Compensation Committee Guide 2020

Jeannemarie O’BrienAndrea Wahlquist, and Adam Shapiro are partners at Wachtell, Lipton, Rosen & Katz. This post is based on a Wachtell memorandum by Ms. O’Brien, Ms. Wahlquist, Mr. Shapiro, David E. KahanMichael J. Schobel, and Erica E. Bonnett. Related research from the Program on Corporate Governance includes Executive Compensation as an Agency Problem by Lucian Bebchuk and Jesse Fried; and Paying for Long-Term Performance by Lucian Bebchuk and Jesse Fried (discussed on the Forum here).

Public company compensation committees continue to be challenged as they seek to approve compensation programs that directors believe will promote the sustainable long-term increase in value of a company, while taking into account all key constituent views to maximize investor support for those programs.

In 2019, as the dialogue about corporate responsibility for Environmental, Social and Governance – “ESG” – issues intensified, the focus in the compensation arena included whether to incorporate ESG-related performance metrics into compensation programs at large public companies in a meaningful way. Boards of directors will need to remain mindful that in designing compensation arrangements for their companies’ leaders, a focus beyond traditional measures of profit maximization may be warranted. Companies that give balanced consideration to the needs of all constituencies will be best positioned to achieve sustainable long-term growth.

In 2019, we also saw an emphasis on complex corporate transactions, as companies across a range of industries sought to unlock and create value in creative ways. In a fast-changing global and domestic landscape, directors continue to recognize that providing appropriate retention and severance protections for their corporate leaders affords more freedom for company leaders to nimbly adapt corporate strategies and respond collaboratively to various transactions. The social and governance issues in transformative transactions are often the key to reaching agreement in the first place and necessary predicates to a collaborative and successful integration.

Finally, we continue to advise directors to be mindful of the heightened sensitivity to pay packages that could be deemed “excessive,” both as to executives and as to the directors themselves. To that end, companies now frequently include, in new or amended equity plans, provisions specifying either the precise amount and form of director compensation (which might include both cash and equity) to be paid or meaningful director-specific individual award limits. Such limits may help avoid and defend claims challenging the level of director compensation, whether by shareholders (more accurately, plaintiffs’ law firms in search of shareholders) or, also increasingly, firms such as ISS.

We cannot emphasize enough that a thoughtful, informed and deliberative process matters when developing and approving compensation arrangements. A compensation committee that follows normal procedures and considers the advice of legal counsel and an independent compensation consultant should not fear being second-guessed by the -1-courts regarding executive compensation. To date, courts continue to apply the business judgment rule and respect executive compensation decisions, so long as the directors act on an informed basis, in good faith, and not in their personal self-interest. The ability to recruit, motivate and retain highly qualified executives remains a core mandate of the compensation committee and is essential to the long-term success of a company.

The primary objectives of this Guide are to describe the duties of public company compensation committee members and to provide information to enable compensation committee members to function most effectively.

Like prior versions, this Guide begins with an overview of key responsibilities and subsequently addresses more specific substantive issues.

  • This Guide begins with a discussion of the responsibilities of the public company compensation committee and its members, including those imposed by the various securities markets and Dodd-Frank, including disclosure requirements regarding executive and director compensation (Chapter I). We then review the fiduciary duties of compensation committees and their members under various applicable laws (Chapter II of the complete publication).
  • This Guide then outlines different means of compensating executives and the tax and other rules that apply to compensation arrangements (Chapters III and IV of the complete publication), followed by a discussion of change-in-control arrangements (Chapter V of the complete publication). We next examine regulation of compensation at financial institutions (Chapter VI of the complete publication). Chapter VII of the complete publication focuses on shareholder proposals, relations and executive compensation litigation, including a discussion of say-on-pay votes, the ongoing influence of proxy advisory firms, and the relevance of ESG-related and other non-financial goals in compensation arrangements.
  • The discussion then shifts to compensation committee composition, meetings and charters (Chapters VIII, IX and X of the complete publication).
  • Finally, this Guide addresses the compensation of directors, including a discussion of recent director compensation litigation (Chapter XI of the complete publication).
  • Examples of compensation committee charters for both NYSE- and NASDAQ-listed companies are included as Exhibits A and B of the complete publication.

