9. The Role and Functioning of the Compensation Committee

Harry Truman’s desktop placard “The Buck Stops Here” applies
very appropriately to the compensation committee on matters of
executive compensation for the CEO and other senior executives.
While management and external experts, such as consultants,
attorneys and governance groups, play important roles in shaping
executive compensation, it is the compensation committee that
renders the final judgments and makes the final decisions on all the
key items of a company’s executive compensation program.
This chapter explores the unique and important role played
by compensation committees at most publicly held companies.

The chapter first describes the typical responsibilities for the compensation
committee, what a committee calendar might look like over a
typical year, how meetings are formatted and organized, and the use
of an outside consultant. To give readers a good idea of how these
structural issues can vary from committee to committee, the author
first describes each topic in general and then explains how each
might be handled in three different hypothetical company settings–
a high growth successful company, a troubled technology company,
and a traditional manufacturer.

The chapter then describes a number of areas requiring the
committees attention including setting an overall compensation
philosophy, making compensation decisions for the CEO and other
senior executives, setting stock ownership objectives, determining
compensation for the board itself, and monitoring deferred compensation.
The author again uses the three companies to show how
compensation committees, faced with the same issue but within
different settings, reach appropriately different conclusions as a
result. Lastly, the chapter focuses on three special issues that may
arise for a compensation committee—the need to create one or more
employment agreements, the question of repricing (canceling and
reissuing) stock options, and the need to determine a compensation
package for a new CEO. —Editors



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