New regulation of the compensation committees of public companies is raising the standards of best practice for executive compensation.
Compensation of executive management is one of the key functions for board of directors for any company that hires management—i.e. the executive management are not among the company’s controlling shareholders. Typically boards delegate the compensation function to a compensation committee that does not include executive management among its members. These committees often model their practices for determining executive compensation on the practices of publicly traded companies.
The Dodd-Frank Act enacted a requirement that the Securities and Exchange Commission (SEC) and the national stock exchanges develop standards for compensation committees that at a minimum require (i) independence of the compensation committee, (ii) independence of the committee’s advisors, (iii) committee authority to retain advisors, and (iv) committee funding for advisors. The SEC adopted these rules in June of this year, and the NASDAQ and New York Stock Exchanges published new listing standards for compensation committees this week. Although these rules do not directly apply to private companies, Dodd-Frank, like the Sarbanes Oxley Act before it, will influence corporate best practices for all companies.
In addition to the basic requirements—(i) independence of the compensation committee, (ii) independence of the committee’s advisors, (iii) committee authority to retain advisors, and (iv) committee funding for advisors—the proposed New York Stock Exchange standards require the board of directors to examine additional considerations in determining compensation committee independence and adopt the SEC’s requirements for compensation committee advisers. The proposed NASDAQ standards, among other things, (i) require a standing compensation committee of at least two members and (ii) outline factors that will disqualify board members from serving on the compensation committee. The new listing standards for both exchanges will become effective in 2014. Full text of the New York Stock Exchange’s proposed standard is available here. Full text of the NASDAQ’s proposed standard is available here.
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