Compensation Committee 101: What Does It Do?

Written by Paul R. Dorf, Ph. D., APD

Upper Saddle River, N.J. – June 8, 2005 - The increased focus onrepparttar size of Executive Compensation Packages and their apparent disconnect withrepparttar 151015 realities of company performance have placed tremendous concern on a company’s decision making process. Add to thatrepparttar 151016 issues of corporate governance, and you now have placedrepparttar 151017 Compensation Committee very much inrepparttar 151018 limelight. But what isrepparttar 151019 role ofrepparttar 151020 Compensation Committee?

The Compensation Committee is appointed by and serves in an advisory role to a company’s Board of Directors. It makesrepparttar 151021 important final decisions on many executive compensation matters, includingrepparttar 151022 types and particulars ofrepparttar 151023 pay plans themselves,repparttar 151024 amount of compensation, and evenrepparttar 151025 performance measures and specific targets upon whichrepparttar 151026 executives will be judged for purposes of calculating incentive awards. In its capacity,repparttar 151027 Committee is responsible for functioning both in a strategic role, as well as serving in an administrative capacity. Strategically,repparttar 151028 Committee must consider howrepparttar 151029 achievement of overall corporate goals and objectives can best be supported throughrepparttar 151030 use of specific compensation programs that will support a pay-for-performance environment. From an administrative standpoint,repparttar 151031 Compensation Committee must undertakerepparttar 151032 necessary studies, evaluate alternatives plans, recommend elements ofrepparttar 151033 Executive Compensation Package including, salary programs, short-term and long-term incentives, and supplemental benefits and perquisites forrepparttar 151034 Corporate Officers. Ultimately,repparttar 151035 Committee ensures that these programs are installed and administered in such a way as to achieverepparttar 151036 desired results.

The following arerepparttar 151037 primary duties and responsibilities typically assigned torepparttar 151038 Compensation Committee byrepparttar 151039 Board:

·Developrepparttar 151040 Compensation Philosophy forrepparttar 151041 Company and ensure that it is consistent withrepparttar 151042 company’s business strategy, mission, and culture.

·Approve any compensation plans in which Officers and Directors are eligible to participate, subject torepparttar 151043 review ofrepparttar 151044 full Board and shareholders, as appropriate.

·Responsible for recommending, providing oversight, and approving awards of stock options and other equity, perquisites and other benefits, and employment and change of control contracts, subject to Board and shareholder approval, as required.

A Primer In Executive Compensation In Not-For-Profits

Written by Paul R. Dorf, Ph. D., APD

Upper Saddle River, N.J. – July 19, 2005 - A tremendous amount has been written about Executive Compensation, and lately, most of this information has been extremely unflattering. Much ofrepparttar criticism has resulted fromrepparttar 151014 gross excesses, misinterpretations of regulations, andrepparttar 151015 rash of criminal cases brought againstrepparttar 151016 top management of a number of large firms, such as WorldCom, Tyco, Enron, and a host of others. Virtually every day another egregious example of corporate greed has come to light. The effect has been a huge increase in media attention, which in turn has acted asrepparttar 151017 stimulus for new government regulations aimed at curbing these abuses. While most ofrepparttar 151018 regulations are aimed at publicly traded companies, there has been some spill-over intorepparttar 151019 Not-For-Profit (NFP) sector. NFPs have their own set of federal and state regulations limiting executive compensation;repparttar 151020 most draconian of these regulations being IRC §4958, or what many refer to as “Intermediate Sanctions”.

It is interesting to note that, forrepparttar 151021 most part,repparttar 151022 regulations covering for-profit, publicly traded companies provide few, if any penalties, and certainly none are spelled out for board members involved inrepparttar 151023 approval of compensation deemed to be excessive. Since in many situations,repparttar 151024 only penalty is that companies cannot deductrepparttar 151025 amount of an excessive compensation payment,repparttar 151026 brunt ofrepparttar 151027 penalty falls ontorepparttar 151028 shareholders. Conversely,repparttar 151029 NFP regulation calls for a 25% excess tax plus a disgorgement ofrepparttar 151030 excess amount. If this does not occur,repparttar 151031 fine jumps to 200%. In addition,repparttar 151032 board members ofrepparttar 151033 NFP, most of who are not paid for their board service, but are merely acting in an altruistic manner, are subject to individual fines ofrepparttar 151034 lesser of 10% ofrepparttar 151035 excess, or $10,000.

What arerepparttar 151036 components ofrepparttar 151037 NFP compensation package? There are traditionally six (6) elements that to one degree or another compriserepparttar 151038 Total Compensation Package of executives, whether or not they are part of a For Profit or NFP. These are base salary, annual bonuses or incentives, long-term incentives which could include stock options, restricted stock, phantom stock, and a large group of equity and cash based programs, typical fringe benefits, supplemental benefits and perquisites, and lastly various written documents or agreements that spell outrepparttar 151039 employment and severance provisions. Inrepparttar 151040 case of NFPs, most of these elements are included but often with scaled-down arrangements. One area that is definitely changing isrepparttar 151041 increased acceptance and use of annual bonuses and incentives. Rather than paying cash compensation inrepparttar 151042 form of salary only, many NFPs are beginning to introduce variable pay. This not only better alignsrepparttar 151043 cash compensation with achievement of predefined results; it also allowsrepparttar 151044 Board to in effect “reduce” pay whenrepparttar 151045 NFP’s situation changes, performance objectives are not met, or when there are cash flow issues. It also allowsrepparttar 151046 NFP to provide a more competitive compensation package that better reflectsrepparttar 151047 realities ofrepparttar 151048 market place. The one compensation element, which heretofore has been virtually missing fromrepparttar 151049 Total Compensation Package, isrepparttar 151050 use of long-term incentives, which typically exists in For Profits inrepparttar 151051 form of equity. This is one ofrepparttar 151052 major disparities between For Profits and NFPs, and it is one ofrepparttar 151053 areas which needs to be addressed in order to begin to “levelrepparttar 151054 playing field” betweenrepparttar 151055 two business groups.

Although it is generally understood that individuals in comparable positions withinrepparttar 151056 For Profit and NFP industries will not necessarily be paid at exactlyrepparttar 151057 same level, there is still a misguided concept held by some individuals, that working at an NFP is rewarding enough, so that their overall compensation should be markedly lower. While altruism is clearly evident, it doesn’t payrepparttar 151058 rent. Recognizingrepparttar 151059 ability of an NFP to pay reasonable levels of compensation, without harmingrepparttar 151060 organization’s ability to carry out its mission, should be a main consideration in determining what compensation elements compriserepparttar 151061 package, and in what amounts.

Is it appropriate to provide short-term and long-term incentives? Short-term incentives are generally associated withrepparttar 151062 achievement of annual financial and/or operational goals. These goals are typically set atrepparttar 151063 beginning of a fiscal year, and their achievement is part of a tactical plan to advancerepparttar 151064 NFP’s mission. To ensure that these awards do not become an “entitlement”,repparttar 151065 Board must set realistic but stretch objectives, and determinerepparttar 151066 actual level of accomplishment against those performance measures when granting awards. Paying out bonuses whenrepparttar 151067 performance is not achieved, orrepparttar 151068 measures are a “slam dunk”, sendsrepparttar 151069 wrong message and defeatsrepparttar 151070 intent ofrepparttar 151071 entire incentive system.

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