I. Key Responsibilities of Compensation Committee Members

The Securities and Exchange Commission (the “SEC”), the New York Stock Exchange (the “NYSE”) and the NASDAQ Stock Market (“NASDAQ”) require a publicly held company to have a compensation committee that assumes a number of compensation-related responsibilities. It also is advisable for compensation committees to assume certain additional responsibilities. It is important, therefore, that a compensation committee understand what is expected of it, and that it be diligent in ensuring that it appropriately and faithfully fulfills its mandate.

A. Responsibilities Imposed by the Securities Markets and Dodd-Frank

1. New York Stock Exchange Requirements

The NYSE requires that all listed companies subject to its corporate governance listing standards have a compensation committee composed entirely of independent directors [1] with a written committee charter that addresses all of the duties described in this section. [2] The NYSE further requires that the compensation committee carry out a number of minimum responsibilities. While the responsibilities of a compensation committee may be delegated to subcommittees, each subcommittee still must be composed entirely of independent directors and also have a published charter. [3]

Under NYSE rules, a compensation committee must, at a minimum, (1) review and approve goals and objectives relevant to the chief executive officer’s (“CEO”) compensation, (2) evaluate the CEO’s performance in light of such goals and objectives, and (3) either as a committee or together with the other independent directors, determine and approve the CEO’s compensation based upon such evaluation. In determining the long-term incentive component of CEO compensation, the NYSE suggests that a compensation committee consider (a) the company’s performance and relative shareholder return, (b) the value of similar incentive awards to CEOs at comparable companies, and (c) the awards given to the CEO in past years. [4] Compensation committee responsibilities regarding CEO compensation do not preclude discussion of CEO compensation with the board of directors generally.

In addition, under NYSE rules, a compensation committee must recommend non-CEO executive officer compensation to the board of directors. This requirement means that a listed company’s compensation committee must recommend compensation of the president, the principal financial officer (the “PFO” or “CFO”), the principal accounting officer (or, if there is no principal accounting officer, the controller), any vice president of a principal business unit, division or function (such as sales, administration or finance), any other officer who performs a policy- making function, or any other person who performs similar policy-making functions. A compensation committee also is charged with recommending to the board of directors the approval of incentive and equity-based compensation plans that are subject to board of directors’ approval. Additionally, the NYSE reiterates and adopts the SEC requirement that a compensation committee produce a report on executive officer compensation required to be included in the listed company’s annual proxy statement or annual report on Form 10-K.

Under NYSE listing standards adopted in response to Dodd-Frank, the compensation committee may, in its sole discretion, retain or obtain the advice of a compensation consultant, independent legal counsel or other advisor, and is directly responsible for the appointment, compensation and oversight of that advisor’s work. The company must provide for appropriate funding, as determined by the compensation committee, for payment of reasonable compensation to the advisor. Prior to retaining an advisor (other than in-house legal counsel or an advisor that consults on broad-based plans that do not discriminate in favor of executive officers or directors), the compensation committee must, subject to limited exceptions, take into consideration all factors relevant to that advisor’s independence from management, including (1) whether the advisor’s firm provides other services to the company; (2) the amount of fees from the company received by the advisor’s firm relative to the total revenue of the advisor’s firm; (3) conflict-of-interest policies of the advisor’s firm; (4) any business or personal relationships between the advisor and members of the compensation committee; (5) any stock of the company owned by the advisor; and (6) any relationships between the advisor or the advisor’s firm and an executive officer of the company. These rules do not require the compensation committee to retain only independent advisors; rather, they mandate that the compensation committee consider the above six factors (and any other factors, if relevant) before selecting an advisor.

