The Evolving Skill Set of a Compensation Committee Chair

The corporate governance landscape is rife with change. As a result, the role of a Compensation Committee Chair has become increasingly pivotal, especially as businesses navigate the complexities of strategic direction and employee welfare amid shifting political and regulatory environments. Notwithstanding these challenges, the end goal of the Compensation Committee Chair remains the same: value-creating executive compensation programs that are motivating, fair, and defensible. As companies grow, the skills required of their leaders, particularly those steering discussions around compensation strategy, must keep or exceed pace.

Over the past five years, the share of the 50 largest US-based public companies disclosing a board skills matrix has increased from 62% to 84%, according to Farient Advisors analysis. These disclosures reveal the most sought-after qualifications for today’s Compensation Committee Chairs:

• Human capital and compensation experience have tripled
• Industry and business acumen has increased by 46%
• Governance, risk management, and public policy expertise have risen by 46%
• Accounting and finance experience has grown by 33%
• Global experience has increased by 32%

These skills directly apply to the following four foundational areas that Farient finds essential to well-functioning Compensation Committees.

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Strategic Thinking and Business Acumen

Compensation programs are best served when intricately linked to overall business strategy. The Compensation Committee Chair must set the tone for committee members and approach pay planning with a strategic mindset. This involves aligning compensation practices with the organization’s long-term objectives and culture. A deep understanding of the business model, competitive landscape, and future trends helps the Chair advocate for compensation structures that attract and retain talent.

Analyzing data and interpreting how macroeconomic factors impact financial performance is critical for any Chair. With the rise of big data, advanced analytics, market volatility and AI, Chairs must be equipped to synthesize data to provide a comprehensive view that shows how strategy and compensation programs are inextricably linked. This includes understanding growth drivers, benchmarking against industry standards, and assessing performance indicators that drive compensation decisions. A keen analytical mindset and approach enable Chairs to make informed decisions aligned with organizational goals and market trends.

“One of the most powerful aligning mechanisms for the board is to ensure compensation reinforces the company’s strategy, drives target performance outcomes and rewards talent, which is the foundation for future value creation,” says Kathleen A. Ligocki, who serves on the boards of three public companies.

Understanding of Regulatory Frameworks, Compliance, and Stakeholder Views

A fundamental component of the Compensation Committee Chair’s role is a comprehensive understanding of the regulatory landscapes that govern executive compensation. Over the years, legislation such as the Dodd-Frank Wall Street Reform and Consumer Protection Act has introduced more detailed reporting requirements and shareholder advisory votes on pay practices. A successful Chair must stay abreast of changes in these regulations, including tax implications and securities laws, to ensure that compensation policies comply with the law and reflect best practices in corporate governance.

Emotional Intelligence and Communication Skills

Pay is personal. As Chairs engage with diverse stakeholders — from executives and board members to shareholders and employees — emotional intelligence is paramount. The ability to foster open communication, build trust, and navigate sensitive discussions surrounding pay is essential. Strong interpersonal skills enable the Chair to facilitate engaging and constructive conversations about compensation philosophy and practices, ensuring that all voices are heard and considered.

Further, the ability to communicate to shareholders the strategy and rationale behind compensation decisions provides transparency and deepens their understanding of the board’s actions. While not all will agree with every committee decision, understanding that those decisions are rooted in sound strategy, analysis, and governance will go a long way in avoiding undue scrutiny.

“The Compensation Discussion and Analysis section of the proxy has grown as various constituencies have sought to understand compensation rationale better,” Ligocki says. “While many proxies would benefit from streamlining given the recent additional regulatory requirements, companies should view this as a great opportunity to explain the Compensation Committee’s thinking about how earned compensation aligns with the company strategy and delivered performance versus market benchmarks. Transparency is key.”

Global Perspective

As businesses increasingly operate in a global marketplace, a Chair must possess a global perspective on compensation. This involves understanding how cultural differences influence compensation expectations and navigating international labor laws and practices. A thorough grasp of global compensation trends ensures the organization remains competitive in attracting top talent from diverse backgrounds and locations.

Farient’s View

The role of the Compensation Committee Chair reflects the broader changes in business practices, regulatory frameworks, and societal expectations. To excel in this position, Chairs must cultivate a multifaceted skill set encompassing strategic thinking, financial acumen, interpersonal skills, a commitment to equity, technological and regulatory awareness, and a global perspective. By embracing these competencies, Chairs can effectively guide organizations in developing compensation strategies that meet compliance standards, promote fairness, motivate performance, and uphold the organization’s values in an increasingly complex landscape.