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Also note: This is not legal advice.

Introduction

Creating a comprehensive compensation committee charter is an essential part of corporate governance. It outlines the roles, responsibilities and criteria used to assess executive pay, and ensures that it is managed in a transparent and consistent manner. This helps to protect the interests of both shareholders and employees; making sure that executive compensation is fair, equitable, managed responsibly and in line with the company’s goals.

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To read on for more information on how to create your own charter step-by-step, as well as access our free template library today, visit

Definitions (feel free to skip)

Compensation Committee: A committee of members of the board of directors responsible for overseeing executive compensation plans and policies within an organization. This includes reviewing, developing and implementing executive compensation plans, policies and practices.

Compensation Plans: A set of rules and regulations that outlines the compensation an executive is entitled to receive.

Executive Compensation: The total financial package an executive receives, which includes salary, bonuses, stock options, and other forms of remuneration.

Executive Performance: The evaluation of an executive’s performance against set goals and objectives.

Legal and Regulatory Requirements: Laws and regulations that govern executive compensation and must be followed.

Contents

• Describe the purpose of the compensation committee and its role within the organization.
• Identify who should serve on the compensation committee, including qualifications and expectations.
• Outline the authority of the compensation committee and its obligations.
• Establish criteria for setting salaries, bonuses, and other forms of compensation.
• Describe the process for determining the terms of employment contracts.
• Outline the procedures for evaluating performance and making changes to compensation plans.
• Describe the procedure for setting long-term incentives and bonuses.
• Outline the processes for developing and implementing executive compensation policies.
• Establish processes for approving executive compensation plans and changes.
• Describe the processes for monitoring the effectiveness of the compensation committee.
• Establish processes for reporting and communicating compensation committee activities.
• Outline the procedures for reviewing and revising the executive compensation policy.
• Describe the process for evaluating the performance of the compensation committee.
• Establish guidelines for setting goals and objectives for the compensation committee.

Get started

Describe the purpose of the compensation committee and its role within the organization.

• Outline the purpose of the compensation committee, including its responsibilities and objectives
• Explain the role of the compensation committee within the organization, including its authority and reporting procedures
• Determine the frequency of meetings and duration of the members’ terms
• Describe the roles and responsibilities of the members of the compensation committee, including the chairperson
• Establish any additional requirements or expectations of the compensation committee and its members, such as legal and compliance obligations
• Make sure to clearly define the scope of the committee’s work and responsibilities

When you have outlined the purpose of the compensation committee and its role within the organization, you can proceed to the next step.

Identify who should serve on the compensation committee, including qualifications and expectations.

• Identify the individuals who should be a part of the compensation committee, such as the Chief Executive Officer, Chief Financial Officer, or other members of the Board of Directors.
• Establish the criteria for the individuals who will be on the committee, including relevant experience and qualifications.
• Outline the expectations of the committee members, such as holding regular meetings and participating in committee activities.
• Establish a timeline for when the committee members should be identified and their qualifications evaluated.

You will know when you can check this off your list when you have identified the individuals who should serve on the compensation committee, established criteria for their membership, outlined expectations for the members, and established a timeline for when the members should be identified and their qualifications evaluated.

Outline the authority of the compensation committee and its obligations.

• Outline the authority of the compensation committee to provide advice and recommendations to the board regarding executive and director compensation, including the adoption, amendment or termination of all plans and arrangements.
• Describe the committee’s responsibilities, including setting executive and director compensation and monitoring pay equity.
• Set standards for determining the appropriate use of compensation consultants and other advisors.
• Ensure the committee has the necessary authority and resources to fulfill its responsibilities.
• Require that the committee operate within the scope of its authority and in compliance with applicable laws, rules, and regulations.
• Review the compensation committee charter and recommend changes as necessary.

Once you have outlined the authority of the compensation committee and its obligations, you are ready to move on to the next step.

Establish criteria for setting salaries, bonuses, and other forms of compensation.

• Define the criteria for setting salaries, bonuses, and other forms of compensation.
• Consider the market rate for salaries and bonuses for similar positions in the industry.
• Consider the skill set, experience, and performance of the employee when determining salaries and bonuses.
• Determine the criteria for other forms of compensation such as stock options and retirement benefits.
• Establish a timeline for when salaries, bonuses, and other forms of compensation should be reviewed and updated.