Lastly, a compensation committee must conduct an annual self-evaluation of its performance. Many consulting firms have published their recommended forms and procedures for conducting these evaluations. Consultants also have established advisory services to assist a committee with the evaluation process. A compensation committee must decide how to conduct its evaluation. In making the decision, it is not required that the directors receive outside assistance, and no specific method of evaluation is prescribed. A compensation committee may elect to do the evaluation by discussions at meetings. Documents and minutes created as part of the evaluation process are not privileged, and care should be taken not to create ambiguous records that may be used in litigation against the company and its directors. [5]

2. NASDAQ Requirements

Under NASDAQ listing standards adopted in response to Dodd-Frank, NASDAQ-listed companies are now required to have a compensation committee consisting of at least two independent directors. The independence requirements under NASDAQ rules are discussed in Chapter VIII of the complete publication. NASDAQ also requires the compensation committee to have a formal charter, as described in greater detail in Chapter X of the complete publication.

Under the NASDAQ rules, the compensation committee is responsible for determining, or recommending to the board of directors for determination, the compensation of the CEO and all other executive officers of the company. [6] The CEO is prohibited from attending meetings while the compensation committee members are deliberating or voting on the CEO’s compensation under the NASDAQ listing standards. NASDAQ places no such restriction on other executive officer attendance and does not prohibit the attendance of the CEO during compensation committee discussions concerning other executive officer compensation.

NASDAQ provides, however, that if a compensation committee is composed of at least three members, then, under “exceptional and limited circumstances” and if certain conditions are met, one director who is not independent under its rules may be appointed to the compensation committee without disqualifying the compensation committee from considering compensation matters that could ordinarily be entrusted to it had it been fully independent. [7] A compensation committee or a company’s independent directors must approve equity compensation arrangements that are exempted from the NASDAQ shareholder approval requirement as a prerequisite to taking advantage of any such exemption. [8]

As with NYSE rules, NASDAQ rules provide that the compensation committee may, in its sole discretion, retain or obtain the advice of a compensation consultant, independent legal counsel or other advisor, and is directly responsible for the appointment, compensation and oversight of that advisor’s work. The company must provide for appropriate funding, as determined by the compensation committee, for payment of reasonable compensation to the advisor. NASDAQ rules require the compensation committee to consider the six factors described in Section A.1 of this Chapter I, but do not expressly require the compensation committee to take into consideration all of the factors relevant to an advisor’s independence from management.

B. CEO and Executive Officer Compensation

While both the NYSE and NASDAQ only require that a compensation committee recommend to the full board of directors non-CEO executive officer compensation, vesting complete authority in the compensation committee for such individuals is advisable given the requirements of Section 162(m) of the Code (albeit of diminishing application given the 2017 Tax Reform Act), the insider trading short-swing profit safe harbor of Rule 16b-3 under Section 16(b) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and state law fiduciary duty jurisprudence, all of which provide substantial incentives for the compensation of executive officers to be determined by a committee of independent directors. A discussion of the requirements of Section 162(m) of the Code and Rule 16b-3 under the Exchange Act is set forth in Chapters IV and VIII of the complete publication.

In evaluating and setting executive officer compensation, a compensation committee should be deliberative and guided by its established compensation policy. If compensation levels are linked to the satisfaction of predetermined performance criteria, a compensation committee should discuss whether, and to what degree, the criteria have been satisfied. In addition, as more fully discussed in Chapter IV of the complete publication, it may be necessary for a compensation committee to certify satisfaction of such performance criteria to take advantage of any remaining tax deductibility opportunities of Section 162(m) of the Code.

Furthermore, to help ensure that compensation and severance packages are justifiable, members of a compensation committee should fully understand the costs and benefits of the compensation arrangements that they are considering. Particular attention should be paid to severance arrangements and to all benefits provided to senior management in connection with termination of employment, as well as the impact of a change in control of the company on equity incentives and other compensation arrangements. It may be useful for a compensation committee to utilize a tally sheet, which provides a concise breakdown of the various components of a given executive officer’s compensation package in scenarios that include continued employment, termination of employment and change in control of the company.

