The New York Stock Exchange and Nasdaq have each released proposals, subject to approval by the Securities and Exchange Commission, to meet "independence" requirements set forth in the Dodd-Frank Act for compensation committees and directors who make pay decisions.

On June 20, the SEC issued final rules pertaining to compensation committees and compensation consultants. Rule 10C-1a, added to the Exchange Act, requires stock exchanges to adopt new listing standards for the companies that list equities with them, including enhanced compensation committee independence standards. The rule also applies to directors who perform that function instead of a committee.All members of a compensation committee, or substituted directors, are required to be “independent,” with the standards for determining that characterization left up to each exchange and subjected to SEC approval.

A major change in the Nasdaq proposal that was filed with the SEC on Wednesday morning is that its listed companies will be required to have a compensation committee consisting of at least two members, each of whom must be an independent director as defined under its current listing rules.

Nasdaq's current rules require that compensation of the chief executive officer and all other executive officers must be determined, or recommended to the board for determination, either by a compensation committee comprised solely of independent directors, or a majority of the board's independent directors in a vote in which only they participate. The exchange said it considered whether keeping an alternative to a committee in place “remains appropriate given the heightened importance of compensation decisions in today's corporate governance environment.”

“Since responsibility for executive compensation decisions is one of the most important responsibilities entrusted to a board of directors, [we believe] that there are benefits from a board having a standing committee dedicated solely to oversight of executive compensation,” it wrote. “Directors on a standing compensation committee may develop expertise in a company's executive compensation program in the same way that directors on a standing audit committee develop expertise in a its accounting and financial reporting processes. A formal committee structure may help promote accountability to stockholders for executive compensation decisions.”

The exchange said it determined that neither the requirement for a compensation committee or setting its size would pose an undue hardship on listed companies. Its current listing rules do not impose size requirements on any board committees, other than the audit committee, which must consist of at least three members.

Other major items in the Nasdaq proposal:

Compensation committee members must not accept directly or indirectly any consulting, advisory or other compensatory fee, other than for board service, from the company or any subsidiary.

In determining whether a director is eligible to serve on a compensation committee, a Company's board must consider whether the director is affiliated with the company and determine whether that affiliation would impair their judgment.

Companies may continue to rely on Nasdaq's existing exception that allows certain non-independent directors to serve on a compensation committee under “exceptional and limited circumstances.”

Companies must adopt a formal, written compensation committee charter that specifies responsibilities and authority. They must also review and reassess the adequacy of the charter on an annual basis;

Smaller Reporting Companies must fulfill  the compensation committee and charter requirement, but are not required to adhere to the compensation committee eligibility requirements relating to compensatory fees and affiliation, or the requirements relating to compensation consultants, independent legal counsel and other compensation advisers that Nasdaq is proposing to adopt.

In the NYSE filing with the SEC on Tuesday afternoon, the NYSE said that it “does not view the ownership of even a significant amount of stock, by itself, as a bar to an independence finding.”

“Share ownership in the listed company aligns the director's interests with those of unaffiliated shareholders, as their stock ownership gives them the same economic interest in ensuring that the listed company's executive compensation is not excessive,” it wrote.

The exchange added that it “does not believe it is appropriate to consider board compensation as part of the compensation committee independence determination with respect to individual directors.”

“Non-executive directors devote considerable time to the affairs of the companies on whose boards they sit and eligible candidates would be difficult to find if board and committee service were unpaid in nature,” it wrote. “[We do] not believe that an analysis of the board compensation of individual directors is a meaningful consideration in determining their independence for purposes of compensation committee service.”

Among the “bright line” tests the NYSE would use to determine a lack of independence:

The director is, or has been within the last three years, an employee of the listed company, or an immediate family member is, or has been (in the same time frame), an executive officer.

The director (or an immediate family member) has received, during any twelve-month period within the last three years, more than $120,000 in direct compensation from the listed company, other than director and committee fees and pension or other forms of deferred compensation for prior service (provided this compensation is not contingent in any way on continued service).

The director is a current partner or employee of a firm that is the listed company's internal or external auditor, has an immediate family member who is a current partner of such a firm, or if the director or family member was a partner or employee of such a firm and personally worked on the listed company's audit within the last three years.

The director, or family member, within the past three years has been employed as an executive officer of another company where any of the listed company's present executive officers at the same time served on that company's compensation committee.

The director, or family member, is a current executive officer of a company that has made payments to, or received payments from, the listed company for property or services in an amount which, in any of the last three fiscal years, exceeds the greater of $1 million, or 2% of the other company's consolidated gross revenues.

Listed companies would have until their first annual meeting after January 15, 2014, or October 31, 2014, whichever is earlier, to comply with new compensation committees independence standards. Existing standards would continue to apply in the interim. Exemptions would apply to controlled companies and smaller reporting companies, limited partnerships, companies in bankruptcy, open-end management investment companies, and foreign private issuers that discloses in their annual report filed with the SEC the reasons it does not have an independent compensation committee.