Compensation Committee Role and Responsibilities Toolkit
Resources relating to a corporate compensation committee and its duties.
A company's board of directors can delegate its responsibilities for reviewing and determining executive compensation to a compensation committee. The benefits of having an independent compensation committee include:
Corporate governance benefits. A board can delegate to an independent committee responsibility for:
determining and approving compensation for the company's chief executive officer and other senior executives; and
designing and implementing the company's compensation strategy.
Tax deductions. Section 162(m) of the Internal Revenue Code prohibits publicly held corporations from deducting more than $1 million per year in compensation paid to certain key employees (26 U.S.C. § 162(m)). However, deductions for qualified performance-based compensation can be excluded from the calculation of the $1 million limit if, among other criteria, the performance goals are approved by a compensation committee comprised of two or more outside directors and the committee certifies that the performance goals were achieved before the compensation is paid.
Exclusion from short-swing profit provisions. The Securities Exchange Act of 1934 ( www.practicallaw.com/5-382-3808) , as amended, provides that a company can recover any profits made by any officer or director who buys and sells the company's stock within a six-month period. However, any equity compensation award made to an officer or director is excluded from the short-swing profit provisions if the award is made by a committee comprised of two or more non-employee directors.
In addition, passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 ( www.practicallaw.com/4-502-8619) and media focus on executive compensation have increased the importance of the role of compensation committees.
The Compensation Committee Role and Responsibilities Toolkit provides continuously maintained resources designed to help employers and practitioners determine which board members should be on its compensation committee, and the appropriate governance standards and duties for a compensation committee.