Tuesday, July 25, 2006

Compensation Committee's Role Will Change

It is almost certain that compensation committees will have a changed role in the corporate governance scheme after the SEC adopts the executive compensation disclosure rules. For one thing, the currently required report of the compensation committee is slated to be eliminated and replaced by the new compensation discussion and analysis (CD&A). The efficacy of the compensation committee report has been the subject of some debate, with the SEC essentially concluding that the report has become useless boilerplate. Some commenters thought that, if the report was boilerplate, it was because of the rules that restricted its content. Others urged the SEC to keep the report and beef up its content. The report is favored by many because it need only be furnished and, unlike the new to-be-filed CD&A, is not within the embrace of the Sarbanes-Oxley certification requirements. But it certainly appears that the compensation committee report will pass into history.

Compensation committees will go on, however, and indeed the SEC proposes new disclosures about them, similar to what is currently required for audit and nominating committees. The company would have to disclose the committee’s processes for the determination of executive compensation, including the scope of the committee’s authority. Any role played by consultants in determining executive compensation must also be disclosed. And importantly, the role of any executives in determining their own compensation must be disclosed.