Compensation Committees

Summary

NYSE and Nasdaq require their listed companies to have a compensation committee

In addition, other legal requirements are typically satisfied through use of an independent compensation committee

NYSE 303A.05

Text of Rule

Listed companies to have a compensation committee ...

Composed entirely of independent directors

... with a written charter covering committee's responsibilities including, at a minimum

Authority to determine and approve CEO compensation, either alone or with other independent directors
Make recommendations on non-CEO compensation
Make recommendations on incentive compensation plans / equity-based plans
Produce a report on executive compensation to be included in proxy statement
Provide an annual performance evaluation of the committee

Committee charter should also address

Committee member qualifications
Committee member appointment and removal
Committee's structure and operations
Committee's reporting to the board
Sole authority to retain and terminate compensation consultants

Committee must produce an annual report

Per NYSE 303A.08, must also approve any equity-compensation plans that are exempt from shareholder approval

PDF version
See also NYSE FAQs

Applies to all companies listing equity securities, with these exceptions:

NYSE FAQs

NASD Rule 4350(c)(3) / IM-4350-4

Text of 4350(c)(3)

Text of IM-4350-4

CEO and executive officer compensation must either be selected or recommended to the board by either:

Majority of independent directors, or by
Compensation committee comprised entirely of independent directors

CEO may attend deliberations about other executive officers

Committee may have one non-independent, non-management director in certain circumstances

"Controlled companies" are exempt

Listed companies have until their next annual meeting after 1.15.04 but no later than 10.31.04 -- to comply

Longer period applies for staggered boards, foreign issuers, small business issuers

SEC approval order

SEC Disclosure Requirements

S-K Item 407(e)

Disclosures regarding Compensation Committees

Charter
Processes
Interlocks
Reports

Access sample of precedent disclosures

Rule 16b-3(b)

Text of rule

Exempts certain grants of issuer securities from 16(b) liability

Including if approved by the board or by a committee "composed solely of two or more Non-Employee Directors"

IRC § 162(m)(4)(C) Definition of "Outside Director"

IRC § 162(m) disallows tax deductions by "public companies" for "excessive employee remuneration" paid to certain executives

Exception is made for performance-based
compensation, if

Compensation committee "comprised solely of 2 or more outside directors" defines and assesses the performance goals
Performance goals are disclosed to, and approved by, "shareholders"

Sample Committee Charters

Citigroup NYSE

EDGAR to access proxy disclosures

eBay NASD

EDGAR to access proxy disclosures

Home Depot NYSE

EDGAR to access proxy disclosures

Johnson & Johnson NYSE

EDGAR to access proxy disclosures

General Electric NYSE

EDGAR to access proxy disclosures

Pfizer NYSE

EDGAR to access proxy disclosures

Walt Disney NYSE

EDGAR to access proxy disclosures

Notable Cases

In re The Walt Disney Company Delaware

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