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12.4 Compensation Committees

New NYSE and SEC rules require that

  • listed companies have a compensation committee composed entirely of independent directors;
  • the compensation committee has a written charter that addresses, among other things, the committee’s purpose and sets forth the duties and responsibilities of the committee;
  • the compensation committee produces—on an annual basis—a compensation committee report on executive compensation, to be included in the company’s annual proxy statement or annual report on Form 10-K filed with the SEC.

These reforms respond to the unprecedented growth in compensation for top executives and a dramatic increase in the ratio between the compensation of executives and their employees over the last 2 decades. A reasonable and fair compensation system for executives and employees is fundamental to the creation of long-term corporate value. The responsibility of the compensation committee is to evaluate and recommend the compensation of the firm’s top executive officers, including the CEO. To fulfill this responsibility objectively, it is necessary that the compensation committee be composed entirely of outside independent directors.