SEC Proposed Rules on Compensation Committee and Consultant Independence
FACT SHEET
Listing Standards for Compensation Committees
SEC Open Meeting
March 30, 2011
Background
In 2010, Congress passed the Dodd-Frank Act that among other things sought to address issues regarding the compensation that companies pay their executives. Section 952 of the Act addresses the compensation committees formed by corporate boards as well as the compensation advisers that these committees retain.
In particular, this provision requires the SEC to direct the exchanges to adopt certain “listing standards” relating to the independence of the members on a compensation committee, the committee’s authority to retain compensation advisers, and the committee’s responsibility for the appointment, compensation and work of any compensation adviser. Once an exchange’s new listing standards are in effect, a listed company must meet these standards in order for its shares to continue trading on that exchange.
In addition, the provision requires each company to disclose in its proxy material for an annual meeting of shareholders whether its board’s compensation committee retained or obtained the advice of a compensation consultant. The provision also requires a company to 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.
Requirements of the Proposed Rules
Independence of Compensation Committee Members
Under the SEC’s proposal, the exchanges would be required to adopt listing standards that require each member of a company’s compensation committee to be a member of the board of directors and to be independent. In developing a definition of independence, the exchanges would be required to consider such factors as:
- The sources of compensation of a director, including any consulting, advisory or compensatory fee paid by the company to such member of the board of directors.
- Whether a member of the board of directors of a company is affiliated with the company, a subsidiary of the company, or an affiliate of a subsidiary of the company.
As with all listing standards, exchanges would need to seek the approval of the SEC before adopting them.
Authority and Funding of the Compensation Committee
The proposed rules would require the exchanges to adopt listing standards providing that the compensation committee of a listed company:
- May, in its sole discretion, retain or obtain the advice of a compensation adviser.
- Is directly responsible for the appointment, payment and oversight of compensation advisers.
- Must be appropriately funded by the listed company.
Compensation Adviser Selection
The proposed rules also would require the exchanges to adopt listing standards providing that a compensation committee may select a compensation consultant, legal counsel or other adviser only after considering the following five independence factors:
- Whether the compensation consulting company employing the compensation adviser is providing any other services to the company.
- How much the compensation consulting company who employs the compensation adviser has received in fees from the company, as a percentage of that person’s total revenue.
- What policies and procedures have been adopted by the compensation consulting company employing the compensation adviser to prevent conflicts of interest.
- Whether the compensation adviser has any business or personal relationship with a member of the compensation committee.
- Whether the compensation adviser owns any stock of the company.
The exchanges themselves could impose additional considerations.
Exemptions
As directed by the statute, the proposed rules would require the exchanges to exempt the following five categories of companies from the compensation committee independence requirements:
- Controlled companies.
- Limited partnerships.
- Companies in bankruptcy proceedings.
- Open-end management investment companies registered under the Investment Company Act of 1940.
- Any foreign private issuer that discloses in its annual report the reasons that the foreign private issuer does not have an independent compensation committee.
In addition, the proposed rules would authorize the exchanges to exempt a particular relationship from the independence requirements applicable to compensation committee members.
The proposed rules also would authorize the exchanges to exempt any category of company from all of the requirements of the new compensation committee listing standards. The proposed rules would exempt controlled companies from all of the requirements of the new compensation committee listing standards.
As with all listing standards, the exchanges would need to seek the approval of the SEC before adopting any exemptions.
Compensation Consultant Conflicts of Interest Disclosure
Exchange Act registrants subject to the federal proxy rules are already required to disclose information about their use of compensation consultants, including specific information about fees paid to consultants that the SEC added in late 2009. The proposed rules would modify existing rules to require disclosure about whether:
- The compensation committee has retained or obtained the advice of a compensation consultant.
- 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.
The proposed rules also would eliminate the current disclosure exception for services that are limited to consulting on broad-based plans and the provision of non-customized benchmark data, but would retain the fee disclosure requirements, including the exemptions from those requirements.
What’s Next?
The SEC is seeking public comments on the proposed rules and data on matters relating to the proposed rules, including the costs and benefits associated with the proposals. Public comments on the proposed rules should be received by April 29, 2011. The SEC will review the comments it receives and consider those comments in determining whether to adopt the proposed rules.
To read the proposed rules in their entirety, click here.
Tim Cotter and Kim Mobley Chosen to Speak at the 2011 American Health Lawyers Annual Meeting held June 27-29
Also presenting at this year's In-House Counsel Meeting on Sunday June 26th is SullivanCotter Chairman, Tim Cotter who will co-present with Michael W. Peregrine, a Partner with McDermott Will & Emery LLP. More details coming soon.
Program Description
As the culmination of AHLA's educational year, the Annual Meeting provides a forum for networking and interaction with colleagues, friends and family, as well as an outstanding educational event. There are more than 35 sessions on a broad range of health law topics including Self-Disclosure under the OIG (Office of Inspector General) and CMS (Centers for Medicare and Medicaid Services) protocols, Powerful Hospital and Powerful Payor: What is the Antitrust Diagnosis, Health Insurance Exchanges, Building a Culture of Collaboration from the Ground Up, and RAC (Recovery Audit Contractors) and the Alphabet Soup Mix of Auditors.
2011 Questionnaire Now Open - Survey of Manager and Executive Compensation in Hospitals and Health Systems
SullivanCotter’s Survey of Manager and Executive Compensation in Hospitals and Health Systems provides the data to make informed decisions that assure you meet the dueling demands of regulatory compliance and attractive, performance-driven executive compensation.
SullivanCotter has launched its data collection efforts for the 2011 Survey, click here to learn more. Last year's survey report contained data from 1,194 organizations, including 288 health systems and 906 hospitals. The survey collects base salary and total cash compensation data for more than 130 system-level jobs and 150 hospital-level jobs.
