Compensation (Comp) committees: what they do, how they’re changing, and the levers of compensation

Happy Thursday from Above Board. We’re very happy to be joined one final time by Debora Tomlin to talk all about Compensation Committees. Debora serves on the boards of LiveRamp (NASDAQ: RAMP), Weave HQ (NYSE: WEAV), and Nexla. She is the former CMO of Symantec, NortonLifeLock, and CSAA Insurance Group.

AB: Once again, thanks for taking the time to share your wisdom with us. What is a Compensation Committee and what is their mandate?

DT: First is performance evaluation: you set the metrics, you look at the peer company benchmarks: what's your group of companies? You can either figure this out by yourself or you can have somebody help you (like a compensation consultant) to identify this group.

Another piece of it is around what kind of organizational construct do we need? The CEO might set up what they want as their management structure and a comp committee can help to confirm or suggest modifications to this plan based on benchmark companies.

The Comp Committee has a big part to play in terms of pay. The comp committee, other than for the CEO, won't typically tell the CEO exactly what to pay their employees or give individual performance metrics, but they will approve total compensation ranges based on benchmark companies. And, they give guidance on the type of compensation based on the peer group. For example, base compensation (salary), short term cash (bonus), and long term incentives (equity). There are different variations and metrics of both short and long term incentives, and the Comp Committee will advise the CEO and management based on their company objectives and reference peer group.

Depending on how early stage the company is, the Comp Committee may also help with job descriptions. The company may not need this depending on the state of their HR team.

The Committee will also consult on offers that candidates or existing employees are receiving.

This is probably more applicable to public companies but a Comp Committee is responsible for governance and disclosures. For example, if LP’s need reports, or if you're public, it’s your annual Proxy Statement.

A new category of responsibilities for Comp Committees I'm seeing in both public and private companies is around talent and diversity. This is why we see the Compensation Committee being renamed as a ‘Compensation and Talent Committee.’

Some questions this Committee might address: Do you have the right talent on your team? Is there appropriate support for the management team? Are you managing your talent correctly? A great example was, during COVID, the question around work from home. What are your policies for work from home? How do they benchmark compared to competitors? What other perks of benefits do we want to offer? Do you want to offer a sabbatical? That's an area where I’m seeing public companies adding to Compensation Committee charters now; again, not to make the final decision but to ask the questions and advise management.

AB: What types of roles do you think should and shouldn't be within the purview of a Comp Committee?

DT: For public companies, it's really clear because you have a public charter. Within the Comp Committee’s purview is the CEO and usually direct reports of the CEO or what they call ‘Section 16 Officers’ which are the most highly paid people in the company.

For a public company, we have purview into the performance metrics and equity of anyone down to director and we approve annual grants. But we're not making decisions about vice presidents and directors typically, and I wouldn't think we would in private companies either, when we get to a point where we need a Comp Committee.

AB: Do you have thoughts on whether to lean on the lower or higher end of industry benchmarks for equity bands?

DT: That's a great question. For public companies, it depends on the role, but what I'm seeing in tech is the 50th percentile is where you want to be. Some people you might bring in a little bit lower or higher (for example, for the last few years in the SF Bay Area, it wouldn’t be uncommon for engineering talent to come in higher than 50th percentile). 

Or, if they're really superstar performers or bring a unique skill set, you might float them up toward, you know, closer to the 75th percentile, especially in the last few years. Typically, though, you want to stay in the “middle of the fairway” with your peer group, if possible.

With that said, in my personal experience, while we might set ranges or benchmarks based on our peer group, we have flexibility and we give the CEO flexibility. Sometimes you'll hire someone who has never had that role before, but they have a ton of runway, or unique skill set. 

On the other hand, sometimes you get really seasoned candidates who are going into a second part of their career or they are so likely to bring so much to the table that you might want to float the equity offer outside of a range. And that is definitely something that I've seen us do. 

What I will say is we're very clear on why, because pay transparency is very important. It’s not that everybody should see everyone's salary, but you never want employees to feel like my colleague makes a zillion dollars more without any reason.

There are no hard and fast rules. When you get to be a public company, you've probably seen that with ISS and Glass Lewis, there are rules that stipulate from the lowest paid employee to the CEO, the range cannot exceed certain amounts.

AB: What are your thoughts on pay for performance, especially from an equity lens?

DT: I'm a big proponent of pay-for-performance. I love for people to over deliver on performance and I’m very, very happy to pay for that performance.

Cash comp is usually a formula as to how much you earn based off performance targets. On the equity side, it might not be in the moment, but it would be at the next annual refresh. Say an employee is knocking it out of the park; at the next annual refresh, we’ll want to look at your equity hold (amount of unvested equity over time) as a way to ensure we keep top talent.

A rule of thumb is two to four times your unvested equity to hold you at the company. If someone is a star performer and they’ve shown consistently high performance and you’re worried you don’t have as much hold on them as you need, the Comp Committee and the CEO have latitude to float their equity package up a little bit, but again, with very clear reasons why and performance expectations to match. I’ll say again, it’s pay for performance!

Deb, thank you very much for everything you have shared with us not just in this edition, but also the past two editions. If you found this interesting, please share it on LinkedIn or with your friends/colleagues.