Proposed Listing Standards for Compensation Committees as Required Under Dodd-Frank Act

Highlights and Next Steps for Companies regarding Proposed Listing Standards for Compensation Committees as Required Under Dodd-Frank Act

October 11 2012

Executive Summary
On September 25, 2012, both the New York Stock Exchange (“NYSE”) and the Nasdaq Stock Market LLC (“Nasdaq”) proposed changes to their respective public company listing standards with respect to the Compensation Committee and committee advisor independence requirements pursuant to Exchange Act Rule 10C-1 and Section 952 of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the “SEC Rules”).

Both the NYSE and Nasdaq proposed standards closely follow the SEC Rules.  However, as noted in our overview below, the Nasdaq standards go beyond the SEC Rules in a number of key areas, including a prohibition against any Compensation Committee member receiving fees other than for service as a director from the company.  In addition, Nasdaq proposes a number of standards, which most companies already voluntarily have in place, such as a standing Compensation Committee and adoption of a formal written Committee charter.

Overview of Proposed Standards
The “NYSE Standards” propose changes to NYSE Listed Company Manual Section 303A and the “Nasdaq Standards” propose changes to Nasdaq Listing Rules 5605 and 5615.  Generally, the NYSE and Nasdaq Proposed Standards are as follows:

Compensation Committee Member Independence
In assessing independence of Committee members, the following must be considered:

  • The source of compensation of the director, including any consulting, advisory or other compensatory fee paid by the listed company to such director;
    • Nasdaq Requirement Only; Member may not receive any consulting, advisory or other compensatory fee paid by the listed company (other than director compensation), and
  • Whether the director is affiliated with the listed company, a subsidiary of the listed company or an affiliate of a subsidiary of the listed company.

Authority and Funding of Compensation Committee
The Proposed Standards require that the Compensation Committee:

  • May, in its sole discretion, retain or obtain the advice of a compensation advisor;
  • Is directly responsible for the appointment, compensation and oversight of compensation advisors; and
  • Must be appropriately funded by the listed company.

Six Factors to Consider when Assessing Compensation Advisor Independence
When selecting a compensation advisor, legal counsel or other advisor, the Compensation Committee must consider:

  • Other services the advisor’s firm provides to the company;
  • Amount of fees the advisor’s firm receives from the company as a percentage of the firm’s total revenue;
  • Policies and procedures adopted by the compensation advisor’s firm to prevent conflicts of interest;
  • Any business or personal relationship with a member of the Compensation Committee;
  • Whether the compensation advisor owns any stock of the company; and
  • Any business or personal relationship with an executive officer of the issuer.

Compensation Committee
New Nasdaq Requirements: Companies must have a standing Compensation Committee with a formal written charter and a minimum of two independent directors.

For a more in-depth description of the NYSE and Nasdaq Proposed Standards, please see Appendix A, which contains a side-by-side comparison of the NYSE and Nasdaq Standards and Appendix B, which contains additional details on both the NYSE and Nasdaq Proposed Standards.

Effective Dates
NYSE Standards.  A company will have until the earlier of their first annual meeting after January 15, 2014, or October 31, 2014, to comply with the new standards with respect to Compensation Committee member independence.  Other standards, including the new standards requiring assessment of compensation advisor independence, will become effective July 1, 2013.

Nasdaq Standards.  A company will have until the earlier of their second annual meeting after the approval of the Nasdaq Standards or December 31, 2014, to comply with the new standards with respect to Compensation Committee member independence.  The other standards, including the requirement that the Compensation Committee (or, prior to the formation of the Committee, independent directors who determine or recommend the compensation of the CEO and the other Executive Officers) must have the specific responsibilities and authority necessary to comply with the SEC rules regarding selection, retention and funding of independent advisors, will be effective upon the SEC’s approval of the Proposed Standards.  A company will need to certify to Nasdaq within 30 days of the effective date that it has complied with the Compensation Committee listing standards.

Next Steps for Publicly Listed Companies
As a general matter, we do not believe that either the NYSE or Nasdaq Standards are likely to require material changes to the way in which our clients currently consider and approve executive compensation, assess and approve Compensation Committee members or select independent compensation advisors.

We encourage our clients to use this period prior to the effective dates to:

  • Review and/or adopt a Compensation Committee charter, corporate governance guidelines and director and officer questionnaires to ensure that these documents comply with the respective proposed standards;
  • Assess and determine the independence of Compensation Committee members to ensure the directors’ independence will not be impaired under the new independence standards;
  • Consider other factors “specifically relevant” to the company in determining the independence of its Compensation Committee members, including the additional factors considered by shareholder advisory firms;
  • Consider whether there are additional relevant factors specific to the company that the Compensation Committee should consider when assessing advisor independence; and
  • Adopt a systematic approach to documenting the Compensation Committee’s compliance with the compensation committee adviser independence assessment requirements.

Additionally, a company’s proxy statement starting in 2013, must contain disclosure as to the nature of any conflict of interest that arose for any consultant in determining or recommending the amount or form of executive or Director compensation.

Our View
With respect to our status as independent advisors to the Compensation Committee, we do not believe that anything in either the NYSE or the Nasdaq Standards will negatively impact our qualification as an independent advisor.  As we have previously stated, we believe independence is critical to our business model and our reputation, and we continue to guard it vigilantly.  We do not provide any services except those relating to executive compensation, board remuneration and related corporate governance.  When serving as advisors to a Compensation Committee, the Committee oversees all material terms of our relationships, including fee arrangements and any services to management that are separate from our service to the Committee.

Based on the NYSE and Nasdaq Proposed Standards, we have established an internal review process to assess, affirm and document our independence from each of our clients on a year-to-year basis (or more frequently as requested).

Links
Proposed Standards:  The NYSE proposal filed with the SEC can be found here. The NASDAQ proposal filed with the SEC can be found here.

Additional Review of Proposed StandardsAppendix A contains a side-by-side comparison of the NYSE and Nasdaq Standards and Appendix B contains additional details on both the NYSE and Nasdaq Proposed Standards.

About Steven Hall & Partners
Steven Hall & Partners is an independent compensation consulting firm, specializing exclusively in the areas of executive compensation, board remuneration, non-profit compensation and related governance issues.  By focusing solely on this critical and complex segment of the human resources arena, we are able to provide our clients with the highest quality expertise and best counsel available on a practical basis.  For more information, please visit www.shallpartners.com and follow us on Twitter @SHallPartners.

Contacting Steven Hall & Partners
This publication is provided by SH&P as a service to clients and colleagues.  The information contained in this publication should not be construed as legal, tax or accounting advice.  We can assist in developing effective equity award plans and setting key terms.  Please call any of our consulting staff listed below, or any member of our staff with whom you have consulted in the past.  If you have not received this publication directly from us, you may obtain a copy of any past or future related publications from Kathie Mulroe (212-488-5400; kmulroe@shallpartners.com).

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