The change makes a director's receipt of fees for services provided to the company merely one a factor in determining director independence (for purposes of the compensation committee service)--it is no longer an automatic disqualification. In weighing compensation as a factor in determining independence, the board of directors must consider the source of the compensation and whether the compensation would impair the director’s ability to make independent judgments about the company’s executive compensation. In other words, if a director receives fees as a result of an executive's decision, the board needs to decide whether the director's decisions about the executive's compensation would be influenced.
This rule change certainly gives boards of directors more flexibility, but also potentially opens them up to criticism if they exercise their discretion in this area. It will be important for boards who deem compensation committee members eligible despite the receipt of fees to document the basis for the board's determination and to articulate it carefully in their proxy statements.
This NASDAQ rule change has implications for even unlisted companies and non-public companies. The SEC's rules require public reporting companies that are not listed on a national securities exchange to apply the rules of one of the exchanges for purposes of stating which directors are independent in their proxy statements. Therefore, even unlisted reporting companies will need to consider the rule change when making independence determinations. Furthermore, listing standards are something of a "best practice" standard for non-public companies, and therefore the rule change could have some relevance to the decisions made by non-public company boards when making committee appointments.
NASDAQ-listed companies must comply with the independence requirements of compensation committee members by the first annual meeting after January 15, 2014 (or October 31, 2014, if no meeting has been held).
As a result of this amendment, NASDAQ’s compensation committee independence rules are now in line with the NYSE.
You can read the amended rule here.