RIP Compensation Committees?

In a different era, public company boards of directors typically had three standing committees: audit, nominating and governance, and compensation. Today, however, amid the growing complexity of business and changing expectations and rules governing corporations, boards are electing to alter their committee structures to keep pace with their increasing oversight demands. Among Russell 3000 (R3000) companies in recent years, the names of compensation committees have been modified to reflect these growing areas of responsibility.

While such changes may at first seem arbitrary, insignificant, or aesthetic, they are indicative of an important development in the realm of corporate governance—specifically, that many companies have formally delegated additional responsibilities to their compensation committees.

One company that changed the name of its compensation committee is Vistra Corp. In 2021, its comp committee was rechristened the “social responsibility and compensation committee.” In addition to retaining its previous role in overseeing and approving the company’s compensation practices, the committee now also monitors company culture and employee engagement; reviews the company’s DEI philosophy, commitment, results, and effectiveness; and tracks progress in advancing its corporate citizenship that includes corporate social responsibility initiatives in support of charitable and community service organizations.

Another name change example occurred at 3M. Its compensation committee added talent to its name in 2022. While fulfilling the mission of its previous incarnation, the renamed committee now also reviews and discusses with management matters relating to executive performance and succession, as well as talent development, sourcing, diversity, and retention strategies. Other responsibilities detailed in the committee charter include reviewing internal pay equity and equal employment opportunities.

For 3M, like Vistra, the change in committee title was not for show, but to better describe the scope of the committee’s work. And these changes were not uncommon: “talent” was the third-most popular committee descriptor added to “compensation” for the companies we observed. “Human capital” was the most popular descriptor, followed by “development.” In total, nearly 21 percent of companies made a reference to personnel in their compensation committee name, according to Farient research.

These companies were not alone in these changes—in 2020, 82 percent of companies in the R3000 had committees simply named “compensation.” This year, that number has fallen to 72 percent. Companies in the bottom half of the R3000 have been the slowest to diversify the names and responsibilities of their compensation committees, going from 89 percent “compensation” committees in 2020 to a still dominant 84 percent in 2023. The five-percent drop was the second smallest observed among the five subgroups.

Percentage of Companies by Size Using ‘Compensation Committee’ Name

Source: Farient Advisors

 

Source: Farient Advisors

 

Companies in the Midcap 400 made the most progress away from synchronicity. The Midcap 400 saw an 11.2 percent drop in conventionally named compensation committees—from 74 percent in 2020 to 63 percent in 2023. Looking only at the bottom 2,500 companies in the R3000, there is a clear trend: Larger companies are both more likely to have compensation committees with diversified names and responsibilities.

It should be noted, however, that the prevalence of changing compensation committee charters and names is not consistent. Companies in the S&P 500 had the smallest drop in conventionally named compensation committees at just over one percent. This inconsistency warrants further investigation—the differences between very large companies and their smaller counterparts could be about the preferences of larger companies given their resources and complexity. Smaller companies might be less willing to delegate more responsibility to a committee if they are unable or unwilling to increase their resources including director compensation. However, there might also be a limit to how many companies will eventually make these changes for a variety of other less obvious reasons.

For boards of directors that wish to have greater oversight over how a CEO is managing their executive team, delegating greater responsibility to the compensation committee makes the most sense when compared to the alternatives. The other two most common committees for R3000 companies—audit and nominating and governance—have responsibilities well outside the purview of talent acquisition, retention, and development while creating an entirely new committee might not be ideal.

Interestingly, nearly two percent of companies included at least one of “governance” or “nominating” in their compensation committee names in 2023. While this change has not yet been adopted by a significant subset of companies, this combination of roles and responsibilities is still extremely noteworthy because of the importance of these committees.

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Takeaways for Directors

• Findings

  • The prevalence to rename compensation committees is increasing across all sized companies and in all industries
  • These changes in committee names are preceded by increased oversight responsibilities for the compensation committee
  • The new compensation committee monikers are most likely to include the words “human capital,” “development,” or “talent,” respectively.

• Recommendations

  • The addition of oversight of human capital issues necessitates the board to reevaluate the expertise of current and potential compensation committee members
  • Board committee charters should be reviewed with an eye toward their accuracy in describing the current roles and responsibilities of each committee and consider a name change if warranted
    

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By Andrew Segal

Andrew Segal is a data analyst at Farient Advisors in Louisville, Kentucky.