Who'll follow the script? - Compensation - Panel Discussion

This may or may not be the year companies finally rein in excessive executive pay. But they now have the tools to try.

In mid-December, an advisory panel sponsored by the Washington, D.C.-based National Association of Corporate Directors released a list of best practices that compensation committees and boards of directors can use for setting executive pay. Among the recommendations cited: the elimination of CEO contracts, a ban on compensation consultants working for both management and the board, and a requirement for executives to hold their employer's stock for at least six months after they leave.

The 34-member panel, officially called the NACD Blue Ribbon Commission on Executive Compensation and the Role of the Compensation Committee, included eight current or former CEOs, who--together with academics, governance experts, and consultants--devised the guidelines. The private-sector group hopes if enough firms adopt the proposals, it will stem any government regulation. "Legislation is not the answer in this case," says William W. George, author of Authentic Leadership, former CEO of Medtronic Inc., and the commission's co-chair. "It's a matter of boards doing their jobs."

The report tackled some long-standing compensation-committee practices. For example, the panel recommended that committees hire the compensation consultant, in much the same way that audit committees now hire the auditors. Currently, says Robert B. Stobaugh, professor emeritus at Harvard Business School and vice chairman of the commission, many advisers are hired by the managers who stand to benefit from their recommendations. "That's clearly a conflict of interest," he says. Once hired, those consultants should set executive-pay packages that are consistent with internal equity, not simply based on external peer comparisons, says Barbara Hackman Franklin, a former Secretary of Commerce and the commission's other co-chair.

WHAT'S A COMP COMMITTEE TO DO?

Recommendations, of the NACD panel

* Recruit diligent and Understating members

* Hire comp consultants who are independent

* Foster relationships with knowledgeable staff

* Provide continuing education to members

* Initiate a self-evaluation process

SOURCE: NACD

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