Portfolio 73-2nd: Compensation Committees

I. Introduction
A. In General
B. Why Have a Compensation Committee?
C. Role of the Compensation Committee
D. Current Focus on Executive Compensation
E. Best Practices
F. Special Considerations
1. Privately held corporations
2. Not-for-profit organizations

II. Dealing With Multiple Interests of Multiple Parties
A. Overview
B. State Corporate Law and Corporate Organizational Documents
1. State corporate law
2. Organizational documents
3. Effect on compensation committee operations
C. Regulators for Public Companies
1. Self-regulatory organizations
a. NYSE
b. NASDAQ
c. AMEX
2. Securities and Exchange Commission
3. Internal Revenue Service
D. Investors and Investor Groups
1. Proxy voting advisors
2. Activist institutional investors
3. Advisory shareholder votes on executive compensation
E. Executives
1. Executives acting for the company
2. Executives affected by compensation decisions
3. Special considerations for the CEO
F. Other Board Members
1. Delegated authority to compensation committee
2. Compensation of directors
G. Dealing With Multiple Interests

III. How to Structure a Compensation Committee
A. Overview
B. Corporate Authority
1. Articles of incorporation
2. Bylaws
3. Effect of corporate authority
4. Noncorporate entities
C. Number of Members
1. Stock exchange requirements
2. Section 162(m) requirements
3. Rule 16b-3 requirements
D. Selection of Members
1. Independence requirements
a. Stock exchange requirements
(i). NYSE
(ii). NASDAQ
(iii). AMEX
b. Section 162(m) requirements
c. Rule 16b-3 requirements
2. Experience preferences for committee members
E. Best Practices

IV. Operation of the Compensation Committee
A. Overview
B. Source of the Committee's Duties
1. Legal requirements
a. State corporate law
b. Self-regulatory organizations
(i). NYSE
(ii). NASDAQ and AMEX
c. Federal securities law
d. I.R.C. § 162(m)
2. The committee charter
a. General considerations
b. Content requirements for NYSE-listed companies
c. Other practices
3. Custom and practice
C. Scope of Duties of the Compensation Committee
1. Establishing compensation philosophy
2. What levels of executives are the committee's responsibility?
a. Chief executive officer
b. SEC named executive officers
c. Executive officers
d. Exchange Act §16 officers
e. Other officers
f. Broad-based employee plans
3. What types of compensation?
a. Stock-based compensation
(i). Stock options
(ii). Stock appreciation rights
(iii). Restricted stock
(iv). Restricted stock units
(v). Performance shares
b. Other long-term incentive compensation
c. Short-term incentive compensation
d. Base salary
e. Deferred compensation and supplemental retirement benefits
f. Perquisites and benefits
4. Broad-based compensation and benefits arrangements
a. Stock programs
b. Qualified retirement and §401(k) plans
5. Other compensation issues
a. Share-ownership guidelines and retention policies
b. Internal pay equity
c. Other types of compensation
D. Governance Practices
1. Meetings
a. Meeting frequency
b. Planning for meetings
c. Conducting the meeting
d. Post-meeting follow-up
2. Minutes
a. Why minutes matter
b. Standard minute-taking practices
E. Director Compensation
1. Responsibility for setting director compensation
2. Types of director compensation
a. Retainer
b. Chair compensation
c. Meeting fees
d. Committee membership
e. Equity compensation
f. Perquisites
g. Other compensation
F. Best Practices

V. Advisors to the Compensation Committee
A. Overview
B. Compensation Consultant
1. Selection of compensation consultant
a. Independence from management
b. Expertise
c. Experience
d. Reputation
e. Personality fit with committee
2. Duties of the compensation consultant
a. Independent advisor activities
b. Provide comparability data on compensation
c. Determine total compensation
d. Align business goals and executive compensation strategy
e. Performance standards
f. CEO compensation
g. Design of programs
h. New developments
i. Assistance on agenda
j. Advice on tax, securities, accounting, and governance
k. Evaluation of proposed employment/severance agreements
l. Special projects
3. Other considerations
C. Legal Advisor
1. In-house counsel
2. Regular outside counsel
3. Independent counsel
D. Management and Other Company Employees
E. Best Practices

