A quick blog today with two reminders for compensation committees about their independence and charters.
As the annual meeting approaches, many boards think about the composition of their committees. Regarding the compensation committee, boards are asking whether they still need to satisfy the “outside directors” requirement of Code Section 162(m), since the reason for that requirement (performance-based compensation) has been repealed. The only reason for continuing to maintain a compensation committee that satisfies the requirements of Code Section 162(m)—and it is an important one—is if there are any unvested or unpaid performance-based awards outstanding and grandfathered. If there are any such awards outstanding, a Committee consisting solely of “outside directors” would need to certify that the performance goals were achieved in order to ensure/preserve their deductible status. If no such awards remain outstanding, a board only need concern itself with the Section 16b-3 and the NYSE requirements and possibly the ISS “demands,” which are slightly more restrictive in that they do not count any former officer as independent.
Two separate issues arise with respect to the compensation committee charter. First, all companies/boards should consider whether to eliminate certain provisions and requirements that were placed in the charter only to satisfy the requirements of (now repealed) performance-based exception of Code Section 162(m). Second, companies that have elected smaller reporting company (SRC) status should consider revising the committee charter to reflect the slightly reduced duties applicable to the compensation committee of an SRC, which often are listed in the charter. For example, the committee of SRC no longer would need to prepare or review a CD&A, provide a “Compensation Committee Report” for the proxy, or conduct or report on a “compensation risk assessment.” Having said this, a committee may want to retain certain functions even though not required, but it would be best to modify the charter language to clarify that those are not mandatory duties.