January 28, 2013
Revisiting Compensation Committee Charters
– Brink Dickerson, Troutman Sanders
I recommend that when companies revise their compensation committee charters to reflect the new NYSE and Nasdaq rules that they also consider updating their charters in other regards as well. Troutman recently reviewed the compensation committee charters for the S&P 100 and was surprised at how many of them were out of date. The focus of the review was to assess how deep within an organization compensation committees approve compensation levels.
A large plurality, but not a majority, provide for committee approval of the compensation of “executive officers.” A surprisingly large number tie approval to Section 16 “officers,” which is not a definition generally used in the compensation context, or various ill-defined groups such as “executive management” or “senior executives.” A significant number require full board approval of compensation, which also is surprising given board fatigue at many companies that large.
The important takeaway, however, is that the discussions of the roles of compensation committees in many companies’ CD&As do not reflect the authority that they have and supposedly are to exercise under their charters. Some over-state it; others under-state it; some do so significantly. Also, a solid majority of the charters do not reflect some of the responsibilities that the compensation committees have been charged with post-SOX, including administering stock ownership guidelines, making claw-back decisions, and assessing the risk aspects of compensation programs.
As a litigation risk minimizer, I recommend that compensation committee charters should clearly delineate which officers must have their compensation approved by the compensation committee – and I suggest “executive officers” as defined in Rule 3b-7, other officers that report directly to the CEO, and such other employees as are identified by the compensation committee in a resolution – and otherwise delegate to management the establishment of compensation to the extent delegable under the applicable plans. I also recommend that compensation committee charters be updated to otherwise reflect current practices and responsibilities.