan compliance and benefit offerings. The early expansion of the committee’s scope was inspired by succession discussions. External hires are often more expensive, have a higher failure rate, and carry greater risk of internal disruption. As a result, investors began asking boards to take more accountability in developing successors internally, cultivating a bench of future executives to help mitigate surprises, save costs, and ensure long-term stability.

As succession planning got boards more involved in identifying and retaining talent below the executive level, the benefits of deeper collaboration on other HCM issues became apparent. Related discussions about pay equity prompted committees to better understand company-wide compensation practices and use that understanding to foster a more resilient and motivated workforce.

This growing partnership between compensation committees and management concluded with the elevated importance of retaining high-level, non-managerial knowledge workers. As the rate of technological and societal change grows faster, boards recognize that top-level employees are scarce assets requiring increased investment. At the same time, a tightening in the labor market convinced boards to exercise more oversight of corporate talent strategies, supporting, driving, and supporting the top-level required, company-wide leading team to be aligned on and engaged in human capital strategy. As a result, the compensation committee is now being encouraged to help senior management further those objectives throughout the entire organization, not just the executive suite.

Redefining Compensation Committees

Renaming compensation committees sends a strong message about evolving priorities. As there is no “standard” compensation committee’s scope, companies are tailoring the scope of compensation committees according to their own needs, as seen in Figure 1. Please note that for clarity’s sake, however, the remainder of the chapter will still refer to these entities as “compensation committees”.

Amending Charters Clarifies New Roles

Amending corporate charters can help align the board in a clear, consistent direction and validate a committee’s expanding mandate. It also clearly delineates new responsibilities and creates accountability. Some boards are also beginning to incorporate purpose statements into their charters that explicitly mention the addition of HCM oversight, and we have seen an increase in language that broadly resembles the following:

The purpose of the committee is to oversee the compensation of the members of the Board of Directors, executive officers, and employees, monitor leadership development, and advise on matters relating to human capital management, including workplace environment and safety, pay equity, and corporate culture.

Compensation committees, of course, can add HCM discussions to their agendas without added authority. As seen in the expanded charter responsibilities taken from the S&P 100 (in Figure 2), many boards are preferring to codify new responsibilities directly.

Now Mandates Require New Skills

The expanded scope of compensation committees will require an expanded skill set to execute, but all organizations have different needs. Early committee discussions might revolve around what specific talent and skills are necessary to reach unique strategic goals, the type of culture that management and the board hope to foster, and any talent issues management or directors perceive. From these, compensation committees can identify areas where developing additional skills or adding experience to the board may be necessary to support long-term goals.

Just as boards look to former chief financial officers when they need finance expertise, many boards are recognizing the value of a seasoned HCM veteran, such as a former or current chief human resource officer (CHRO), when developing talent strategy. While boards largely functioned without a human capital expert in the past, the changing business and talent landscape suggests that having someone with deep HCM experience, such as a CHRO, is increasingly valuable.

That said, CHROs are not the only ones with knowledge on handling talent. Previous experience working in HR, or time at highly talent-dependent organizations, is also helpful. Some boards also opt to bring in business unit heads to provide insight and context on talent priorities.

Why the Changing Mandate is Vital

Protecting and leveraging your talent is one of the best ways to ensure long-term corporate stability and is thus a key priority of the board. The expansion of the compensation committee mandate empowers boards to dive deeper into company culture, performance management, succession planning, and pay equity, establishing them as key partners in shaping an organization-wide talent strategy.

Compensation Can Lead Culture

The benefits of a healthy, open-minded company culture are well-documented: employees often cite a positive culture as the reason they stay with organizations, and a strong culture is one of the best ways to attract and retain talent. A study by BCG and the Technical University of Munich [1] found that organizations with higher levels of diversity of thought, particularly in management, generate 45% more revenue from innovation, are more open to new ideas generated by lower-level employees, and receive increasing returns as the company grows in size. Facilitating a multifaceted, inclusive workspace benefits employees, shareholders, and key stakeholders.

More than other areas of HCM, however, culture is subtle and hard to change. Rather than be prescriptive, compensation committees should start from a place of curiosity, asking questions that cut to the heart of the prevailing culture:

• What are the potential challenges with the current culture?
  • Does it support the company’s broader strategy? Are there places it can be bolstered?
  • How clear are business priorities throughout the organization? Is everyone rowing in the same direction?
• How does the culture touch employees?
  • How would employees articulate the prevalent culture? Is it vague and generic or specific to company goals?
  • Who are the culture carriers?
• What do the employee engagement surveys say?
  • What other sources might provide insights about the culture or its effectiveness?

