A compensation committee is formed by the board of directors who are responsible for compensation decisions at a company. Compensation committees are usually required by market exchanges (e.g., NYSE, NASDAQ), with the obligation that it consist only of independent directors.
The compensation committee is required to have a written charter and mandatory duties, specifically relating to the supervision of compensation advisors as required by Exchange Act Rule 10C-1. NASDAQ requires that a compensation committee have at least two members.
As you know, compensation is why we all show up to work, and the level of compensation is what’s used to attract the best and brightest people to work for our companies. This means you have to be competitive with other companies like yours.
Compensation philosophies and the committees that govern them should also evolve as your company grows. For startups, compensation is more democratic. Sometimes the founding members are taking home equity as opposed to a traditional paycheck as they all work towards the common goal of growing the company. As the company grows mature, things get complicated and other more complicated ways of thinking about attracting and then compensating employees has to change.
Just as the compensation philosophy changes, the compensation committee must change along with it. In startups, the compensation committee is simply recommending proposals to the larger board of directors, but in more mature companies, the compensation committee has more decision-making authority for all kinds of compensation issues.
My role in the compensation committee is to make sure everyone is paid according to their skill set.