When you can check this off your list:

• When you have established criteria for setting salaries, bonuses, and other forms of compensation.
• When you have established a timeline for when salaries, bonuses, and other forms of compensation should be reviewed and updated.

Describe the process for determining the terms of employment contracts.

• Develop criteria for evaluating potential employees that includes qualifications, experience, and other relevant factors.
• Create a process for negotiating and approving employment contracts that includes input from key stakeholders such as the HR department, legal counsel, and other relevant parties.
• Set a timeline for completing contract negotiations and ensure that all contracts comply with relevant laws and regulations.
• Establish a system for tracking the performance and progress of employees who have signed contracts.
• Review and update the process for determining the terms of employment contracts on a regular basis.

Once all of the above steps have been completed, you can mark this step off your list and move on to the next step.

Outline the procedures for evaluating performance and making changes to compensation plans.

• Establish a timeline for the evaluation and review of performance in order to determine when changes to compensation plans should be made.
• Identify the criteria to be used in evaluating performance, such as job performance, customer feedback, cost savings or other factors.
• Identify the criteria to be used in making changes to compensation plans, such as cost savings, customer feedback, or other factors.
• Set up a review process that allows for input from all stakeholders and allows for changes to be proposed and discussed.
• Establish a communication plan for informing all stakeholders of changes to compensation plans.

Once you have outlined the procedures for evaluating performance and making changes to compensation plans, you can check off this step and move on to the next step.

Describe the procedure for setting long-term incentives and bonuses.

• Establish long-term incentives based on performance that are tied to the organization’s strategic objectives and goals.
• Consider factors such as the company’s overall financial performance and future prospects, individual and team performance, and other factors that the committee deems appropriate.
• Develop and implement a bonus plan that rewards executives for meeting or exceeding performance goals.
• Review long-term incentives and bonus plans on a regular basis to ensure they are still meeting the organization’s goals.
• When changes to the long-term incentives or bonus plans are needed, the Compensation Committee should review the plans and make any necessary adjustments.

When you can check this off your list:

• When you have determined the appropriate procedure for setting long-term incentives and bonuses.
• When you have developed and implemented a bonus plan.
• When you have reviewed the long-term incentives and bonus plans and made any necessary adjustments.

Outline the processes for developing and implementing executive compensation policies.

• Define a timeline for developing and reviewing executive compensation policies.
• Identify the members of the committee responsible for developing and approving executive compensation policies.
• Outline the process for gathering input from shareholders and other stakeholders on executive compensation policies.
• Establish the criteria to be used when evaluating executive compensation policies.
• Describe how executive compensation policies will be communicated to the executive team and other stakeholders.
• Establish procedures for periodic review of executive compensation policies.

You can check this off your list and move on to the next step when all of the above points have been addressed.

Establish processes for approving executive compensation plans and changes.

• Establish a process for review and approval of executive compensation plans and changes.
• Ensure that any new plans or changes are consistent with the organization’s compensation philosophy and strategy.
• Develop a set of criteria for evaluating and approving executive compensation plans and changes.
• Develop a process for documenting the rationale for approving executive compensation plans and changes.
• Establish a timeline for reviewing and approving executive compensation plans and changes.
• Ensure that all relevant stakeholders are consulted and informed of any executive compensation plans and changes.

You can check this step off your list when you have established processes for approving executive compensation plans and changes that are consistent with the organization’s compensation philosophy and strategy, have developed a set of criteria for evaluating and approving executive compensation plans and changes, have developed a process for documenting the rationale for approving executive compensation plans and changes, have established a timeline for reviewing and approving executive compensation plans and changes, and ensured that all relevant stakeholders are consulted and informed of any executive compensation plans and changes.

Describe the processes for monitoring the effectiveness of the compensation committee.

• Establish a method for the compensation committee to review and evaluate the effectiveness of its performance on an annual basis.
• Develop a process to assess the effectiveness of the compensation committee in meeting its responsibilities and goals.
• Develop metrics and data points to measure the effectiveness of the compensation committee.
• Develop a formal process to review the performance of the compensation committee.
• Develop a formal process to report the performance of the compensation committee to the full board of directors.