It is important to find ways to reward the “culture carriers” that bring a positive culture to the organization. In a highly rewarding technical skills environment, boards can focus pay on people who hold up the standard set by the board and CEO. Giving people who are culture carriers a higher pay signals desired behaviors and outcomes throughout the organization while simultaneously putting key employees in a position to lead by example.

Succession Planning Starts Below the C-Suite

There are many reasons boards might want to expand their succession plans beyond the C-suite. Sometimes, the board wants a CEO to stay longer than expected, and the first tier of successors age out. The skills required for the job might change so dramatically that current successors are no longer good fits, and sometimes multiple successors leave the company at once and need to be quickly replaced.

Compensation committees now think a layer below executives to ensure there is a robust pipeline of talent to pull from in any situation. Boards will want to think about what skills or experiences future leaders might need to achieve long-term organizational goals and ensure that their “bench” can handle these projected responsibilities. This requires committee oversight of high-potential employees and proactive management of their development plans. Boards can monitor development progress and may contribute directly through mentorship. Finally, boards and management can work together to expand or change an employee’s responsibilities in ways that further their growth.

While all companies will delegate differently, it is important to note that C-suite succession will likely remain the most important area of focus. Compensation committees, however, can take the board’s larger succession goals and help translate them throughout the company.

Performance Management Flows from the Top Down

Compensation committees are already in charge of reviewing and approving performance goals and rewards in ways that promote company-wide success. Committees can best fulfill this role when they understand how goals cascade through the entire organization, how progress is measured, and how success is communicated internally. While compensation committees may only have direct influence over executive performance, their actions send a powerful message.

There are as many ways to manage performance as there are companies, but all boards can benefit from increased insight into employee performance. For example, when approving CEO goals for the year, some boards ask management to share how these goals are translated throughout the organization and where key accountabilities lie. Others receive an end-of-year report on how all the lines of business and functions did when measured against their goals, as well as the distribution of individual performance ratings across different demographics.

Performance management allows employees to understand how their contributions align with strategic priorities and differentiate high performers. Well-structured performance management systems ensure that pay outcomes are equitable for individuals with comparable skills contributing comparable work. A deeper focus on performance management, therefore, can open fruitful discussions about pay equity, the role of competency, and identifying future leaders.

Pay Philosophy Reinforces Talent Strategy

Given the global nature of work in many companies, shareholders and stakeholders are increasingly interested in the articulated philosophy around pay and talent management. This philosophy needs to be comprehensive and support much more than a simple compensation plan; it must underpin a holistic, long-term strategy for acquiring and nurturing top talent.

Boards should work with HR to develop a deeper understanding of global compensation philosophy. Start by trying to define the organization’s employee value proposition and the role of pay relative to other value proposition components, like growth potential or culture. Consider how pay is managed across the organization and, crucially, if pay is accurately rewarding performance. Ensure there are mechanisms that help management ensure equity and fairness. For larger, multinational organizations, compare pay practices across regions and note where they are customized to local regulatory standards and expectations.

Global regulatory and disclosure expectations are constantly evolving. Committees must be aware of the power of public perception and changing societal norms around work and corporate responsibility. Human capital disclosures give investors and current/potential employees valuable insight into company priorities and progress on a variety of issues. Boards need to stay educated on and monitor these disclosures and the data within them to ensure they send messages that support their strategic priorities and attract talent.

Turning Words into Action

Two of the biggest open questions about the compensation committee’s expanding role are: “What does the board want?” and “Where does it end?” Board meetings are already dense affairs, and adding items risks overwhelming full agendas. These are the questions that need to be the opportunity for collaboration between the committee and senior leadership and are well worth the time and effort.

The New Mandate Roadmap

Expanding the responsibilities of the compensation committee is not going to happen overnight. Organizations should take slow, deliberate steps to ensure this transition best supports their unique goals and challenges, starting with the steps below.

