What Comp Committees Should Be Asking But Aren’t

It takes an “astute and forward-thinking” compensation committee to incorporate enterprise risk management into executive compensation programs, according to the Blue Ribbon Commission Report, “Adaptive Governance: Board Oversight of Disruptive Risks,” from the National Association of Corporate Directors.

According to the report, compensation committee members should ask questions and play out scenarios to determine if pay plans provide enough flexibility to reward innovative thinking and agility among employees or, instead, reward rigid, status quo performance. Similarly, comp committee members should regularly monitor whether the committee has systems in place to stay abreast of the skill sets needed among senior leaders and whether those skills are present or in development among C-level executives and high-potential employees.

“Unfortunately, there are no customary design parameters that can entirely ensure your compensation program covers unforeseen risk,” writes Jannice Koors, senior managing director and Western region president at Pearl Meyer, who authored a section of the report.

“The best-in-class compensation committee will ask: ‘Have we created a leadership team, an environment, and an executive pay structure that gives our board and this organization the flexibility—as well as the creativity and the confidence—to do what’s right, not necessarily just what’s documented on paper?’ Directors that can answer ‘yes’ to this question have made a significant contribution toward building a resilient compensation program and an adaptable organization that truly aligns pay with performance.”

As the report suggests, it’s challenging for board members to predict the future, writes Koors, but she encourages compensation committees to play out different scenarios that could help the board determine sources of potential risks and evaluate all of the varied outcomes.