June 10, 2021 Laura Morgan

Our compensation committee doesn’t like that our bonuses are not aligned – What can we do?

Ever have that conversation with your compensation committee that ended with “I’m sure all of what you’re doing is fantastic, we don’t have any questions, so let’s get together again next year”?

I did not think so. 

As you know, the compensation committee is not formed to just let things shape on their own.  Shareholders look to company boards, particularly the compensation committee, as their stewards to review and approve executive pay.  Boards in turn work closely with executive leaders in matters relating to employees, operations, partners, customers and overall financial performance.  Some compensation committees dig deeper and wider to not only review executive pay but review and question broader key HR practices. 

The fact that most directors on the compensation committee are independent, have diverse experiences and exposures, and are held to significant standards, rules, and laws, make their influence levels stronger across the HR spectrum.  The board is chartered to champion responsible corporate governance and be morally responsible.  The board and the compensation committee are further challenged to cultivate an image to be more inclusive and responsive to stockholder concerns.  In turn, most compensation-related projects that I’ve been chartered to deliver were stemmed from a compensation committee’s specific request to address a perceived gap or issue.

The most common compensation committee request that I have received, centers on bonus plan design and performance metrics.  What worked for a company for years may suddenly be subject to a challenge when a new compensation committee member asks a simple question, “why does this plan have so much discretion?”  Ever hear questions like that?  I’m sure you have or you will soon.

As company’s grow, pay design and delivery need to be reviewed.  The CEO at one point may have known every single employee.  The delivery of the bonus awards in those days may have been motivational, relevant, and directly performance related.  At some point, though, with continued growth and hiring, the additional layers of leadership and delegation of authority begins to shape new opinions, ideas, and thoughts about how pay is designed and delivered.  The level of ‘discretionary’ awards may turn or feel like favoritism and create images of disparity.  The compensation committee therefore looks for more predictable, unbiased, and relevant bonus plan designs and aligned performance metrics.

With diversity, growth, and layers of leadership, companies find the need to document their compensation philosophy, review their pay design and structures, and communicate and train leaders and educate employees.  Make sure your pay practices are written well enough that all leaders can read the document and then understand it well enough to communicate the intention and delivery process. 

Remember, nothing is true until it is written.