2022 HR and Compensation Committee Checklist

The following are what effective Human Resource and Compensation Committees will be focusing on in 2022.

1. Strategic Execution Linked to KPIs

Most of the value of an organization now is non-financial leading value drivers, which are often the least maturely measured and overseen by boards. KPIs that are either non-existent or manipulated by management with board consent leave investor value on the table and the board relegated to looking in a rear-view mirror. Good compensation committees are ensuring that the CEO’s evaluation measures strategic execution of the full business model, including value drivers such as digital, data, community and environment impact, employee engagement, customer satisfaction and market share.

2. ESG KPIs Linked to Incentive Pay

Variable pay is easier to link to performance when there is an explicit business model approved by the board, with five to seven value drivers, as opposed to exclusively relying on peer benchmarking. Good ESG value drivers and KPIs to measure each are strategic in nature, not esoteric or aspirational. The job of good pay committees is to ensure that the KPIs to measure each value driver have proper performance stretch and can be measured across time. Management may push back and state that the KPIs are operational. They are not. The board cannot oversee what it cannot measure. The pandemic has recut many KPIs, and a complacent board enables unjust enrichment or goals that cannot be met if stale KPIs are moved forward.

3. Emergency and Permanent CEO Succession Plan

In early 2022, the committee should review and recommend to the board an emergency succession plan for the senior management team and be satisfied those rapid arrangements can be made to account for emergency isolation, illness or otherwise. A permanent plan should also come forward setting out high potential talent, development, strengths and weaknesses, and length of time to be CEO-ready. Gaps should be addressed, including fortifying any succession gaps with external hires, without any member of senior management being defensive.

4. Risk Takers Appropriately Incentivized

Incentive pay structure for independent oversight functions and risk takers should receive committee review and board approval. Claw back clauses, given legal changes, with ethical and risk triggers should be instituted. Other risk-adjusted pay limits and controls should receive committee scrutiny as well. Key functions, such as sales, customer-facing or procurement, should receive enhanced committee scrutiny. Balanced scorecards and behavioral gateways should be used. Revenue-based (ROE, EPS, TSR) thresholds are not risk-adjusted. When management shakes the fences, the eyes will focus on the board and the absence of risk-adjusted compensation.

5. Diversity, Equity and Inclusion Governance

DEI is no longer the sole prerogative of management. For many boards, this is now a strategic issue, coming directly to the board for review and approval. In 2022, look for investors demanding racial audits, equal pay, promotion criteria, work-life balance, and full talent pipeline disclosure. Human capital data exists whether it is currently measured or not. Good boards are approving criteria, policies and practices, education and communication, unconscious bias and micro-aggression training, measurable performance objectives, and linking variable pay to appropriate DEI objectives. Most important, the board sets the tone for management to act and report on conditions and practices that are not inclusive and value human rights and dignity.

Dr. Richard Leblanc is the Editor of The Handbook of Board Governance, published by Wiley in 2020.