Did You Hear the One About the Compensation Committee Member…

Fred Whittlesey
Compensation Venture Group, Inc.

…who worked 300 hours on Compensation Committee matters last year? Neither did I. But I expect that this time next year we will be hearing those kinds of tales. The Business Week article “Board of Hard Knocks” (22 January 2007) cites the “new rules for directors” including that Audit Committee members should be prepared to spend 300 hours per year on committee responsibilities. (Disclosure: I am quoted in the article.)

But that’s the Audit Committee; the Compensation Committee can’t require that level of time commitment, can it?

Business Week’s cover teaser was “Board Seat, Anyone?” I’d ask “Compensation Committee Membership, Anyone?” Let’s look at the numbers.

In small and midcap technology companies, the typical Compensation Committee met six times last year. I’ll assume that these typical Committees were diligent Committees and spent four hours in each meeting. I’ll further assume that the individual Committee members always received the materials well in advance of the meeting and spent four hours reviewing and considering the materials. Let’s give them credit and assume they spent another 2 full days before each meeting in talking to one another, talking to management, and so forth. That’s still only 144 hours. And that’s the problem. Let’s add, say, 3 days at training courses. That takes it to 168 hours which is 8% of a year of 40-hour weeks. We’re still 16-and-a-half days short.

Audit Committees experienced trial by fire with the advent of Sarbanes-Oxley. Compensation Committees experienced the Sarbox zeitgeist, but didn’t have the numerous and onerous new requirements to contend with. Instead, Compensation Committees have experienced a slow water torture of changes in accounting rules (FAS123R), tax rules (409A), corporate governance expectations, proxy advisor and institutional shareholder policies, and SEC rules (disclosure requirements). All of these took time but were driven by technical specialists who presented the issues and solutions, went away and crunched numbers and drafted documents, and then ran it by the Committee for approval. That is, until the new SEC disclosure requirements came along. And, that is, until the media and shareholder noise level resulting from the new disclosures creates the need for earplugs like a front row seat at a Metallica concert. And creates hours and days and weeks of work. 300 hours is roughly two full-time months of the work year.

We have seen a pay hierarchy emerge in director pay. Of course, committee members earn extra pay for the committee work, and committee chairs earn even more pay for their role. But the differences in workload have already been reflected in director pay programs: Audit Committee members typically receive about a third more than Compensation Committee members, who typically receive a third more than members of other committees such as the nomination and governance committee. Further, the Chair of the Audit Committee is typically paid much more than the Chair of the Compensation Committee in additional retainer and/or meeting fees.

Over the past year, I have heard many people say “the comp committee is the new audit committee” or “compensation 2007 is audit 2003-2005.” If so, Compensation Committee members may need to discuss whether their compensation deserves a similar level of attention to those of the executives they are monitoring.

The other challenge facing compensation committee members, also cited in the Business Week article and the subject of a recent article in McKinsey Quarterly, is the need to refocus on strategy in a time of compliance.

That is the topic of our next issue of The Compensation Committee Adviser.