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Five Big Challenges for CEO Compensation Committees

As thousands of public companies contemplate the 2008 proxy season, which will once again center around the issue of CEO compensation, here's what smart comp committees ought to be thinking about:

  • Get the math right. How can you get the resources and information to really get a grip on how much total compensation the CEO is being paid? In the past, you've had fragmented information on salary, options, bonus, retirement and the like. But you've rarely had all that information integrated into a coherent whole.
  • Get the consulting relationships right. Obviously, you need comp consultants to figure all this out but make sure they do not have any conflicts of interest. If they are making millions of dollars a year consulting on other types of business for the senior vice president of human resources and other members of top management, their advice to you is going to be biased. You should only engage consultants who are loyal, and accountable, to you.
  • Make sure you have the right membership on the comp committee. In the past, and for obvious reasons, CEOs have tended to place their friends and allies on comp committees. But the members of the comp committee should be dominated by independent directors and they should be heavy hitters, not just "diversity" directors or "serial" directors who sit on five boards.
  • Start adjusting expectations. It's crazy for your CEO to think that he or she is going to be compensated at the 75th percentile of CEOs in your industry (the so-calld "comps") every year. There will be some years when his or her performance is average. The CEO has to feel the difference in compensation. If the whole concept of "pay for performance" means anything, there can't be a steady year-after-year increase in total compensation if the underlying business struggles or declines for a period of time.
  • Take advantage of the Compensation Discussion and Analysis (CD&A). In 2007, boards resorted to mind-numbing boilerplate to respond to the Securities and Exchange Commission requirement for CD&As. It's a missed opportunity. Comp committees should make clear statements of their strategy and their thinking on awarding compensation packages.
Smart comp committees will start getting ahead of all the criticism directed their way over CEO compensation. Comp committees that keep their heads in the sands will probably get those heads handed to them.
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