C. Non-Executive Officer Compensation and Broad-Based “ERISA” Plans

There is no particular allocation of responsibilities for the compensation and benefits of a company’s employees that is appropriate for every company. Companies should consider whether the compensation committee will have responsibility for employee compensation beyond that of executive officers. In addition, companies should consider whether the compensation committee will have responsibility for risk oversight in incentive compensation plans for all employees, as discussed in Section I of this Chapter I, below. Limiting a compensation committee’s responsibility to executive officer compensation may make sense for many companies so that directors can concentrate their limited time and resources on establishing proper incentives for those employees who are most likely to influence company performance. However, companies should be mindful that due to increased focus on pay ratios and shareholder litigation surrounding compensation issues generally, it may be useful for compensation committees to increase their oversight of total compensation expenditures (e.g., bonus compensation in financial institutions). Ultimately, the full board of directors is charged with allocating compensation responsibilities, but the compensation committee may be best equipped to make recommendations to the full board of directors concerning the compensation committee’s scope of responsibility.

As noted in Chapter II of the complete publication, a compensation committee also may have fiduciary responsibilities under the Employee Retirement Income Security Act of 1974, as amended (“ERISA”), for certain broad-based employee benefit plans, either as a result of language in plan documents or the compensation committee’s own charter, or by virtue of actually exercising such responsibilities. It is possible for a plan to state that the full board of directors or the compensation committee is responsible for administering ERISA plans or for managing the investment of their assets, either of which will implicate ERISA’s fiduciary duty rules, which in most instances require that the fiduciary act exclusively for the benefit of the plan participants. It may or may not be appropriate for a compensation committee to assume such responsibilities—as with shareholder litigation surrounding compensation issues generally, it may be more useful to limit the responsibility of boards of directors and their committees with respect to employee benefit plans—but, in any event, companies should ensure that the documentation and actual exercise of fiduciary responsibilities are consistent, and that all who are ERISA fiduciaries are aware of that fact and understand the legal responsibilities it entails.

D. Development of Compensation Philosophy

A compensation committee must develop a compensation policy tailored to the company’s specific business objectives in order to evaluate, determine and meet executive compensation goals. It should be noted that a compensation policy not only makes good business sense, but the SEC requirements for the Compensation Discussion & Analysis section of the annual proxy statement (the “CD&A”) require discussion of such a policy.

E. Compensation-Related Disclosure Responsibilities

A compensation committee should oversee compliance with all compensation-related disclosure requirements. Such compliance presents a significant challenge in light of the comprehensive SEC rules regarding disclosure of executive officer and director compensation. Compensation committee members should request that management review with them (1) potential disclosures that may be required in connection with compensation-related actions, including the timing requirements for any such disclosure, and (2) the nature of the information to be disclosed in upcoming public filings, including information relating to the compensation committee members themselves. Importantly, under current SEC guidance, a company that receives an SEC comment letter due to noncompliance with executive compensation disclosure rules will have to amend any materially noncompliant filings. Set forth below are the principal components of the executive compensation disclosure required each year.

1. Compensation Discussion and Analysis

The CD&A provides investors with material information necessary for an understanding of a company’s compensation policies and decisions regarding the named executive officers (“NEOs”), which generally include the CEO, the CFO and the three most highly compensated executive officers other than the CEO and the CFO. In particular, the CD&A must explain the rationale behind all material elements of NEO compensation, including the overall objectives of the compensation programs and the rationale underlying and method of determining specific amounts for each element of compensation. Under Dodd-Frank, a company also must address in its CD&A whether (and if so, how) the company has considered the results of the most recent say-on-pay vote in determining compensation policies and decisions.

The CD&A is considered “filed” with the SEC; accordingly, misleading statements in the CD&A expose a company to liability under Section 18 of the Exchange Act. In addition, to the extent that the CD&A is included or incorporated by reference into a periodic report, the disclosure is covered by the CEO and CFO certifications required by the Sarbanes-Oxley Act of 2002 (“Sarbanes-Oxley”). If forward-looking information is included in the CD&A, a company may rely on the safe harbors for such information.

