Compensation Committee Handbook

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.

• Foreword ixPreface xiiiAcknowledgments xviiAbout the Authors xixPART One THE MODERN COMPENSATION COMMITTEE 1CHAPTER 1 The Compensation Committee 3Board Structure: The Focus on Independence 4Compensation Committee Composition and Multiple Independence Requirements 5Compensation Committee Size 10Compensation Committee Charter 11Role of the Compensation Committee 13Role of the Compensation Committee Chair 14Duties and Responsibilities of the Compensation Committee 14Compensation Benchmarking 26The Importance of Compensation Committee Meeting Minutes 29Call to Action 31CHAPTER 2 Selecting and Training Compensation Committee Members 33The Role of the Nominating Committee 33Nomination and Selection of New Compensation Committee Members 34Time Commitment 39Diversity 40Attracting Candidates 41Conducting the Search 41How to Approach Candidates 43CEO Involvement in the Selection Process 43Making the Final Selection 44How to Say No 47What if the New Director Does Not Work Out? 47Benefits of an Educated Board 48Orientation of New Members 49Ongoing Training 51Outside Experts and Advisors 53CHAPTER 3 CEO Succession and Evaluation 59The Relationship Between Pay and Succession Planning 61The Advantages of Effective Succession Planning 65The Succession Planning Process 67CEO Evaluation 73CHAPTER 4 Director Compensation 97Overview 97Elements of Director Compensation 99Disclosure 103Trends in Director Compensation 106Conducting a Director Compensation Study 109PART Two LEGAL AND REGULATORY FRAMEWORK 115CHAPTER 5 Corporate Governance 117Fiduciary Duties of Directors 117Practical Applications of Fiduciary Duty Rules 126Stock Exchange Corporate Governance Rules 131External Compensation Policies and Guidelines 131CHAPTER 6 Disclosure of Executive and Director Compensation 143Background 143Compensation Discussion and Analysis 144The Tabular Disclosures 146Option Grant Practices 154Director Compensation 155Disclosure of Material Compensation Risk 155Compensation Disclosure Requirements for Smaller Reporting Companies 157Golden Parachute Compensation 158Pending Dodd-Frank Disclosure Requirements 160Beneficial Ownership Reporting 162Disclosure of Related Person Transactions 162Director Independence and Governance Disclosure 163Disclosure of Equity Compensation Plans 165Plan Filing Requirements 167Form 8-K 168Selected Provisions of Regulation S-K 168CHAPTER 7 Other Securities Issues 171Selected Dodd-Frank Provisions Relating to Executive Compensation 171Special Rules Regarding Stock Transactions 175NYSE/NASDAQ Rules: Approval of Equity Compensation Plans 189Selected Sarbanes-Oxley Provisions Relating to Executive Compensation 193CHAPTER 8 Tax Rules and Issues 199Overview 199Organizations Responsible for Federal Tax 200Major U.S. Tax Law and Issues 201CHAPTER 9 Accounting Rules and Issues 255Overview 255Organizations Responsible for Accounting Standards (Past and Present) 256New Equity-Based Compensation Accounting Rules 261Previous Equity-Based Compensation Accounting Rules Under U.S. GAAP 280Other Current and Past Accounting Standards 283CHAPTER 10 ERISA and Labor Law, Rules, and Issues 305ERISA Law and Regulations 305Labor Laws and Regulations 309ADEA Law 310PART Three PRACTICAL APPLICATIONS 315CHAPTER 11 Executive Employment, Severance, and Change-in-Control Arrangements 317Background 317At-Will Employment Arrangements 318Contractual Employment Arrangements 319Fundamental Elements of a Written Employment Arrangement 320Process 322Types of Employment Arrangements 323Terms and Conditions Contained in Employment Arrangements 325CHAPTER 12 Incentive Compensation 349Useful Definitions and Abbreviations 349Cash versus Equity 352Typical Plan Features and Designs 353Shareholder Approval Requirements 364Retention-Only Plans 364CHAPTER 13 Equity-Based Compensation 367Equity-Based Incentive Awards 367Stock Ownership and Retention Guidelines 384CHAPTER 14 Executive Pension-Benefit, Welfare-Benefit, and Perquisite Programs 387List of Programs 388Pension-Benefit Arrangements 388Welfare-Benefit Arrangements 397Perquisites 400APPENDIX A Selected SEC Rules, Regulations, Schedules, and Forms 405APPENDIX B List of Organizations and Periodicals 511APPENDIX C List of Director’s Colleges and Other Training Opportunities 519APPENDIX D Sample Compensation Committee Charters 527APPENDIX E Sample Compensation Discussion and Analysis (CD&A) 547Glossary 633Bibliography 685Index 699