VI. Evolving Legal Standards for the Compensation Committee
A. Introduction
B. Overview of Relevant Legal Standards
1. Legal duties of directors
2. The business judgment rule
C. Disney and Its Progeny
1. The Disney cases
2. The Grasso cases
3. Lessons
D. Other Executive Compensation Cases
1. Stock option backdating
2. Tyco case
3. WorldCom case
4. Other compensation litigation
a. Perquisites
b. Operation of compensation plans
E. Company Stock in Retirement Plans
1. ERISA fiduciary responsibilities
2. Company stock in ERISA plans
3. Compensation committee exposure
F. Recent Laws That Affect Compensation Decisions
1. Prohibition on loans to officers and directors
a. Stock option plans
b. Executive stock purchase and loan programs
c. Other personal loans
d. Split-dollar life insurance
2. Compensation recovery after financial restatements
3. Insider trading during pension fund blackouts
4. Section 409A of the Internal Revenue Code
5. Executive compensation restrictions for certain financial institutions
a. Direct purchases
b. Auction purchases
G. Best Practices

VII. SEC Disclosure Requirements
A. Overview
B. Role of Compensation Committee
C. Effect of SEC Rules on Compensation Disclosure
D. Summary of SEC Compensation Disclosure Rules
1. Overview of disclosure rules
2. Identifying the named executive officers
3. Compensation Discussion and Analysis
a. In general
b. Focus on equity awards
c. Focus on performance targets
d. Not solely a fiscal year report
e. Discussion of individual executives
f. `Filing' the Compensation Discussion and Analysis
g. ‘Plain English' requirement
h. Small business issuers
4. Summary compensation table
a. Total compensation column
b. Salary and bonus columns
c. ‘Plan-based awards' columns
i. Stock awards and options awards columns
ii. Non-equity incentive plan compensation column
d. Change in pension value and nonqualified deferred compensation earnings columns
e. All other compensation columns
f. Perquisites
g. Small business issuers
5. Grants of plan-based awards table
6. Narrative disclosure for the summary compensation table and plan-based awards table
7. Equity compensation tables
a. Outstanding equity awards at fiscal year end table
b. Option exercises and stock vested table
8. Post-employment compensation
a. Pension benefits table
b. Nonqualified deferred compensation table
c. Other potential-post employment payments
9. Director compensation table
10. Related person disclosures
a. Principles-based disclosure
b. Definitions
c. Description of transaction
d. Exceptions
e. Procedures for approval
11. Corporate governance disclosures applicable to compensation committees
a. Director independence
b. Compensation committee information
c. Compensation committee interlocks and insider participation
d. Compensation committee report
E. Best Practices

VIII. Special Issues for the Compensation Committee
A. Overview
B. Change-in-Control Arrangements
1. Role of compensation committee
a. Should the company have executive change-in-control arrangements?
b. Defining a change-in-control
c. Amount to be paid
d. Which executives are included?
e. What types of benefits are included?
2. Special concerns
a. SEC proxy disclosure rules
b. Timing of adoption or amendment
3. Best practices
C. Termination Pay Arrangements
1. Role of the compensation committee
a. Severance pay under an employment agreement
b. Termination pay under other compensation arrangements
c. Events triggering termination pay
d. Amount to be paid
2. Special concerns
a. SEC proxy disclosure rules
b. Post-termination obligations of the executive
c. Special restrictions for certain financial institutions
3. Best practices
D. Shareholder Proposals on Compensation
1. Types of shareholder proposals
a. Say-on-pay
b. Compensation limits
c. Specific types of compensation
d. Using compensation proposals for other purposes
2. Role of compensation committee
E. Shareholder Advisory Firms and Activist Institutional Shareholders
1. Role of shareholder advisory firms and activist institutional shareholders
2. Issues of concern to shareholder advisory firms and institutional investors
a. Approval of equity compensation plans
b. Other compensation proposals
c. Voting for members of the compensation committee
3. Role of compensation committee
a. Understand the large institutional shareholders of the company
b. Information on shareholder advisory firms
c. Evaluation of specific actions