2. Compensation Committee Report

A company must include a Compensation Committee Report in its proxy statement and its annual report on Form 10-K (incorporation by reference into the Form 10-K from the proxy statement is permitted). The Compensation Committee Report is required to state whether a compensation committee has reviewed the CD&A, discussed it with management and recommended it to the board of directors. The names of the compensation committee members must appear below the report. To help ensure the accuracy of the Compensation Committee Report, the compensation committee should have detailed discussions with management concerning the CD&A in advance of the filing deadline.

3. Additional Annual Disclosure Regarding NEO Compensation

The SEC rules require quantitative elements of executive compensation of NEOs to be disclosed in tabular format, together with narrative explanations and footnotes that describe the quantitative disclosure. The central component of the tabular disclosure is the Summary Compensation Table, which discloses, by category, all compensation earned by each NEO during the prior fiscal year, including compensation attributable to salary, bonus, equity awards, change in pension value, earnings on nonqualified deferred compensation and perquisites.

Other required tables provide detailed information regarding:

  • equity awards and bonus award opportunities granted to NEOs during the last fiscal year;
  • outstanding equity awards at the end of the last fiscal year, including vesting schedule and exercise price, to the extent applicable;
  • stock options that NEOs have exercised during the last fiscal year and NEO stock awards that have vested during the last fiscal year;
  • pension plan participation by NEOs, including accumulated benefits and any payments during the last fiscal year; and
  • NEO participation in deferred compensation plans, including executive and company contributions, earnings, withdrawals, distributions, and the aggregate balance at the last fiscal year-end.

Finally, companies must describe the circumstances in which an NEO may be entitled to payments and/or benefits upon termination of employment and/or in connection with a change in control and quantify the value of those payments and benefits as of fiscal year-end. As discussed in greater detail below, companies may wish to consider utilizing in their annual proxy statements the format prescribed by Dodd-Frank for disclosing and quantifying change-in-control protections in proxy statements relating to corporate transactions. [9]

4. Director Compensation Table

The SEC rules [10] also require a Director Compensation Table that must provide disclosure regarding director compensation during the prior fiscal year that is comparable to the Summary Compensation Table for NEOs, including disclosure with respect to perquisites, consulting fees and payments or promises in connection with director legacy and charitable award programs. Additionally, the company must provide narrative disclosure of its processes and procedures for the determination of director compensation. As discussed in Chapter XI of the complete publication, recent shareholder litigation regarding director compensation has increased focus on expanding this disclosure.

5. Compensation Committee Governance

Narrative disclosure regarding the governance of a compensation committee is also required by SEC rules. The narrative disclosure must describe a company’s processes for determining executive and director compensation, including the scope of authority of the compensation committee; the extent to which the compensation committee may delegate its authority; and any role of executive officers and/or compensation consultants in making determinations regarding executive and/or director compensation. If compensation consultants play a role in determining executive and/or director compensation, a company must identify the consultants, state whether they are engaged directly by the compensation committee, and describe the nature and scope of their assignment.

6. Compensation Consultants and Advisors

SEC rules require annual disclosure of the role of compensation consultants in determining or recommending executive and director compensation, including:

  • the identity of the consultants engaged;
  • whether the consultants were engaged directly by the compensation committee;
  • the nature and scope of the assignment; and
  • under certain circumstances, the value of the services provided.

Dodd-Frank added another layer of requirements relating to compensation consultants, and the SEC has adopted related rules. Under these rules, a company must disclose whether the work of a compensation consultant who played any role in determining or recommending the form or amount of executive and director compensation raised any conflicts of interest, the nature of any such conflicts, and how the conflicts are being addressed.

