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Acting with accountability: Your guide on how to form an effective compensation committee

September 4, 2025
Drew Maginn

The unwritten compensation policy of most organizations used to be that employees kept their pay to themselves, and if someone chose to violate that policy, they quickly found themselves in hot water with both their colleagues and senior management. Those times have changed though, and many businesses have embraced transparency and accountability in their compensation planning approach, as well as their overall compensation strategy. The expectation is that this starts at the very top, through a board of directors’ compensation committee.

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What is a compensation committee?

As the name suggests, a compensation committee is a sub-committee that is formed by an organization’s board of directors. This sub-committee, consisting of independent directors, is responsible for oversight and management of compensation for the chief executive officer (CEO) and other senior leadership team members. They are established as a standing committee, meaning they operate on an ongoing basis, with certain components like membership and mandate reviewed annually to account for changes in areas such as internal strategy or external regulations.  

While compensation committees exist in various types of organizations, they are a requirement in Canada for publicly traded companies under National Policy 58-201 – Corporate Governance Guidelines, as issued by the Canadian Securities Administrators and administered by provincial partners (e.g., Ontario Securities Commission, B.C. Securities Commission). 

Why is a board compensation committee important?

Compensation committees exist to ensure executive compensation practices are objective, transparent and defensible. When it comes to compensation, especially for senior-level staff, it is essential that organizations demonstrate their commitment to a compensation policy that builds trust internally with employees, as well as externally with key stakeholders such as investors, clients, consumers and partners. In the event that compensation practices are challenged by any of these interested parties, the work of a compensation committee can often alleviate any questions or concerns.    

Who should be considered as a compensation committee member?

While committee members with strong financial and accounting backgrounds can be extremely helpful in navigating complex compensation decisions, oftentimes the best committees consist of individuals who represent a wide range of perspectives. This may include individuals with expertise in human resources, governance, legal compliance and specific industries, to name a few. Gaps in expertise can be addressed by accessing approved external support during the year, through consultants or third-party information, as well as by reassessing membership on an annual basis.  

What are compensation committee responsibilities and how are they documented? 

To ensure consistency in approach, regardless of business location across Canada, the Corporate Governance Guideline outlines key responsibilities of a compensation committee, including:

  • Reviewing and approving corporate goals and objectives relevant to CEO compensation, evaluating the CEO’s performance in light of those corporate goals and objectives and determining (or making recommendations to the board with respect to) the CEO’s compensation level based on this evaluation;

 

  • Making recommendations to the board with respect to non-CEO officer and director compensation, incentive-compensation plans and equity-based plans; and

 

  • Reviewing executive compensation disclosure before the issuer publicly discloses this information.

All these responsibilities, alongside other key information, is captured in a committee charter. This charter is a foundational document that includes:

  • Committee purpose and responsibilities;

 

  • Member qualifications;

 

  • Process for appointing and removing members;

 

  • Structure and operations (including ability to solicit outside expertise and support); and

 

  • Reporting requirements for the board.

Once this charter is developed and approved, the committee can initiate their work for the year.

What are typical compensation committee reporting requirements?

To understand the work of a compensation committee, it can be helpful to look at what they produce, beyond the committee charter, to guide board decision-making and stakeholder communications, while keeping in line with regulatory and best practice standards.

These reporting requirements may include the below.

  • Compensation policies, guidelines and recommendations: Compensation committees are expected to provide policies and guidelines to direct executive pay, including recommendations for the administration of base pay alongside incentives such as cash bonuses or equity awards. All recommendations must be evidence-based and adhere to applicable regulations, with incentives tied to performance metrics that are clear, measurable and strategy-aligned.  

 

  • Communications: Any communications relating to executive compensation, such as public statements or annual reports, should be prepared and approved in consultation with compensation committee members. 

 

  • Meeting minutes and board reports: Given the importance of the work of the compensation committee, detailed minutes should be prepared and made available for all meetings that clearly capture the process followed by the committee to reach consensus, including discussions, decision-making processes and rationale. Compensation committees may also be required to formally report to the board of directors throughout the year to ensure they are meeting the responsibilities outlined in the charter.

Regardless of whether you’re a small non-profit organization or a large enterprise trading on the stock exchange, the work of these independent committees, when undertaken in good faith with fairness and transparency top of mind, can be a signal of strong organizational values and culture. 

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