WSJ's Ten Pointers for Boards on Pay

In a section dedicated exclusively to executive compensation, today's Wall Street Journal has ten suggestions for boards to ease shareholder anger over pay packages.

1. Make sure the board's pay consultants don't also work for management.  The potential for conflicts of interest seem obvious, but consultant relationships that cross this line are not unusual.  The new proxy rules don't require disclosure of these relationships; however, shareholders are paying more attention and asking for more information in this regard.  According to the article: "Last October, 13 institutional investors sent a letter to the 25 biggest companies in the Standard & Poor's 500-stock index, asking pay-panel chairmen to disclose whether their companies had other business relationships with thier executive-pay advisors."
2. During outside CEO hunts, set limits on the projected compensation, hire a savvy negotiator and find a back-up candidate.  "Too often, critics say," according to the Journal, "boards desperate for fresh leadership blindly agree to star prospects' exhorbitant demands.  This picture is starting to change."
3. Skip severance for anyone with a sizable stock stake and deferred-compensation account.  The article quotes Michael Kesner, a principal in Deloitte Consulting's executive compensation practice as saying "severance is completely unnecessary" for these individuals, and discusses how setting a pay range at the outset of Gateway Inc.'s 2006 search for a new chief executive "gave us a channel market of what's reasonable" according to the company's compensation panel chairman, Joe Parham.
4. Retreat from "pay for failure" by making it easier to fire for cause.  Generous departure deals for unsuccessful CEOs have received a lot of press recently and is a target of shareholder activism.
5. Take a skeptical view of "peer group" comparisons.  The new disclosure rules require companies to name and describe peer companies that their board uses to gauge compensation competitiveness; this new transparency may create pressure to select more defendable comparitor groups.
6. Kill unjustifiable perquisites.  This trend is already underway as noted in an earlier post, as the new disclosure requirements cause companies to retreat from previous practices rather than risk the backlash that the new exposure might generate.
7. Link all long-term incentives to performance goals.  The idea here is to prevent executives from making money (from equity pay vehicles) simply because the stock market is rising.  According to the Journal, "ten companies have received investor resolutions this year recommending linking a substantial amount of equity compensation, such as options and restricted shares, to performance."
8. Divulge precise measures that shape payouts for performance based awards, and set hurdles high.  In spite of the new disclosure requirements, companies are still able to conceal performance metrics and goals based on competitive reasons - and many do.  The Journal quotes Lucian Bebchuk, a Harvard Law School professor and co-author of "Pay Without Performance" as saying, "Investors should be able to figure our whether generous bonuses reflect good performance or poorly set targets."
9. Conduct regular checkups about pay practices.  Never a bad idea, and probably a very good idea given the current business and political climate.  The Journal article mentions several approaches being tried by companies along this line, from an annual internal audit to a regular rotation of outside pay consultant - to ensure that the advice represents a "fresh look".
10. Give investors a voice about executive-pay packages.  The new "say on pay" bill introduced by U.S. Representative Barney Frank (new chairman of the House Financial Services Committee), would give shareholders a non-binding advisory vote on a company's executive compensation practices (see CFO.com article for more on the bill) has passed the committee and is moving toward a full House vote.