7. Risk and Broad-Based Compensation Programs

To the extent that risks arising from a company’s compensation programs for employees generally (not just executives) are reasonably likely to have a material adverse effect on the company, the SEC rules require a stand- alone discussion in the annual proxy, independent from the CD&A, of the company’s compensation programs as they relate to risk management and risk-taking incentives. The threshold under the rules—reasonably likely to have a material adverse effect—sets a high bar for disclosure. A company should engage in a systematic process involving participants from its human resources, legal and finance departments in which it (1) identifies company incentive compensation plans, (2) assesses the plans to determine if they create undesired or unintentional risk of a material nature, taking into account any mitigating factors, and (3) documents the process and conclusions. If a company concludes that its programs are not reasonably likely to have a material adverse effect, no disclosure is required; however, as a practical matter, it may be advisable to provide such disclosure because ISS has encouraged disclosure about the review process and the company’s conclusions and, to the extent that no disclosure is provided, the SEC may seek confirmation from the company that the risk review was done and that the company determined that disclosure was not required. While the compensation committee need not be involved in the evaluation of risk as applied to incentive compensation arrangements themselves, the compensation committee should satisfy itself that management has designed and implemented appropriate processes to make such evaluations.

8. Dodd-Frank Disclosure Requirements

The SEC has issued either proposed or final rules regarding various compensation-related disclosure requirements mandated by Dodd-Frank. On April 29, 2015, the SEC issued proposed rules regarding annual disclosure of the relationship between compensation actually paid to executive officers of a listed company and the financial performance of such company (the so-called “pay-for-performance” disclosure, discussed in more detail in Chapter IV of the complete publication). On July 1, 2015, the SEC also proposed rules regarding the recovery of executive compensation (so- called “compensation clawbacks,” discussed in more detail in Chapter IV of the complete publication). These rules still await finalization by the SEC.

a. Pay Ratio Disclosure

Dodd-Frank requires that annual proxy statements filed in respect of fiscal years beginning on or after January 1, 2017 include annual disclosure of the ratio between the CEO’s annual total compensation and the median compensation of all other employees. A study of 2005 public companies as of the end of the second quarter of 2018 found an average pay ratio of 144:1 and a median pay ratio of 69:1. [11]

The final pay ratio rules [12] provide that, for purposes of calculating the pay ratio, companies are required to consider the annual total compensation of “all employees” (other than the CEO and contract/leased workers) as of a date selected by the company within the last three months of its most recently completed fiscal year. In addition, the rules include a handful of exclusions that companies may find useful (as described in more detail in our client memorandum on these rules, dated August 6, 2015). The rules provide companies with flexibility when identifying the median employee, including that companies may narrow the relevant employee population by using statistical sampling or other reasonable methods, [13] may identify the median employee using either (1) annual total compensation or (2) any other compensation measure that is consistently applied to all employees included in the calculation, and may make certain cost-of-living and annualizing adjustments in identifying the median employee and annual total compensation. Finally, companies may use the same median employee for three consecutive years, unless there has been a change in the employee population or employee compensation arrangements that the company reasonably believes would result in a significant change in the pay ratio disclosure. Once identified, the median employee’s and the CEO’s annual total compensation is to be determined in accordance with the disclosure rules that prescribe the calculation of total compensation for the named executive officers for purposes of the annual proxy Summary Compensation Table. A company must briefly describe its methodology for identifying the median employee, and, to promote comparability from year to year, if a company changes the methodology, and if the effects of any such change are significant, the company must briefly describe the change and the reasons for the change.

b. Hedging Disclosure

On December 18, 2018, the SEC adopted final rules requiring companies to describe their policies regarding the hedging of company equity securities that are held, directly or indirectly, by employees (including officers) or directors or to state that they do not have any such policies. [14] The required disclosure covers equity securities (whether or not compensatory) of a company, its parent or subsidiary and any other subsidiary of its parent. A policy may be disclosed verbatim or in summary form. The final rule does not define key terms such as “hedging” or “held, directly or indirectly,” but the promulgating release makes clear that these phrases should be interpreted broadly.

It is worth highlighting that the new Item 407(i) only requires disclosure. It does not prohibit hedging transactions or mandate that a company adopt a hedging policy. Companies must comply with the new rule in proxy or information statements for the election of directors during fiscal years beginning on or after July 1, 2019. The rule covers emerging growth companies and smaller reporting companies, but does not apply to foreign private issuers.

9. Current Reports on Form 8-K

A company must report certain material actions and events relating to appointment or departure of directors, NEOs, and other senior officers, or relating to the compensation of NEOs, in a Current Report on Form 8-K within four business days following the occurrence of the action or event.

