Risk Oversight: Where Should Compensation Committees Begin?

One goal of the Securities and Exchange Commission’s recent rule proposal on Proxy Disclosure and Solicitation Enhancements is to encourage public company boards of directors and compensation committees to evaluate how the company’s risk management and oversight functions relate to executive compensation decisions and processes.  What questions should your Company's compensation committees be asking? Think about these:

  1. What is the relationship between the Company’s overall employee compensation policies and its risk management practices and/or risk-taking incentives?
  2. How does management determine the Company’s risk appetite and how have management’s performance goals and the committee’s compensation metrics been tailored to fit this risk appetite?
  3. Has the Board and the committee reviewed the Company’s incentive compensation structure with strategies and risks in mind?
  4. Has management incorporated risk management practices into job descriptions, training, work processes, supervisory procedures and performance reviews?
  5. Has management indentified and evaluated possible risk scenarios presented by the Company’s current compensation structure and what were the results of this exercise?
  6. Does the Company have in place a succession plan that adequately minimizes the risks commonly associated with a change in executive leadership?
  7. Can management and the Board tie profits, as well as losses, to the risk profile as presented in internal communications and external disclosures?
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