News & Insights

Directors Governance Center

April 10, 2017

2017 Compensation Committee Guide (Harvard Forum on Corporate Governance)


In a recent article for the Harvard Law School Forum on Corporate Governance and Financial Regulation, Michael Segal, a partner at Wachtell, Lipton, Rosen & Katz, summarizes the firms recently published 2017 Compensation Committee Guide, which highlights the key responsibilities of public company Compensation Committees and discusses their role in overseeing the companys compensation decisions, policies, internal controls and disclosures.

Mr. Segal begins with a brief discussion of trends that Compensation Committees and Directors can expect in the near term. Specifically, Mr. Segal notes that:**Shareholder Activism* . Shareholder activism and litigation continue to play a significant role in shaping executive compensation trends. Compensation Committees and Directors should be mindful of hot-button issues that have garnered increased shareholder attention in recent years such as excessive compensation packages and meaningful award limitations.

**Regulatory Uncertainty* . The 2016 election added an element of uncertainty to the regulatory landscape, as lawmakers aim to scale back complex business regulations such as Dodd-Frank. For example, Mr. Segal notes that while Dodd-Franks heightened pay ratio disclosure rules were previously finalized and required for proxy statements beginning in 2018, the SEC has recently reopened public comment on these requirements, suggesting that more changes may be forthcoming from the new SEC leadership. Mr. Segal then analyzes certain Compensation Committees mandates required by SEC rules and national securities exchange listing standards. The article highlights notable differences between NYSE and NASDAQ requirements related to Director independence standards, Compensation Committee duties and board and committee composition. Mr. Segal concludes this section by briefly discussing the Compensation Committees role in overseeing CEO and executive officer compensation, non-executive officer compensation and the overall compensation philosophy.

Mr. Segal then provides an overview of the Compensation Committees duties and responsibilities regarding the companys compensation-related disclosures. The article provides a list of such required disclosures, as well as the Compensation Committees role in preparing and approving them for public filing. Compensation-related disclosures discussed in this summary include:

*Compensation Discussion and Analysis (CD&A);

*Compensation Committee Report;

*compensation of named executive officers (NEOs);

*Director Compensation Tables;

*Compensation Committee governance;

*the companys use of outside compensation consultants and advisors;

*compensation-related risks;

*pay-for-performance; and

*the forthcoming pay ratio rules imposed by Dodd-Frank. After a brief discussion of other Compensation Committee duties, such as the supervision of internal compensation controls, the companys equity compensation policies and management succession planning, Mr. Segal turns to the critical role that the Compensation Committee plays in risk assessment. Noting that risk assessment is often associated with the Audit Committee, Mr. Segal notes particular areas for which the Compensation Committee shares responsibility for risk management, including evaluating the nature of a companys compensation risk, ensuring that any compensation risks are consistent with the companys overall risk strategy and cultivating a corporate culture that is sensitive to, and proactively mitigates, risk. The article concludes by analyzing the impact certain compensation factors have on a companys risk profile.

The full text of Mr. Segals article may be found here.