In general, the appointment or retirement, resignation or termination of any NEO and certain other specified officers must be reported on Form 8-K. Under applicable SEC guidance, the disclosure obligation relating to resignation or retirement is triggered by notice of a decision, whether or not in writing, but the question of whether communications represent discussion or consideration or an actual notice of a decision is a facts-and- circumstances determination. Given the timing requirements associated with Form 8-K, it is important that members of the compensation committee and other directors be mindful of this distinction when discussing potential officer departures.

In addition, the adoption or material amendment of a material compensatory plan, contract or arrangement with an NEO must be disclosed on Form 8-K. The determination of whether a Form 8-K is required in respect of a compensatory action for an NEO is not always black-and-white and there are meaningful exceptions that may apply with respect to ordinary course compensation decisions, including that an award that is materially consistent with the previously disclosed terms of a plan need not be disclosed on Form 8-K if it is disclosed when Item 402 of Regulation S-K requires such disclosure.

Form 8-K disclosure is also implicated when a company elects a new director, except by vote of security holders, and when a director has resigned or refuses to stand for re-election because of a disagreement with the registrant, known to an executive officer of the registrant, on any matter relating to the registrant’s operations, policies or practices.

10. Conclusion

The importance of clear, thorough compensation disclosure that effectively conveys the business rationale for executive compensation decisions is greater than ever, due to the significant attention from the SEC, the media and corporate governance activists, and the imposition of mandatory say-on-pay. Companies should expect heightened focus on, and, accordingly, clearly explain the basis for, pay levels relative to total shareholder returns, termination and change-in-control payments, benchmarking practices, the existence and nature of compensation clawback policies and the relationship between particular compensation arrangements and risk.

The complete publication, including footnotes, is available here.


1The NYSE definition of “independent” is explored further in Chapter VIII of the complete publication.(go back)

2Under NYSE corporate governance rules, a NYSE-listed company is required to maintain a website that must include, among other things, a printable version of its compensation committee (and any subcommittee thereof) charter. See NYSE Listed Company Manual Section 303A.05.(go back)

3A listed company of which more than 50% of the voting power for the election of directors is held by an individual, a group or another company (known as a “controlled company”) is exempt from these requirements.(go back)

4The NYSE clarifies that a compensation committee is not precluded from approving awards so as to comply with applicable tax laws, with or without ratification by the full board.(go back)

5For a brief discussion of the factors a compensation committee should consider in its annual self-evaluation, see Wachtell, Lipton, Rosen & Katz, Nominating and Corporate Governance Committee Guide.(go back)

6See NASDAQ Listed Company Manual Section 5605(d).(go back)

7The specific conditions that must be met for such exemption to be available, as well as the precise contours of the NASDAQ definition of “independent,” are discussed in Chapter VIII of the complete publication.(go back)

8The shareholder approval requirements and the relevant exemptions for certain compensation committee approved arrangements are discussed in Chapter IV of the complete publication.(go back)

9See Chapter V of the complete publication.(go back)

10See Item 402(k) of Regulation S-K, 17 C.F.R. § 229.402(k) and the Instructions related
thereto.(go back)

11See Pearl Meyer & Partners, LLC’s The CEO Pay Ratio: Data and Perspectives from
the 2018 Proxy Season (Oct. 14, 2018).(go back)

12See Pay Ratio Disclosure: Final Rule, 80 Fed. Reg. 50103 (Aug. 18, 2015) (amending
12 C.F.R. Parts 229, 240 and 249).(go back)

13On September 21, 2017, the SEC issued guidance regarding the use of statistical sampling and other reasonable methodologies. This guidance has generally been viewed positively by companies as easing the burden of ensuring compliance with these rules. See SEC, Division of Corporate Finance Guidance on Calculation of Pay Ratio Disclosure.(go back)

14See Disclosure of Hedging by Employees, Officers and Directors: Final Rule, 84 Fed.
Reg. 2402 (Feb. 6, 2019) (amending 17 C.F.R. Parts 229 and 14a-101), available here: back)

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