Compensation Committee Guide - Deloitte

1 2015 Wachtell, Lipton, Rosen & Katz Compensation Committee Guide Michael J. Segal David E. Karp Jeannemarie O Brien Andrea K. Wahlquist Adam J. Shapiro David E. Kahan About This Compensation Committee Guide This Compensation Committee Guide (this Guide ) provides an overview of the key rules applicable to Compensation committees of listed companies and practices that Compensation committees should consider in the current environment. This Guide outlines a Compensation Committee member s responsibilities, reviews the composition and procedures of the Compensation Committee , and considers important legal standards and regulations that govern Compensation committees and their members. This Guide also recommends specific practices to promote Compensation Committee effectiveness in designing appropriate Compensation programs that advance corporate goals.

2 Although generally geared toward directors who are members of a public company Compensation Committee , this Guide also is relevant to members of a Compensation Committee of a pri-vate company, especially if the private company may at some point con-sider accessing the public capital markets. This Guide contains sample Compensation Committee charters as Exhibits, which have been updated to reflect the changes required to be made as a result of the implementation by the exchanges of certain provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act ( Dodd-Frank ). These Exhibits aim to be useful in assisting a Compensation Committee in performing its functions. However, it would be a mistake to simply copy published models. The creation of charters requires experi-ence and careful thought.

3 It is not necessary that a company have every guideline and procedure that another company has to be state of the art in its governance practices. When taken too far, an overly broad commit-tee charter can be counterproductive. For example, if a charter explicitly requires review or other action and the Compensation Committee has not taken that action, the failure may be considered evidence of lack of due care. Each company should tailor its Compensation Committee charter and written procedures to what is necessary and practical for the particular company. This Guide is not intended as legal advice, cannot take into account par-ticular facts and circumstances and generally does not address individual state corporate laws. April 2015 April 2015 Wachtell, Lipton, Rosen & Katz All rights reserved.

4 -i- Compensation Committee Guide TABLE OF CONTENTS Page Introduction ..1 I. Key Responsibilities of Compensation Committee Members ..3 A. Responsibilities Imposed by the Securities Markets and Dodd-Frank ..3 1. New York Stock Exchange Requirements .. 3 2. NASDAQ Requirements .. 5 B. CEO and Executive Officer Compensation ..6 C. Non-Executive Officer Compensation and Broad-Based ERISA D. Development of Compensation E. Compensation -Related Disclosure Responsibilities ..8 1. Compensation Discussion and Analysis .. 9 2. Compensation Committee Report .. 9 3. Additional Annual Disclosure Regarding NEO Compensation .. 10 4. Director Compensation Table .. 11 5. Compensation Committee Governance .. 11 6. Compensation Consultants and 11 7. Risk and Broad-Based Compensation Programs .. 12 8. Implementation of Dodd-Frank Disclosure Requirements.

5 12 9. Conclusion .. 13 F. Internal Controls ..13 G. Equity Compensation Grant Policy ..13 -ii- H. Management Succession ..14 I. Role of Risk in Compensation Programs ..14 1. The Role of the Compensation Committee in Risk Oversight of Incentive Compensation .. 14 2. Management s Risk Analysis .. 16 II. Fiduciary Duties of Compensation Committee Members ..19 A. Fiduciary Duties Generally ..19 1. Business Judgment Rule .. 19 a. Duty of Care .. 19 b. Duty of Loyalty .. 20 2. Adopting or Amending Compensation Arrangements in the Context of Corporate Transactions .. 22 B. Fiduciary Duties Under ERISA ..24 III. Methods of Compensation ..27 A. Understanding and Pursuing Compensation Goals and Objectives ..27 B. Equity Compensation ..28 1. Stock Options .. 28 2. Stock Appreciation Rights .. 29 3. Restricted Stock.

