Practical Thoughts for the Evolving Role of the Compensation Committee

Much has been written in recent months about the external forces accelerating investor, proxy advisor and employee focus on the topic of human capital management.

From the Securities and Exchange Commission Form 10-K human capital management disclosure requirement to a broader recognition from investors and insurers that people risk and opportunities are a material environmental, social and governance factor for every company — small and large — the compensation committee is even more central to a firm’s ESG strategy and journey than ever before.

Historically, the compensation committee charter duties were primarily focused on the chief executive officer’s  compensation and performance, as well as those elements for the broader executive officer population. However, as regulator and investor focus has shifted from executive compensation to broader human capital management, so too has the focus of many compensation committees.

In fact, many companies have changed the compensation committee name to reflect this expanded scope of duty: “Human Capital Committee” or “People Committee” are among some of the other derivations of these names. In fact, a majority of respondents in Aon’s Fall 2021 ESG Oversight Survey indicated that “human capital management” and diversity, equity and inclusion are formal duties of the compensation committee. Additionally, many companies have formally updated their charter documents to include oversight of human capital management and, increasingly, diversity, equity and inclusion related duties.

This expanded role into broader people risk and opportunities poses new challenges for the compensation committee. While compensation committees have gotten comfortable with external expectations surrounding executive compensation, the issue of broader workforce management requires a heavier coordination with corporate human resources teams. Like any  ESG topic, board or committee level oversight of a material ESG risk factor, such as human capital management, requires a clear definition of each group’s role, strong communication and information flow practices, along with an effective committee agenda list for each calendared meeting. The role of the compensation committee should not be to micromanage management teams on workforce planning, but to be informed enough on this topic to act as an independent, internal activist on the behalf of shareholders and employees.

Best Practice Considerations
With these aforementioned variables in mind, Aon recommends compensation committees consider the following best practice considerations heading into the 2022 proxy season:

  • Stay Informed. Stay current on regulations, investor expectations, and employee and market sentiment as it relates to the workforce. Use your compensation consultant or outside governance advisors to obtain necessary trends and information.
  • Ask the Right Questions. Be clear on what the company’s human capital and diversity, equity and inclusion-related goals are, and how they are tracking and defining success or failure. Know the extent to which such information is publicly disclosed or not, and understand if all such disclosures are consistent across all public forums.
  • Think Holistically. External observers are not looking at executive compensation decisions in isolation anymore. How your bank pays the CEO and other officers will be compared to how it treats the broader workforce. If you have lay-offs, furloughs or broader workforce compensation cuts, there will be an expectation that executive compensation be aligned with those broader actions. Stakeholders are evaluating executive compensation decisions in a broader context, so it is important to factor in all of these variables. It may also require greater coordination with the nominating and governance committee, if they own succession planning duties.
  • Give Yourself Credit. With human capital management being a material risk factor for virtually all industries, it is important to tell your story. If you do not proactively do this, someone else will — and it likely will not be favorable. Give yourself credit for the oversight, process, and practices that you have worked on with management to cultivate a meaningful human capital management strategy.