The Compensation Committee Handbook

New and updated information on the laws and regulations affecting executive compensation

Now in a thoroughly updated Fourth Edition, The Compensation Committee Handbook provides a comprehensive review of the complex issues challenging compensation committees that face revised executive compensation disclosure regulations issued by the SEC, as well as GAAP and IFRS rulings and trends. This new and updated edition addresses a full range of functional issues facing compensation committees, including organizing, planning, and best practices tips.

• Looks at the latest regulations impacting executive compensation, including new regulations issued by the SEC, as well as GAAP and IFRS rulings and trends
• Covers the selection and training of compensation committee members
• Explores how to make compensation committees a performance driver for a company
• Guides documentation requirements and timing issues

The Compensation Committee Handbook, Fourth Edition will help all compensation committee members and interested professionals succeed in melding highly complex technical information and concepts with both corporate governance principles and sound business judgment.

Foreword ix

Preface xiii

Acknowledgments xvii

About the Authors xix

PART One THE MODERN COMPENSATION COMMITTEE 1

CHAPTER 1 The Compensation Committee 3

Board Structure: The Focus on Independence 4

Compensation Committee Composition and Multiple Independence Requirements 5

Compensation Committee Size 10

Compensation Committee Charter 11

Role of the Compensation Committee 13

Role of the Compensation Committee Chair 14

Duties and Responsibilities of the Compensation Committee 14

Compensation Benchmarking 26

The Importance of Compensation Committee Meeting Minutes 29

Call to Action 31

CHAPTER 2 Selecting and Training Compensation Committee Members 33

The Role of the Nominating Committee 33

Nomination and Selection of New Compensation Committee Members 34

Time Commitment 39

Diversity 40

Attracting Candidates 41

Conducting the Search 41

How to Approach Candidates 43

CEO Involvement in the Selection Process 43

Making the Final Selection 44

How to Say No 47

What if the New Director Does Not Work Out? 47

Benefits of an Educated Board 48

Orientation of New Members 49

Ongoing Training 51

Outside Experts and Advisors 53

CHAPTER 3 CEO Succession and Evaluation 59

The Relationship Between Pay and Succession Planning 61

The Advantages of Effective Succession Planning 65

The Succession Planning Process 67

CEO Evaluation 73

CHAPTER 4 Director Compensation 97

Overview 97

Elements of Director Compensation 99

Disclosure 103

Trends in Director Compensation 106

Conducting a Director Compensation Study 109

PART Two LEGAL AND REGULATORY FRAMEWORK 115

CHAPTER 5 Corporate Governance 117

Fiduciary Duties of Directors 117

Practical Applications of Fiduciary Duty Rules 126

Stock Exchange Corporate Governance Rules 131

External Compensation Policies and Guidelines 131

CHAPTER 6 Disclosure of Executive and Director Compensation 143

Background 143

Compensation Discussion and Analysis 144

The Tabular Disclosures 146

Option Grant Practices 154

Director Compensation 155

Disclosure of Material Compensation Risk 155

Compensation Disclosure Requirements for Smaller Reporting Companies 157

Golden Parachute Compensation 158

Pending Dodd-Frank Disclosure Requirements 160

Beneficial Ownership Reporting 162

Disclosure of Related Person Transactions 162

Director Independence and Governance Disclosure 163

Disclosure of Equity Compensation Plans 165

Plan Filing Requirements 167

Form 8-K 168

Selected Provisions of Regulation S-K 168

CHAPTER 7 Other Securities Issues 171

Selected Dodd-Frank Provisions Relating to Executive Compensation 171

Special Rules Regarding Stock Transactions 175

NYSE/NASDAQ Rules: Approval of Equity Compensation Plans 189

Selected Sarbanes-Oxley Provisions Relating to Executive Compensation 193

CHAPTER 8 Tax Rules and Issues 199

Overview 199

Organizations Responsible for Federal Tax 200

Major U.S. Tax Law and Issues 201

CHAPTER 9 Accounting Rules and Issues 255

Overview 255

Organizations Responsible for Accounting Standards (Past and Present) 256

New Equity-Based Compensation Accounting Rules 261

Previous Equity-Based Compensation Accounting Rules Under U.S. GAAP 280

Other Current and Past Accounting Standards 283

CHAPTER 10 ERISA and Labor Law, Rules, and Issues 305

ERISA Law and Regulations 305

Labor Laws and Regulations 309

ADEA Law 310

PART Three PRACTICAL APPLICATIONS 315

CHAPTER 11 Executive Employment, Severance, and Change-in-Control Arrangements 317

