What is it:
The compensation committee is the subset of a company's board of directors responsible for designing, approving, and overseeing executive compensation. Their remit includes setting performance metrics, approving individual pay packages, and exercising any discretion the plan documents reserve for it.
Why does it matter:
Nearly every consequential decision covered elsewhere in this glossary, from what metrics apply to your PSU grant to whether Negative Discretion gets used, traces back to this committee. As a subset of the board of directors, their goal is to properly incentivize the executive team to achieve desired strategic or operational objectives. The constructs and formulas they create are designed to reward specific achievements for your business. This explains why plan design and outcomes can vary so much from company to company.
What do people most often get wrong:
People often think of compensation formulas as fixed, objective, self-executing rules. In reality, the compensation committee designs the formula, chooses when to revisit it, and in many plans retains explicit authority to adjust the result. The formula is a tool the committee uses and controls.