Corporate Governance, Rule 10C-1, and the SEC: Nasdaq and Charters for Compensation Committees (Part 3)
The Nasdaq standard also went beyond Rule 10C-1 by requiring that listed companies exclude from the compensation committee any director who received any compensation from the company other than fees. See Exchange Act Release No. 68640 (directors on the compensation committee "must not accept directly or indirectly any consulting, advisory or other compensatory fee from the listed company or any of its subsidiaries.").
In effect, Nasdaq applied the same standard with respect to compensation applicable to audit committees. In doing so, Nasdaq simplified the independence standard. Unaffiliated directors who sit on the audit committee will also be able to sit on the compensation committee.
Nasdaq also, for the first time, imposed on compensation committees an obligation to have a charter. As the Commission noted: "A written charter will also provide added transparency for shareholders regarding how a company determines compensation and may clarify and improve the process itself." Moreover, the requirement brought Nasdaq in conformity with the NYSE. See NYSE Listed Company Manual, Section 303A.05.
The charter must set out the "scope of the compensation committee’s responsibilities" and the committee's "responsibility for determining, or recommending to the board for determination, the compensation of the chief executive officer and all other Executive Officers of the Company."
Most interestingly, the charter must specifically state that the the CEO "may not be present during voting or deliberations on his or her compensation." While this does not prevent the CEO from participating in discussions or providing information to the committee, it does indicate that he or she cannot be present when decisions are actually made.
Compare this with the requirement of the NYSE. The NYSE also requires that the compensation committee have a charter. See 303A.05(b). There is nothing that bars the CEO from being present during deliberations. Indeed, the note to the provision provides that "[n]othing in this provision should be construed as precluding discussion of CEO compensation with the board generally, as it is not the intent of this standard to impair communication among members of the board." Since the CEO sits on the board, this comment can be read to reaffirm the CEO's role in the compensation process.
While Nasdaq does not preclude communications among directors for the most part (including the CEO), it does carve out one small and appropriate exception.