6 30 4. Restricted Stock 31 C. Retirement Programs ..33 D. Perquisites ..33 E. Clawback Provisions ..34 IV. Laws and Rules Affecting A. Section 162(m) of the Internal Revenue Code ..37 1. General .. 37 2. Covered Employees Subject to the Limitation .. 37 -iii- 3. Performance-Based Compensation Exception .. 38 4. Section 162(m) Compliance Procedures .. 38 B. Section 409A of the Internal Revenue Code ..39 C. Stock Exchange Rules Regarding Shareholder Approval of Equity Compensation Plans ..39 1. General Rules .. 39 2. Material Revisions .. 40 V. Change-in-Control Compensation A. Addressing Executive Uncertainty ..41 B. Arrangements ..41 1. Change-in-Control Protections .. 41 2. Stock-Based Compensation 43 3. Separation Plans .. 44 4. Deferred Compensation 45 VI. Shareholder Proposals, Relations and Litigation.

7 47 A. Say-on-Pay ..47 1. The Say-on-Pay Vote .. 47 2. The Say-When-on-Pay Vote .. 50 3. The Golden Parachute Say-on-Pay Vote .. 52 B. Shareholder Proposals ..53 C. Shareholder Advisory Firms ..53 D. Executive Compensation Litigation ..58 1. Section 162(m) Related 58 2. Say-on-Pay Suits Round 60 3. Say-on-Pay and other Disclosure Suits Round 61 VII. Special Considerations Applicable to Financial Institutions ..65 A. Safety and Soundness Guidance ..66 -iv- B. Final Proposed Rule Under Section 956 of Dodd-Frank ..67 1. Covered Financial Institutions .. 68 2. Covered 68 3. Prohibitions Under the Final Proposed Rule .. 68 4. Additional Requirements Applicable to Larger Covered Financial Institutions .. 69 5. Policies and Procedures .. 70 6. Required Reports .. 70 C. Section 111 of EESA and the Implementation of Interim Final Rules.

8 71 D. FDIC Golden Parachute Regulations ..71 VIII. Compensation Committee Membership ..73 A. Independence Standards of the Major Securities Markets ..73 B. Internal Revenue Code Section 162(m) Membership Requirements ..77 C. Membership Requirements for the Short-Swing Profit Exemption of Rule 16b-3 Under Section 16(b) of the Exchange Act ..78 1. Non-Employee Director .. 79 2. Ensuring Compensation Committee Membership Compliance .. 80 3. Ensuring Independence Under State Law .. 80 IX. Compensation Committee Meetings ..83 A. Meetings and Agenda ..83 B. Quorum Requirements ..83 C. Minutes ..84 D. Shareholder and Director Right of Inspection ..85 E. Access to Outside Advisors ..86 F. Compensation Committee Chairperson ..87 -v- X. Compensation Committee Charters ..89 A. NYSE-Listed Companies charter Requirements.

9 89 B. NASDAQ-Listed Companies charter Requirements ..91 XI. Director Compensation , Indemnification and Directors and Officers Insurance ..93 A. Director Compensation ..93 B. Indemnification and Directors and Officers Insurance ..95 -vi- EXHIBITS Exhibit A Compensation Committee charter (NYSE-Listed Company) Exhibit B Compensation Committee charter (NASDAQ-Listed Company) -1- Introduction The past year in executive Compensation has been marked by two continu-ing trends: (1) a continuing refinement of conceptions of so-called best practices advocated by certain shareholders and responses to those re-finements by Compensation committees , most notably in the context of the nonbinding, advisory say-on-pay vote required by Dodd-Frank, and (2) an increased desire by corporations to engage with shareholders to reas-sure them of the appropriateness of such responses and to engage in a dia-logue regarding the corporation s Compensation arrangements generally.

10 Against this backdrop, the key challenge for Compensation Committee members has been to continue to approve Compensation programs that di-rectors believe are right for their corporations while maintaining a suffi-cient understanding of shareholder views and communicating the appro-priateness of their arrangements to avoid challenges and criticism that could undermine directors abilities to act in their company s best interest. Compensation committees should design Compensation programs with great care, focusing first and foremost on the incentives that the programs promote. Directors should also bear in mind the heightened sensitivity to pay packages that could be deemed excessive. This is particularly true in today s environment, which has witnessed a marked increase in litiga-tion on executive Compensation matters, a trend we expect will continue at least in the short run.