SEC Changes Criteria for Compensation Committees | New SEC Regulations
SEC Changes Criteria for Compensation Committees
Do you serve as a Board Member for a publicly held company? Are you a compensation consultant or SEC attorney currently working with a public company? If you answered yes, then you need to be aware that the SEC recently issued proposed rules designed to increase the independence of compensation committees at SEC registered companies. Required by both the Dodd-Frank Wall Street Act and the Consumer Protection Act, the new rules specify all U.S. stock exchanges must require public companies traded on their exchange to meet specific standards regarding the Compensation Committee and Compensation Consultants.
Key Point: This means ANY publicly held company registered on a U.S. based stock exchange will soon be required to comply with new SEC rules and to develop new policies governing the Compensation Committees of member companies.
Committee Member Selection Rules
The proposed rules provide guidance on the process for selecting members to serve on the Compensation Committee. The rules require that individual stock exchanges mandate that any listed companies’ Compensation Committee members be both a member of the Board of Directors and “independent”. Each exchange will be required to create their own definition of what constitutes an independent professional. However, the SEC has offered some criteria to consider when defining the independence criteria. These include:
- Compensation. A key aspect to independence is compensation, its source, and how it may affect decision making. There are a few key issues to consider. The board member’s source of compensation as it relates to the company. Does the member receive any consulting, advisory or compensatory fees paid by the company? How do these payments impact the member’s ability to make fair and unbiased decisions regarding compensation?
- Affiliation. A secondary aspect to independence is affiliation. There are a few key issues to consider. Is the Board member affiliated with the parent company, a subsidiary of the company, or an affiliate of a subsidiary of the company?
Committee Funding & Authority
The proposed rules would also require exchanges to adopt new standards for listed companies that provide the following directives for the operation of the Compensation Committee. These include:
- The Committee may, at its sole discretion, retain, appoint, or obtain the advice of a compensation, legal or other such advisor
- The Committee is responsible for the appointment, payment and oversight of any compensation or other such advisors
- The listed company is required to appropriately fund the Compensation Committee to accomplish all relevant objectives.
Advisor Selection Requirements
The proposed rule requires that exchanges develop a set of standards to be used by the Compensation Committee when selecting an advisor including compensation consultants, legal counsel, or other such advisor, only after considering several key independence criteria. These include:
- Additional Services. The committee must assess whether the compensation consulting firm employing the adviser is providing any other services to the company
- Advisor Income. The Committee must determine how much the compensation consulting firm that employs the advisor has received in fees from the company. They must also assess this number in terms of the total revenue that person brings to the firm.
- Conflict of Interest Policies. The Committee must determine what policies and procedures the compensation consulting firm is using to prevent conflict of interest situations from arising.
- Existing Relationships. The Committee must also determine whether the selected compensation consultant has any current or previous personal or business relationships with any current or immediate past member of the committee.
- Stock Ownership. Finally, the Committee must determine whether the selected compensation consultant owns any company stock.
This criteria has been established by the SEC as a minimum set of standards that Compensation Committees should have as part of their advisor selection process. They encourage exchanges to develop additional criteria as part of their policymaking endeavor.
It is imperative that your company plan ahead to be prepared for the changes brought about by these new rules. If you are unsure how these rules will impact the Board of Directors and Committee structure, then contact us now. For additional information, contact Craig Podradchik, CPA at 561-367-1040, or click here to email Craig.