NACD Compensation Committee Chair Advisory Council Brief

For more than any other standing board committee, the events of 2020 have arguably and fundamentally reshaped the role and function of the compensation committee.

What should be the compensation committee’s responsibilities in the oversight of human capital management and diversity, equity, and inclusion (DE&I) initiatives at the board, management, and workforce levels? How should the scope of that responsibility be reflected in the committee’s charter and reporting? And how do boards compensate executives effectively and fairly in an environment that has challenged each of them like never before? These questions were on the minds of compensation committee chairs when NACD, Farient Advisors, and Weil, Gotshal, and Manges convened some 45 Fortune 500 compensation committee chairs in the spring of 2021.

Why Now Is the Right Time to Tell Your Story

While both the pandemic and the social equity movement of 2020 challenged most business executives, they also created opportunities for companies and their boards to rethink how they approached and shared their compensation and human capital management strategies. Historically, investors were the primary audience of the compensation committee, and the committee communicated its story to their shareholders through the proxy’s compensation discussion and analysis (CD&A). With the emergence of ESG as a key compensation metric, and the growth of the compensation committee’s involvement in human capital oversight, however, more stakeholders are now looking at the compensation committee’s strategy as a key part of the company’s ESG narrative. “As we look back on 2020, it was an extraordinary year. ESG accelerated, with a big focus on the S,” said Robin Ferracone, CEO and founder of the compensation consulting firm, Farient Advisors. “As corporations consider their stakeholders—investors, lawmakers, customers, employees—everyone is looking for the story in terms of plans, goals, and how it advances the corporate strategy.”

The focus on the board’s compensation committee has never been sharper. The components of compensation plans and the link between compensation and company performance are under intense scrutiny from shareholders, employees, policymakers, the media, and other stakeholders. The Report of the NACD Blue Ribbon Commission on the Compensation Committee revisits NACD’s 2003 Report of the NACD Blue Ribbon Commission on Executive Compensation to highlight the new environment in which compensation committees—and, more broadly, boards—are now operating. It recommends that the compensation committee and board work together to establish an executive compensation philosophy that supports the company in creating long-term, sustainable value.

The report includes ten specific recommendations for compensation committees to consider when evaluating their compensation philosophies. It also provides practical tools, such as sample compensation committee charters, a compensation committee assessment, and guidance on executive employment contracts.