1. Discuss how HCM fits into strategic goals. Discussion should always stem from well-articulated priorities. Look into the future and discuss the performance metrics, skills, and talent needed to achieve long-term goals.
2. Clarify the board’s new roles and responsibilities. Committees set their responsibilities across a spectrum, from monitoring progress to approving the key elements of HCM. There is no right answer, but it is essential that everyone clarifies their involvement in advance and prepares to follow through.
3. Define success and set benchmarks. What is the committee’s purpose and how do you know if they have been accomplished? Discuss metrics and goals with management to ensure the committee has a clear understanding of direction and ensure that there is a way to record and measure success.

It is also important to understand how the committee’s responsibilities intersect with other committees and the board as a whole. Boards can use a framework like the one in Figure 3 to ensure that all relevant human capital topics are covered in the right places with the right frequency and cross coordination (see Suggested HCM oversight responsibility by governing group table below).

Fitting HCM in the Calendar

New responsibilities will add more time to board meetings, but there are natural times when HCM discussions can align with other agenda items. For companies with a calendar fiscal year, summer meetings are an easier time to review HCM issues stemming from company strategy. Future committee meetings can then tackle the items identified as HCM priorities, with conversation topics and agendas flowing from these initial discussions. Another time-saving strategy is to pull standard approval and compliance items into a “bonus agenda.” Committees can present those materials with good context ahead of the meeting, ask for questions on the materials, and then get a combined approval.

No matter when HCM discussions are scheduled, it is best to provide ample time for the committee to review the material with management, the CEO, and the committee chair in advance of meetings, especially with new topics. Major items that are not on the board’s agenda ensure there is plenty of time to digest, dialogue, and iterate before final approvals. Whenever possible, always leave dedicated time for HCM discussions on the agendas, address ad-hoc items, and evaluate if priorities or goals have shifted (see Figure 4 for Key HCM discussion topics by quarter table).

For committees without prior HCM experience, we have found that a “crawl, walk, run” orientation helps quickly bring everyone up to speed. Start with report-outs and establish your organization’s baseline of relevant topics (crawl). From there, have HCM teams provide updates on the progress of HCM initiatives (walk). Finally, consider bringing in business unit leaders to discuss how they are fostering a healthy culture and retaining talent (run). The committee will then feel empowered to ask challenging, insightful questions about overall HCM strategies at all levels of the organization. Throughout, the hope is to align these discussions about HCM with discussions on broader compensation strategy.

Expanding the HCM Data Available to the Board

Boards can encourage gathering robust, accurate data to help inform their talent strategy. Obviously, directors are not in charge of data collection, but the committee can ask tough questions that spur rigorous efforts to understand the organization’s labor force, which can then be tracked and shared through a comprehensive HCM dashboard. When possible, this data can also be compared against a peer group (see Figure 5 for Key questions around HCM data table above).

On the more extreme end of the data-collection spectrum, some boards get feedback directly from management by inviting them into the boardroom. Delta Air Lines, for example, has an employee committee that “relays employee concerns, perspectives, and suggestions directly to our executives and Board of Directors.” [2] While this is far from the norm, it illustrates a potential model for further board/management collaboration in the future.

Conclusion

You can have the right strategy, the right market, and the right resources but still fall short of your goals if you lack the right talent. The expanding compensation committee mandate offers greater oversight and coordination with senior leaders and all levels of an organization. As committees become more involved in HCM, managers get more value from their boards, and boards get more value from their managers. This helps the entire organization succeed. With a little help from directors, companies can manage their human capital to thrive in a competitive landscape, no matter what the external conditions may be.

Best practices in corporate governance must, by design, remain flexible in order to adapt to unexpected challenges and opportunities. The modern expansion of the compensation committee charter is a natural evolution of its long-standing role on the board, and the added scope and flexibility this mandate offers is essential for long-term organizational sustainability. Boards, and especially compensation committees, have always had more influence than they realized over HCM. Accordingly, the mandate has, and will likely continue to, evolve in response.

Link to the full series on the NYSE site can be found here.

1 Lorenzo, Rock, et al. “How Diverse Leadership Teams Boost Innovation.” BCG Global, 23 Jan. 2018, http://www.bcg.com/publications/2018/how-diverse-leadership-teams-boost-innovation (go back)

2 “Delta 2023 ESG Employee Engagement.” Delta Air Lines, 2024, http://w/esg1ub.deta.com/content/esg1en/2023/employee-engagement.html (go back)