The Compensation Committee is a committee of a company’s Board of Directors which has the primary responsibility of reviewing and approving the CEO’s and other named executive officers’ compensation. In addition to this responsibility, the committee also oversees the company’s equity plans, communicating the structure and progress to the full Board. With regard to Compensation Committee composition, both the New York Stock Exchange (NYSE) and Nasdaq have created requirements for companies which mandate the committee members be “independent” of management and the company.
Compensation Committee Independence refers to the independence and conflict of interest requirements for Board compensation committees imposed by the Securities and Exchange Commission (SEC) through the listing standards of the NYSE and Nasdaq. Section 952 of the Dodd-Frank Act mandated the SEC adopt rules requiring the national exchanges to prohibit the listing of any company not meeting the independence requirements for compensation committees. The June 2012 SEC regulations, which were adopted by the NYSE and the Nasdaq, do not provide a bright-line rule with regards to independence standards.
Instead, the SEC rule gives the board discretion to determine whether a director is independent according to several factors, most having to do with previous work or consulting done for the company as well any other personal relationship which threaten to taint the independence of the director.
Multiple Interpretations Across the Industry
The NYSE adopted the SEC rules near verbatim, making only small additions to the rules which supplemented its existing compensation committee and independence rules. Nasdaq, however, did not require a compensation committee prior to the rules adoptions, and so it had to make more significant changes to its own listing standards to adopt the SEC’s rules. The SEC approved both the exchange’s listing standards in January 2013 and the Center does not expect the changes to have a major impact on most large companies, which already had compensation committees meeting the standards.
However, Compensation Committees’ areas of responsibility have expanded to include succession, executive development, talent acquisition, and human capital management. That includes the increased focus on building more diverse, equitable, and inclusive corporate cultures.