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Compensation Committee Listing Standards July 1, 2013 Deadline Approaching
Practical Law Legal Update 6-527-2455 (Approx. 5 pages)
Compensation Committee Listing Standards July 1, 2013 Deadline Approaching
by PLC Corporate & Securities
| Published on 02 May 2013 • USA (National/Federal) |
NYSE and NASDAQ standards relating to compensation committee advisors become effective on July 1, 2013.
The NYSE and NASDAQ listing standards relating to compensation committees and their advisors, approved by the SEC in January 2013, take effect in two stages:
- On July 1, 2013, NYSE and NASDAQ listed companies must comply with new rules regarding the committee's authority to retain advisors, the listed company's need to fund compensation of the committee's advisors and the committee's evaluation of the independence of its advisors.
- On the earlier of the first annual meeting after January 15, 2014 or October 31, 2014, NYSE and NASDAQ listed companies must comply with new rules regarding compensation committee independence (and in the case of NASDAQ, a new requirement to create a formal compensation committee).
The NYSE and NASDAQ have slightly different requirements and permit different exemptions. Below is a summary of those standards that apply beginning July 1, 2013, followed by information on resources offered by PLC Corporate & Securities and PLC Employee Benefits & Executive Compensation to help compensation committees navigate both new and old requirements.
NYSE Requirements
The charter of the compensation committee of a NYSE listed company must address the following:
- The compensation committee may, in its sole discretion, retain or obtain the advice of a compensation consultant, independent legal counsel or other advisor.
- The compensation committee must be directly responsible for the appointment, compensation and oversight of any compensation advisor.
- The listed company must provide appropriate funding for payment of reasonable compensation to a compensation advisor, as determined by the compensation committee.
- Before selecting, or soliciting advice from, compensation advisors (other than in-house legal counsel), the compensation committee must take into consideration all factors relevant to that person's independence from management, including:
- provision of other services to the company by the person that employs the consultant, counsel or other advisor;
- amount of fees paid by the company to the person that employs the consultant, counsel or other advisor, as a percentage of that person's total revenue;
- policies and procedures of the person that employs the consultant, counsel or other advisor regarding the prevention of conflicts of interest;
- any business or personal relationship between the consultant, counsel or other advisor and any member of the committee;
- ownership by the consultant, counsel or other advisor of the company's stock; and
- any business or personal relationship between the compensation advisor or the person that employs the compensation advisor and any executive officer of the company.
Smaller reporting companies must comply with the first three requirements, but do not have to comply with the requirement to evaluate the independence of its compensation advisors. Other listed entities that are already exempt from the NYSE's existing compensation committee requirements, including controlled companies and foreign private issuers, are exempt from all of these new requirements.
NASDAQ Requirements
The compensation committee or group of independent directors that oversees executive compensation of a NASDAQ-listed company must have the following responsibilities and authority:
- The compensation committee or director group may in its sole discretion retain or obtain the advice of a compensation consultant, legal counsel or other advisor.
- The compensation committee or director group must be directly responsible for the appointment, compensation and oversight of any compensation advisor.
- The listed company must provide appropriate funding for payment of reasonable compensation to a compensation advisor, as determined by the compensation committee or director group.
- Before selecting or soliciting advice from compensation advisors (other than in-house legal counsel), the compensation committee or director group must take into consideration the following factors:
- provision of other services to the company by the person that employs the consultant, counsel or other advisor;
- amount of fees paid by the company to the person that employs the consultant, counsel or other advisor, as a percentage of that person's total revenue;
- policies and procedures of the person that employs the consultant, counsel or other advisor regarding the prevention of conflicts of interest;
- any business or personal relationship between the consultant, counsel or other advisor and any member of the committee;
- ownership by the consultant, counsel or other advisor of the company's stock; and
- any business or personal relationship between the compensation advisor or the person that employs the compensation advisor and any executive officer of the company.
These new provisions must be reflected in the compensation committee charter or in a resolution or other action formalizing the delegation of authority for the oversight of executive compensation to the group of independent directors.
Smaller reporting companies and other listed entities that are already exempt from NASDAQ's existing compensation committee requirements, including controlled companies and foreign private issuers, are exempt from all of these new requirements.
Practical Considerations
Listed companies that are not otherwise exempted from the new rules should ensure that:
- By July 1, their compensation committees' charters or formal resolutions regarding the actions of directors that oversee compensation as applicable, are updated to include the new responsibilities and authority and approved by their boards of directors.
- Beginning July 1, their compensation committees, or director groups, as applicable, must conduct an independence assessment before retaining or requesting advice from any advisor, including their compensation consultant and their or their companies' outside legal counsel. In particular:
- the committee or director group does not have to retain an independent advisor. Rather, it must consider the six independence factors before it either selects or receives any advice (on any topic) from an advisor (other than in-house legal counsel); and
- the committee or director group does not need to assess the independence of any compensation advisor that only consults on certain types of broad-based plans or provides information that is not customized for the company.
Resources
PLC Corporate & Securities and PLC Employee Benefits & Executive Compensation offer several resources to assist compensation committees with both new and existing responsibilities and requirements:
- For a form of compensation committee charter that has been updated to reflect not only the new standards that take effect on July 1, 2013 but also the standards that take effect in 2014, see Standard Document, Compensation Committee Charter.
- For a form of questionnaire that compensation committees can use to obtain information relating to the six independence factors to aid in their evaluation of advisors, see Standard Document, Compensation Consultant Conflict of Interest Questionnaire.
- For more information on the new compensation committee requirements, including the independence requirements that take effect in 2014, see Practice Note, Corporate Governance Standards: Compensation Committee.
- For additional resources and information on existing compensation committee obligations, see Compensation Committee Role and Responsibilities Toolkit.