Compensation Committee Charter: Guidance and Examples

Compensation committees operate more effectively with charters that explicitly outline their purpose and procedures. This brief, a part of the NACD Board and Committee Toolkit Series, offers guidance and sample language to help compensation committee members formulate, approve, and update their charters.

General Guidance

What is the purpose of a compensation committee charter?

The purpose of any committee charter is to describe the committee’s role, structure, responsibilities, membership requirements, and scope of authority. In the case of public companies, compensation committee charters are required by US listing standards. The two main U.S. stock exchanges—the New York Stock Exchange (NYSE) and Nasdaq—have adopted listing rules that require such charters and list the areas that they must cover.

The typical compensation committee sets pay for the company’s executive officers, who by definition bear accountability for financial results and who by tradition tend to be much more highly paid than other employees.

Key Items—Mandatory

What key elements should be included in the compensation committee charter based on stock exchange requirements?