How should companies evaluate whether there is a conflict of interest related to the compensation consultant’s work?

Tomorrow, on July 27, 2012, a new Regulation S-K, Item 407(e)(3)(iv), disclosure requirement focusing on the conflicts of interest of compensation consultants will become effective.  Item 407(e)(3)(iv) disclosure should be addressed in any proxy or information statement for a meeting of shareholders at which directors will be elected occurring on or after January 1, 2013.

Pursuant to the new requirement, public companies will have to disclose the nature of the conflict of interest, if any, related to the compensation consultant’s work on executive and director compensation and how the conflict of interest is being addressed.  To comply with this requirement, one of the threshold questions that a public company should ask is whether there is a conflict of interest.

In order to evaluate whether such conflict of interest exists, public companies should act now to establish controls and procedures for obtaining conflict of interest information. For example, the company should:

1. Establish internal procedures and processes to track:

(i)  all services provided to the company by the compensation consultant and the entity that employs the consultant starting from the last completed fiscal year; and

(ii) the amount of fees paid by the company to the entity that employs the compensation consultant.

2. Request from the compensation consultant, or from the entity that employs the consultant, the following information:

(i) the percentage that the amount of fees received from the company by the entity that employs the compensation consultant represents to the total revenue of such entit; and 

(ii) direct or indirect ownership of the company’s stock by the compensation consultant, and

(iii) policies and procedures of the entity that employs the compensation consultant that are designed to prevent conflicts of interest.

3. Add the following question to the company’s Directors’ and Officers’ Questionnaire:

Do you have a business or personal relationship with the compensation consultant or the entity employing the compensation consultant?   ___ Yes  ___ No         

If “yes,” please describe:

                                                                                                          

                                                                                                          

 

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