Over the past few years, companies, and their boards, have come under increased scrutiny regarding their approach to an ever-growing array of environmental, social, and governance factors. One issue in particular — executive compensation — has left regulators, legislators, shareholders, and investors eager for greater transparency into how decisions are made. As a result, more and more companies are adding a Compensation Committee to their boards.
Inovia recently invited Marie Josee Lamothe to speak with talent functions from a few of our portfolio companies to help them better understand the role of Compensation Committees. Marie Josee is the President of Tandem International, an advisory firm that helps organizations scale globally. Prior to this, she was the Managing Director at Google Canada and held executive positions at L’Oréal and Procter & Gamble. She also sits on several boards, including Inovia portfolio company Lightspeed Commerce.
Below are some of the key insights Marie Josee shared during the discussion about Compensation Committees and compensation best practices more broadly:
The role of HR is evolving
Not all that long ago, HR was often viewed as an administrative function responsible for payroll processing and other tactical activities. As regulatory scrutiny has grown, issues like governance and compensation have become of much greater importance. As a result, HR has had to evolve into a more strategic function that works in close partnership with the CEO to help manage social responsibility across the business.
Rigour is essential
Lack of rigour and consistency in a company’s approach to compensation leads to inequities. As your business scales over time, that unfairness will only compound, creating a legacy that’s hard to move beyond. Establishing a compensation committee will help avoid that pitfall and ensure that you meet regulatory requirements.
Start early, well before you go public
Even if you’re not a public company today, if your business is on the path to eventually becoming one, it’s critical to lay the foundation necessary to withstand the regulatory scrutiny it’s sure to face in the future. Growth-stage CHROs should assume that their business will be 10x bigger and ready to IPO in the next three to five years. With that in mind, they should develop a multi-year plan that maps out every step they will need to take to prepare.
Take care in setting up your Compensation Committee
Make sure that members are fully independent and have skill sets that complement each other and your HR team. Try to find members who know your business, understand the importance of human capital, and are up-to-date on the most recent legislation in the markets where you do business.
Have a clearly defined mandate for the Compensation Committee
A clear mandate will set your committee up for success by clearly defining roles and responsibilities for members of the Compensation committee while also distinguishing it from other committees, like audit and risk, in terms of responsibility and authority.
- Writing a committee charter that can adapt as the committee’s role expands, will ensure ongoing clarity and alignment. The committee charter is often subject to investor rights agreements regarding the composition of the board and its committees. These discussions will evolve as your company enters IPO readiness mode.
- The purpose of a Compensation Committee is to assist the board of directors in overseeing senior executive compensation and succession planning and director and executive compensation disclosure.
- With increasing scrutiny from authorities and stakeholders of a board’s approach to ESG, the committee has also assumed the responsibility of assisting the board with corporate governance, board composition, and corporate environmental, social and governance programs. This role can include setting up proper governance and KPIs around human capital management and compensation-based performance, diversity, equity and inclusion and other social concerns.
HR and the Compensation Committee must work hand-in-hand
The HR team’s role is to design, recommend, and implement compensation plans for the committee, while the Compensation Committee’s job is to oversee and make sure that actions align with the most recent legislation and regulations. Ultimately, the Compensation Committee should bring additional insights that the HR team needs to help prepare the company to go public.
Develop a holistic view of compensation
Executive compensation is about more than just salary and bonus. You also have to consider equity, RSUs, long-term incentive plans, pensions, and any additional perks, as well as what you’ll have to pay out in the event of a termination. Get your arms around the full picture, and make sure to map out when payouts are due over the next five years. You want to have a long-term view of the different dynamics at play that inevitably drive retention, such as anticipating significant cliffs as options vest.
Make sure your peer set is up-to-date
As your company grows, the peer set you use to benchmark your employees’ salaries, bonuses, and other compensation will need to evolve. While selecting a peer set is straightforward when you’re a private company, it becomes much more strategic after you go public. Make sure that the peer set you choose is not only appropriate for the size and stage of your business but that there is complete alignment with all of the key stakeholders, board and committees.
Compensation Committees help ensure companies develop fair, transparent executive compensation policies that adhere to regulatory requirements. When you’re on a growth trajectory, it’s imperative to establish a Compensation Committee so that you’re able to add the necessary rigour for your company to successfully manage compensation in an age of increased regulatory scrutiny.
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