The Handbook of Board Governance, 3rd Edition

46The Effective Compensation Committee

Steven E. Hall, BA, MBA

Managing Director, Steven Hall & Partners

Few topics attract as much attention as the levels of compensation paid to top executives at public companies. At a time when chief executive officers (CEOs) report pay packages in the tens of millions of dollars, the average American questions how anyone could be worth that amount of money, especially when they compare it to their own paycheck. Recent CEO pay ratio numbers show that the average CEO in the 200 largest companies is making about 350 times the median worker at their companies.

Contrary to many who may not understand the risk attached to the different components of executive pay, or who believe that CEOs set their own pay levels, either directly or indirectly, it is the compensation committee of the board of directors who oversees, considers, and approves the pay program and levels of pay for the senior management team.

Compensation committee members of today recognize that their decisions and reputations are subject to second-guessing by shareholders, through required say-on-pay votes, by shareholder advisory organizations like Institutional Shareholder Services (ISS) and Glass Lewis, and, of course, the press. All of which has resulted in the view that service on the compensation committee is more challenging than that of the audit committee.

Compensation committee members can no longer hide behind weak corporate disclosures. Every decision that they make ...