Compensation Committees 2739

  • Does SOX require compensation committees be composed entirely of independent directors? Does the NYSE require this?

  • No. The Sarbanes-Oxley Act of 2002 does not contain any provisions that deal with compensation committees.
    The NYSE’s listing rules distinguish between domestic issuers and foreign issuers. Check out the NYSE Listed Company Manual ( Section 303A.05 deals with compensation committees and requires that all members of the compensation committee of domestic issuers are independent. Section 303A.00 that deals with the applicability of the NYSE’s Corporate Governance Standards for issuers, specifies that foreign private issuers are permitted to follow home country practice in lieu of the provisions for domestic issuers. Section 303A.11 requires foreign private issuers to disclose how their home country practice differs from the NYSE’s requirements for domestic issuers.
    The US Securities and Exchange Commission (SEC) has issued a proposed rule (( that would require disclosure about any other services that compensation consultants provide in addition to director and officer compensation advice, any fees for such other services and for director and officer compensation advice, as well as whether management played any role in selecting the compensation consultant as the provider for such other services. The new disclosure would be codified in 17 CFR 229.407

  • I work at a NASDAQ listed company. If I understand the answer, there are no specific SOX requirements to have a committee or for the committee to follow.
    Then it sounds like it’s also safe to assume there are no specific SOX requirements for approval of sales compensation plans or assignment of sales quotas.
    Is my understanding correct?

  • Neither the Sarbanes-Oxley Act nor the rules of the Securities and Exchange Commission that implement the Sarbanes-Oxley Act have any provisions that specifically deal with approvals of sales compensation plans or sales quotas.
    The overall objective of the Sarbanes-Oxley Act is to improve the realiability and accuracy of financial reporting. The objecive of internal controls over financial reporting (ICFR) is to prevent material misstatements of financial reports to shareholders due to errors or fraud. Section 404 of the SOA requires the company’s management to evaluate the effectiveness of its ICFR and the company’s registered public accounting firm to audit the effectiveness of ICFR. The approval of sales compensation plans or sales quotas could only be revelant if it could prevent errors or fraud that could result in material misstatements of the financial statements. If a salesman could set his own sales quota or set his bonus for exceeding a certain sales quota without the need for independent approval, he could basically commit payroll fraud to increase his own compensation. However, the question is whether the amount would be material in relation to the consolidated financial statements. Similarly overly agressive sales quotas and variable sales-driven compensation may entice the company’s senior management to try to fraudulently increase sales through booking sales that have not been delivered or sales where the customer has a right to return and where they conceal this right of return from the auditors.
    So if we are talking about senior executives and materially large amounts of money, it could be relevant for the reliability and accuracy of financial reporting. There is no simple answer to your question, but I hope my answer helped you somewhat.

  • Yes, this really helps. I really appreciate your insights.

  • I wanted to make a general note on the requirement for NASDAQ listed companies to have a compensation committee.
    Neither the Sarbanes-Oxley Act itself nor any rules by the US Securities and Exhange Commission implementing the Sarbanes-Oxley Act require an issuer to have a compensation committee. However the NASDAQ listing rules section 5605(d) requires that the compensation of executive officers has to be determined or recommended to be determined either by a compensation committee comprised solely of indepdentn directors or by the a majority of the independent directors. Apart from executive officer compensation there are no specific duties for the compensation committee in the NASDAQ listing rules. Foreign Private Issuers are exempt from this requirement and can follow their home country corporate governance practices provided that they disclose them.

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