Once you have established a method for monitoring the effectiveness of the compensation committee, a process to assess its performance, metrics and data points to measure its effectiveness, a formal process to review its performance and a reporting process to the full board of directors, you can check this step off your list and move on to the next step.

Establish processes for reporting and communicating compensation committee activities.

• Establish a system for tracking and reporting committee activities
• Establish a timeline for reports to be presented to the board
• Develop a regular schedule for committee meetings
• Determine the necessary documentation for committee meetings
• Agree on a method for communication between committee members
• Establish a policy for documenting committee decisions
• Establish a process for communicating decisions to the board and other stakeholders

Once all the above steps have been completed, you can check this off your list and move on to the next step.

Outline the procedures for reviewing and revising the executive compensation policy.

• Develop a timeline for reviewing and revising the executive compensation policy
• Identify the process for making changes and approving the policy
• Set up a system for gathering feedback from stakeholders on the policy
• Determine the criteria for assessing the effectiveness of the policy
• Establish an evaluation system for monitoring the policy
• Specify the procedures for making any necessary modifications
• Review the policy on an annual basis to ensure it remains up-to-date
• When the policy is updated, document the changes and communicate them to all stakeholders

When you can check this off your list and move on to the next step:

• When the procedures for reviewing and revising the executive compensation policy have been outlined, reviewed and approved.

Describe the process for evaluating the performance of the compensation committee.

• Review the committee’s performance against the objectives and goals outlined in the charter, and identify areas of improvement.
• Establish criteria to measure the effectiveness of the committee’s performance, such as the quality of the recommendations, the timeliness of the decisions, and the effectiveness of the communication of decisions.
• Develop a system for providing feedback to the committee on its performance.
• Identify opportunities for training and development to strengthen the effectiveness of the committee.

You can check this off your list and move on to the next step when you have a comprehensive process for evaluating the performance of the compensation committee outlined in the charter.

Establish guidelines for setting goals and objectives for the compensation committee.

• Brainstorm key performance objectives for the committee to focus on
• Discuss and decide on the committee’s goals and objectives
• Set measurable benchmarks to track progress
• Create a timeline to review and assess progress
• Establish a reporting system to track progress
• Keep the objectives, goals and benchmarks up to date
• When all objectives, goals and benchmarks are established, check this step off the list and move on to the next step.

FAQ:

Q: Do I need a Compensation Committee Charter?

Asked by William on February 14th, 2022.
A: Whether you need a Compensation Committee Charter depends on the size and complexity of your business. Generally, if you have a large organization with lots of workers and complex compensation systems, then you may benefit from having one. However, if you have a smaller organization with simpler compensation systems, then one may not be necessary. Ultimately, it is up to you to decide if a Compensation Committee Charter is the right fit for your business.

Q: What benefits does a Compensation Committee Charter provide?

Asked by Charlotte on March 19th, 2022.
A: A Compensation Committee Charter provides many benefits to an organization. It outlines the roles and responsibilities of the committee, which can help ensure that everyone is on the same page when it comes to compensation decisions. It also provides guidance on how to handle compensation issues that may arise, such as disputes between employees or disputes between departments. Finally, it can help establish clear lines of communication between the committee and other stakeholders within the organization, such as executives or shareholders.

Q: What are the differences between a US vs UK vs EU Compensation Committee Charter?

Asked by John on April 28th, 2022.
A: The main difference between a US vs UK vs EU Compensation Committee Charter is in the details regarding labor laws and regulations. In the US, labor laws are determined at the state level and vary from state to state. In the UK, labor laws are determined at the national level and can differ significantly from one region to another. In the EU, labor laws are determined at both a regional and national level and can be quite complex due to its many different countries and varying regulations. As such, when creating a Compensation Committee Charter for your organization, it is important to research and understand all applicable labor laws in your area so that you can create a charter that is compliant with all applicable laws.

Q: How do I determine which compensation policies should be included in my Compensation Committee Charter?

