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Independence of Compensation Consultants and Other Compensation Committee Advisors

Section 10C(b) of Dodd-Frank deals with the “Independence of Compensation Consultants and Other Compensation Committee Advisors”.  A compensation committee may only select a compensation consultant, legal counsel or other advisor (“Advisor”) after taking into account certain “independence factors” to be promulgated by the SEC.  The Act requires these independence factors include the following:

  • Section 10C(b)2(A) – The rendering of non-executive compensation services to the company by the Advisor;
  • Section 10C(b)2(B)- The amount in fees received from the company by the Advisor, as a percentage of the Advisor’s total revenue;
  • Section 10C(b)2(C)- The policies and procedures of the Advisor that are designed to prevent conflicts of interest;
  • Section 10C(b)2(D)- Any business or personal relationship of the Advisor with a member of the compensation committee; and
  • Section 10C(b)2(E)- Any stock of the company owned by the Advisor.

Further, under section 10C(c)2(A), a public company must disclose whether its compensation committee retained or obtained the advice of a compensation consultant.  If a compensation consultant has been retained, the company must also disclose whether the work of the compensation consultant has raised any conflict of interest and, if so, the nature of the conflict and how the conflict is being addressed.

Currently, compensation committees undertake varying degrees of due diligence in evaluating the independence of Advisers.  NYSE currently requires compensation committees be permitted to retain, oversee and compensate Advisers.  NASDAQ requirements do not mandate that boards have the ability to retain, oversee and compensate advisers, other than the audit committee.  Therefore, these new rules are basically codifying an existing practice.  Where compensation committees will see change is in compensation advisor selection and disclosure. With its five, definite factors, this rule will actually create more flexibility for a compensation committees to choose an advisor based on a broad range of criteria and not be limited simply by perceived conflict.