Thomson Reuters Announces 100 Top Hospitals Award Winners for 2011
Last month, the 2011 Thomson Reuters 100 Top Hospitals award winners list was released. This year's winners where chosen from nearly 3,000 U.S. hospitals and award-winning facilities which demonstrated that high-quality patient outcomes can be achieved while improving efficiency. The article accompanying the 100 Top Hospitals list includes new research and an analysis of regional performance, including five-year trends. Thomson Reuters found that all hospitals have made noteworthy improvements in mortality, core measures, and length of stay. Hospitals in the Midwest continue to dominate their winners’ list, with half of all winners located in the Midwest census region.
Now Accepting Participants - 2011 Physician Compensation and Productivity Survey
The SullivanCotter survey is recognized as one of the industry’s leading and most comprehensive reports on physician total compensation and productivity.
Last year’s report contained data from 351 health care organizations comprising 215 physician, PhD, and mid-level provider (MLP) specialties as well as eight medical group executive positions.
Data were reported on the total cash compensation (TCC) levels paid to 58,626 physicians, residents, PhDs, MLPs, and Medical Group Executives. The report also contains productivity data (TCC, collections, gross patient charges, and wRVUs) and productivity ratios for staff physicians (TCC to collections, TCC to gross patient charges, TCC per wRVU, and collections per wRVU).
Learn more about how your organization can particpate today
Health Care On-Call Pay Continues To Rise
Most clinicians who provide call coverage for a hospital, whether employed by that hospital or not, have seen increases in pay for providing this service, according to the 2010 Physician On-Call Pay Survey Report, based on the sixth annual survey from compensation consultancy SullivanCotter.
The survey report, with data from 148 U.S. healthcare organizations, describes current physician on-call pay practices and rates paid for 40 physician specialty areas at both trauma and nontrauma centers. Key trends reported by survey participants include the following:
- 55 percent said their physician on-call pay expenditures have increased within the past 12 months.
- From 2007 to 2010, median on-call expenditures reported by trauma centers more than doubled, from $1.2 million in 2007 to $2.4 million in 2010.
- For nontrauma centers, the median expenditure in 2007 was $433,849, compared to $798,000 in 2010.
- 95 percent of the survey participants provide on-call pay to at least some of their nonemployed physicians with admitting privileges.
- 65 percent provide on-call pay to at least some of their employed physicians; 27 percent who don't pay extra for call factor this duty into physicians' salaries.
- 27 percent pay for "excess call only," meaning that providers are only compensated for call after exceeding a specified number of shifts per month or year.
- 15 percent compensate physicians who respond to call by phone but are not required to present at the hospital.
Key variables affecting physician on-call pay rates include the rates of local and national market benchmarks, frequency of the call coverage provided, the likelihood of being called in for service, payer mix and compensation received when called. Thus, rates - and likelihood of getting paid for call - varied dramatically by specialty.
Strategic Physician Leadership Development: A White Paper for Health System Executives
The emerging healthcare environment has changed the game for healthcare organizations and for physician leadership. That environment is going to require what could be called “agile organizations” and those organizations are going to rely on many more physicians in formal and informal leadership roles and in much more collaborative relationships with administrative leaders.
Developing that level of physician leadership will include not only building leadership competencies, but also the leadership structure and roles for physicians and the relationships that make it all work.
Fortunately, there are some shortcuts for CEOs in getting started along with guiding questions for developing physician leadership structures and roles and models of effective competency building approaches that can provide direction.
Projected Corporate Governance Trends for Nonprofit Hospitals and Health Systems - 2011
Competitive Physician Compensation Models
Healthcare financial executives need to understand valuation methodology to ensure legal and regulatory compliance. When developing and reviewing their physician compensation programs, healthcare organizations should:
- Understand the market data
- Test outcomes of incentive plans for fair market value
- Check total compensation for fair market value and reasonableness
Structuring competitive physician compensation arrangements can be a challenge for healthcare organizations trying to balance complex regulatory requirements against strategic business decisions, physician satisfaction concerns, and a highly competitive physician labor market. Many healthcare organizations are employing greater numbers of physicians to achieve physicianalignment and vertical integration. These organizations are increasingly faced with developing novel and more sophisticated physician compensation programs that will attract and retain physicians, often including productivity-based incentive compensation or rewards for high-quality outcomes. As healthcare organizations develop and review their physician compensationprograms, they should keep in mind the legal and regulatory framework that governs hospital payments to physicians as well as valuation concerns.
Dodd-Frank: The Spillover Impact on Nonprofit Healthcare
Let’s get this straight at the top: Dodd-Frank does not specifically apply to nonprofit healthcare. It wasn’t written with the healthcare sector in mind. It does not directly affect the framework that regulates nonprofit healthcare. It was not enacted to address any practices or abuses that are prevalent in nonprofit healthcare. Unlike Sarbanes-Oxley, it does not contain any general provisions applicable to public and nonprofit companies alike.
So why should we care? Why read any further?
Well, we care for a bunch of fairly significant reasons. Ultimately, we care because it is ademonstration of Congress’ ability to remake regulation of an entire industry in abreathtaking, sweeping manner—especially when there is a perception that the priorframework of industry regulation didn’t work.
More specifically, we care because the Act has the potential to have a noteable spilloverimpact on at least four key areas of nonprofit hospital operations: enterprise riskmanagement (ERM), corporate governance, corporate compliance and, perhaps mostsignificantly, executive compensation. If history serves as any guide, the basic regulatorythemes present in Dodd-Frank are likely to re-appear “somewhere down the road,” in amanner that impacts nonprofit healthcare.
Read the full article here.