Compensation Committees

Generally when you set up a board, you set up two, maybe three committees. The two that are standard are the compensation committee and the audit committee. The third that I see more and more now is the governance/nominating committee which is now standard on public company boards. And it’s common to set up a board committee to help the management navigate through transactions like financings and sale transactions. These financing/sale subcommittees are often temporary and last as long as the transaction is active.

I’ve sat on probably close to fifty boards at this point in my career and an equal number of compensation (comp) and audit committees. I’ve been on audit and comp committees for public companies too.

While many say that audit committee work is the most difficult and treacherous, I personally find the comp committee work more difficult.

Audit work is pretty cut and dry. You know what your responsibilities are. It’s largely about process, communication, regular meetings, and becoming an expert in the mundane but important world of accounting practices and principals.

Comp committee work on the other hand is never cut and dry. Comp committees oversee the compensation of the CEO and usually the entire senior management team. And they work with management to develop a template for the overall compensation structure of the company. So you are talking about people’s take home pay, and that’s never an easy conversation.

To make things worse, venture capitalists in general are highly compensated and/or wealthy. So you’ve got the image of these rich guys being stingy with the take home pay of the people who actually do the work every day. It’s a tricky dynamic to deal with.

But the comp committee has a responsibility to the board and shareholders of the company to ensure that the management is compensated fairly, both fair to the management and fair to the shareholders.

So the way a comp committee manages this dynamic is to rely on data about the way that comparable companies compensate their employees. And there are firms that collect and sell this data. But in my experience the data is never that great and it’s hard to make apples to apples comparisons.

I know what the companies in our portfolios do and that has always been a better compass for me anyway. But of course, we could be below market across our entire portfolio. I doubt it, but that is always a concern.

I spent an hour this morning drilling into a spreadsheet full of public company comps pulled from SEC filings. My head ached after about ten minutes. I didn’t really understand the definitions of various numbers. The numbers were all over the place. Thank god for excel’s scatter plotting feature. I was able to visualize the data and come to some conclusions that way.

The Internet is making things better however. This NY Times piece mentions a number of web services that help employees and employers figure out what a "market salary" is. Too bad the author of that article left out the best salary search service out there, from our portfolio company Indeed (which ironically is also a portfolio company of the NY Times!).

The bottom line is being on a comp committee is hard and you are serving two masters. You need to make sure your company is compensating your management fairly or you’ll lose good people. But you also need to make sure that the shareholders are getting a fair deal too. It’s hard work and rarely have I ever been thanked for doing it. But someone has to do it.