Asked by Jacob on May 5th, 2022.
A: When determining which compensation policies should be included in your Compensation Committee Charter, it is important to consider the size and complexity of your organization as well as any industry specific regulations or laws that may apply. Additionally, it is important to consider any unique aspects of your business model or sector that could impact how compensation policies should be handled (such as whether your business model is SaaS-based or B2B). Once you’ve taken all of this into account, you can determine which policies should be included in your charter based on what best suits your organization’s needs.

Q: How often should I update my Compensation Committee Charter?

Asked by Mason on May 12th, 2022.
A: The frequency with which you should update your Compensation Committee Charter will depend on how often changes are made to labor laws in your area or any industry specific regulations that may apply to your organization. It is also important to keep an eye out for any changes in your business model or sector that could impact how you handle compensation policies (such as transitioning from SaaS-based to B2B). Generally speaking, it is best practice to review your charter at least once per year in order to ensure that it remains compliant with all relevant laws and regulations and accurately reflects any changes made within your organization or industry.

Q: What type of information should I include in my Compensation Committee Charter?

Asked by Owen on June 22nd 2022.
A: When creating a Compensation Committee Charter for your organization, it is important to include all relevant information related to compensation policies and procedures such as job descriptions and responsibilities; salary ranges; performance criteria; vacation entitlements; bonuses; stock options; etc. Additionally, it is important to include specific guidelines regarding any special circumstances that may arise such as maternity leave or disability benefits so that everyone involved understands how these will be handled within your organization. Finally, it can also be beneficial to include information regarding how disputes over compensation issues will be handled so everyone understands what steps will be taken if an issue arises.

Q: Is there an easy way to create my own Compensation Committee Charter?

Asked by Emma on July 8th 2022.
A: Yes! There are many tools available online which allow you to easily create a custom-made Compensation Committee Charter based on the needs of your business or organization. These tools walk you through each step of creating a charter so you don’t have to worry about understanding complex legal language or trying to interpret applicable labor laws yourself – they take care of all of this for you! Additionally, many of these tools also provide templates so you can easily customize your charter with company specific information without having to start from scratch each time.

Q: Are there any resources available online which offer guidance when creating a Compensation Committee Charter?

Asked by Matthew on August 13th 2022.
A: Yes! There are many online resources available which offer guidance when creating a Compensation Committee Charter – both free and paid options are available depending on what type of guidance you need or prefer. Free resources typically consist of articles and blog posts offering general advice while paid options often include template charters tailored for certain industries or business models as well as more comprehensive services offering one-on-one consultation with experts in the field who can walk you through each step of creating a charter that meets all applicable labor laws in your area as well as any unique needs specific to your organization or industry sector.

Q: Do I need legal advice when creating my Compensation Committee Charter?

Asked by Abigail on September 23rd 2022.
A: Although not necessarily required when creating a Compensation Committee Charter for most organizations, it is highly recommended that legal advice be sought out when doing so – especially if there are certain industry specific regulations that must be adhered to or if there are complex elements within your business model (such as SaaS-based) which could impact how policies should be handled within the charter itself. Consulting with an experienced lawyer who understands both labor law in your particular region as well as any unique needs specific to your business will help ensure that all aspects of your charter remain compliant with applicable laws so you do not run into any legal issues down the road!

Example dispute

Possible Lawsuits Referencing Compensation Committee Charter

• If a company has adopted a compensation committee charter that outlines the roles and responsibilities of the committee, and the company fails to abide by the terms of the charter, a plaintiff may have a valid claim for damages.
• For instance, if the charter states that the compensation committee must review and approve executive compensation, and the company gives an executive an excessive bonus without proper oversight, the plaintiff may be able to demonstrate that the company breached the terms of the charter and should be held liable.
• In addition, if the charter requires that compensation committee meetings be held regularly and the company fails to do so, the plaintiff could argue that the company failed to fulfill its obligations outlined in the charter and should be held accountable.
• The plaintiff could also raise a lawsuit if the compensation committee charter outlines the procedures for evaluating executive compensation and the company fails to follow those procedures.
• If damages can be proven, the plaintiff may be entitled to compensation for losses incurred as a result of the company’s breach of the charter. The amount of damages would depend on the severity of the breach and the resulting losses.

Templates available (free to use)

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