Background 317

At-Will Employment Arrangements 318

Contractual Employment Arrangements 319

Fundamental Elements of a Written Employment Arrangement 320

Process 322

Types of Employment Arrangements 323

Terms and Conditions Contained in Employment Arrangements 325

CHAPTER 12 Incentive Compensation 349

Useful Definitions and Abbreviations 349

Cash versus Equity 352

Typical Plan Features and Designs 353

Shareholder Approval Requirements 364

Retention-Only Plans 364

CHAPTER 13 Equity-Based Compensation 367

Equity-Based Incentive Awards 367

Stock Ownership and Retention Guidelines 384

CHAPTER 14 Executive Pension-Benefit, Welfare-Benefit, and Perquisite Programs 387

List of Programs 388

Pension-Benefit Arrangements 388

Welfare-Benefit Arrangements 397

Perquisites 400

APPENDIX A Selected SEC Rules, Regulations, Schedules, and Forms 405

APPENDIX B List of Organizations and Periodicals 511

APPENDIX C List of Director’s Colleges and Other Training Opportunities 519

APPENDIX D Sample Compensation Committee Charters 527

APPENDIX E Sample Compensation Discussion and Analysis (CD&A) 547

Glossary 633

Bibliography 685

Index 699

JAMES F. REDA is Managing Director, Executive Compensation Consulting, Arthur J. Gallagher & Co., Human Resources Consulting Practice. Mr. Reda has served for more than 27 years as advisor to the top management and boards of major corporations in the United States and abroad in matters of executive compensation, performance, organization, and corporate governance.

STEWART REIFLER is the head of the executive compensation practice at the New York office of Vedder Price, P.C. Mr. Reifler has over 25 years of experience negotiating and structuring executive compensation arrangements on behalf of executives, board compensation committees, and companies.

MICHAEL L. STEVENS is a partner in the executive compensation practice at Alston & Bird, LLP. Mr. Stevens has over 20 years of experience advising clients with respect to securities, corporate governance, and tax issues relating to stock plans, incentive compensation arrangements, executive employment agreements, and deferred compensation.

Just when executive compensation was starting to settle down after the Sarbanes-Oxley Act, another upheaval has forced committee members to adapt yet again. The 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act had a significant impact on executive compensation and reporting. This Fourth Edition of The Compensation Committee Handbook includes vital information that compensation committees need to stay current with Dodd-Frank and other new accountability requirements.

In addition to legal compliance, compensation committee members need to address a growing range of functional issues such as organizing, planning, evaluating executive performance, negotiating change-in-control arrangements, and beyond. The rapid changes in the role of the compensation committee can leave organizations reeling. The Compensation Committee Handbook defines the latest responsibilities and standards related to compensation, while recognizing that there is no single "correct" model for executive pay that will fit every business organization.

The strategy board members assign incentives needs to align with each specific case, but the standard approach has evolved almost as rapidly as the regulatory landscape. This handbook identifies the best practices that reflect the most current understanding of issues related to compensation. Since the Third Edition was published in 2007, regulatory and theoretical changes have altered the way this committee should and must approach compensation. In this updated edition, the authors strive to remind readers of both the general and technical determinants of good compensation committee decision-making.

Bits and pieces of wisdom from business and academic publications can be difficult to synthesize when it comes time to discuss numbers. The Compensation Committee Handbook is a valuable reference because it comprehensively addresses all the relevant issues. This book's issue-oriented approach is adequately comprehensive to target any compensation discussion. The Compensation Committee Handbook, Fourth Edition will help all compensation committee members, as well as executives, human resource officers, and general counsels, succeed in turning complex technical information into sound business judgment.

Just when executive compensation was starting to settle down after the Sarbanes-Oxley Act, another upheaval has forced committee members to adapt yet again. The 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act had a significant impact on executive compensation and reporting. This Fourth Edition of The Compensation Committee Handbook includes vital information that compensation committees need to stay current with Dodd-Frank and other new accountability requirements.

In addition to legal compliance, compensation committee members need to address a growing range of functional issues such as organizing, planning, evaluating executive performance, negotiating change-in-control arrangements, and beyond. The rapid changes in the role of the compensation committee can leave organizations reeling. The Compensation Committee Handbook defines the latest responsibilities and standards related to compensation, while recognizing that there is no single "correct" model for executive pay that will fit every business organization.

The strategy board members assign incentives needs to align with each specific case, but the standard approach has evolved almost as rapidly as the regulatory landscape.This is handbook identifies the best practices that reflect the most current understanding of issues related to compensation. Since the Third Edition was published in 2007, regulatory and theoretical changes have altered the way this committee should and must approach compensation. In this updated edition, the authors strive to remind readers of both the general and technical determinants of good compensation committee decision-making.

Bits and pieces of wisdom from business and academic publications can be difficult to synthesize when it comes time to discuss numbers. The Compensation Committee Handbook is a valuable reference because it comprehensively addresses all the relevant issues. This book's issue-oriented approach is adequately comprehensive to target any compensation discussion. The Compensation Committee Handbook, Fourth Edition will help all compensation committee members, as well as executives, human resource officers, and general counsels, succeed in turning complex technical information into sound business judgment.