In this Episode
- Matt Isakson
- TK Kerstetter
In the first quarter of every new year, the compensation committee faces a full agenda. The first task is to review last year’s performance results and annual salary increase recommendations from management. The second task, and perhaps the most-challenging, is to set bonus goals and targets for the current year.
In this episode, Matt Isakson, an experienced partner with Meridian Compensation Partners, outlines the biggest challenges facing compensation committees during their first-quarter meetings. For each task, Isakson offers several best practices for making these processes flow more smoothly.
(1) Processing management pay recommendations: How are most compensation committees today approaching the data-review and decision-making process? In Meridian’s experience, what type of meeting format works best? How has the rationale for pay increases evolved?
The days of coming in and saying to your compensation committee, ‘Well we’re moving up Susie because she needs to be at the 50th percentile’—those days are [over]… The market data [is] one reference point. But what about your succession planning? What about this individual over here that’s high potential? Where’s your internal equity? How does this all sit from an equality perspective? There are a lot more questions—and better rationale—that management teams have to develop.
(2) Setting goals & targets: Again, what are best practices (for both management and compensation committees) in approaching the goal-setting process? Isakson outlines four guiding perspectives for reviewing and evaluating management’s compensation goals.
For compensation committees, meeting both management and investor expectations is quite the balancing act. Isakson zeroes in on the golden rule for committee productivity: The better the structure of your committee’s process, the smoother it will go.
The filming of this episode of Inside America’s Boardrooms was made possible by our Knowledge Partners.
When I was involved taking those [pay increase] recommendations to the board, really, it was about the CEO and the direct reports. Today, a lot of these compensation committees have talent development as part of their responsibility… How low [in the hierarchy] should committees go with talent development? Does that all occur together now, or how traditionally have you seen that work with talent management vs. just looking at senior management?
Split in two. Most often, we’re still seeing the compensation committee really have purview—what’s dictated by their charter—those section 16b officers. Sometimes there is a review of how those individuals (that next level down) sit on a market perspective and what the CEO is thinking about doing. But we’re really separating the senior leadership pay changes from the leadership development. It’s a really good question because we’ve had that change where committees now want to look at leadership development in the summer when it isn’t so busy with goal setting, pay changes, market data, etc. They’re looking at it in the summer—whether it’s their strategy retreat—but it’s a different topic and it’s almost the whole meeting.
I hope that more compensation committees are spending time on the talent development. Everybody says how important their people are, but in the past, I didn’t see enough time spent. If the people are so important, you need to be cultivating that more and take a look at that.