Internal Support for The Board Compensation Committee

— An Opportunity for Qualified In-House Professionals —

Frederic W. Cook & Co., Inc.

(dated April 24, 2003)

Many compensation committees are considering the appointment of compensation consultants as independent advisors.
While this is useful, external consultants never really know a lot about what's going on internally.
Therefore, in cases where there's a strong internal HR or compensation person, who has the trust of the Committee, it may be useful to formally designate that person(s) as having a dual solid line reporting relationship to both the CEO and to the Committee Chair.

— The analogy is the internal auditor reporting to both the Audit Committee and the CFO.
With this formally in place, the internal person is empowered professionally to give the Committee Chair his or her best advice and to respond forthrightly and fully to any direct questions from the Committee Chair about an agenda item or anything else.
The designated internal person could also be charged with proactively coming to the Committee Chair if he or she suspects or knows of wrongdoing internally and couldn't get it corrected.

— This also should include proactively identifying and assessing executive compensation risks to take preemptive corrective action and avoid surprises.
Communications between the Committee Chair and the internal person would of necessity need to be confidential, both ways.
As a formal, dual reporting relationship, the Committee Chair should have input to the CEO on the person's performance evaluation and pay, and the internal person should not be able to be transferred or terminated without the Committee Chair's consent.
The internal person also could be designated as Committee Secretary and, because of the confidential relationship, attend executive sessions of the Committee.
Any designated external consultant and the internal support person should expect to work cooperatively and confidentially in the Company’s best interests.
The designated internal person’s performance should be reviewed informally once a year by the committee chair, with the internal person also being asked to critique the committee’s work and provide a confidential assessment of executive compensation effectiveness and issues in the company.