The Advisors' Blog

– Broc Romanek

Do you have language in your compensation committee charter that provides that the CEO can set the compensation for certain officers provided it’s consistent with the budget or not in excess of approved guidelines? I know that a number of large companies delegate the compensation-setting authority for lower-level VPs to the CEO provided that certain conditions are met – but some have language in their charters that is inconsistent with their actual practices.

Here are some examples of potential problems that I have heard about over the years:

– Company has conditions that probably are met – but there’s no way to document it. For example, one condition that lets the CEO set compensation is that the compensation not be above 50th percentile of the peer group. That is an easy test for a CFO or CEO where you have access to peer group statistics – but what about a Chief Merchandising Officer or Chief Technical Officer, where the peer group probably does not publish data because they are not NEOs? And, in any event, the position is not the same everywhere? This type of condition is fairly common in charters.

– What if the charter is silent about whether the CEO has the authority to set lower-level comp decisions concerning bonuses and setting salaries? Some companies interpret the silence as still delegating authority from the board to the CEO to make these decisions. Thus, the compensation committee would delegate these lower-level decisions out even though it wasn’t specifically spelled out in the committee charter.

– Avoid the wording that “the Committee shall . . .” take some action. The charter should empower the committee, not obligate it. I think that sort of wording can create a problem if the committee failed to strictly follow a duty created in the charter. I’d prefer wording like “the Committee is authorized to….” I prefer minimalist charters, with the tasks, checklists, calendar, etc. that describe “duties” in separate documents that guide, but don’t obligate, the committee.

Here’s a pretty good example of delegation from a compensation committee charter. It doesn’t have the express delegation from the board to the CEO – but perhaps that’s in a separate resolution. But it does include language that addresses – from the committee’s perspective – the fact that the CEO has been granted authority:

– Compensation of Other Executive Officers – The Committee shall review and approve, in its discretion (without the need for further approval by the Board), but only upon recommendation of the CEO, the compensation (including salary, bonuses, stock bonuses, options and appreciation rights, severance payments and other benefits) and other terms of employment of all other executive officers of the Company and its subsidiaries that have been designated or reasonably can be expected to be designated as “executive officers” of the Company within the meaning of Section 16 of the Securities Exchange Act of 1934, as amended (“Section 16 Officers”); provided that, the hiring, appointment or promotion of an individual into a position as a Section 16 Officer, and the conferring of the titles of the Section 16 Officers, shall be reserved to the Board……

– Compensation of Non-Section 16 Officers – While the CEO has been delegated the authority to determine the compensation (including salary, bonuses, severance payments and other benefits, but excluding equity awards except to the extent otherwise delegated to the CEO by the Committee) and other terms of employment of all other officers and employees of the Company and its subsidiaries who are not Section 16 Officers, the Committee shall periodically review and discuss with the CEO the compensation and other terms of employment of such other officers…

– Administration of Incentive Plans – The Committee shall review and approve, or to the extent required or deemed appropriate make recommendations to the Board regarding, the adoption of, amendment to, or termination of incentive compensation, stock, bonus and other similar plans and programs established by the Board from time to time as permitted or required thereunder. The Committee shall administer these plans, as and to the extent provided in the plan documents and upon the recommendation of the CEO, including without limitation establishing guidelines, interpreting plan documents, selecting participants, approving grants and awards, delegating authority to the CEO to make grants and awards to non-Section 16 Officers, and making all other decisions required to be made by the plan administrator under such plans.