Top committee agendas: trust & accountability; Executive compensation ranks high on every list of issues dominating corporate boardrooms, and good compensation committees--concerned about public perceptions of pay programs--want to do the right thing.

• Author: Vallario, Cynthia Waller
• Position: Compensation

The facts surrounding the Michael Ovitz employment fiasco at The Walt Disney Co. continue to garner headlines--for as governance scenarios go, this case is indeed a nightmare. When CEO Michael Eisner hired Hollywood agent Michael Ovitz to be his top lieutenant, and fired him 14 months later, Ovitz walked away with a severance package worth about $140 million, mostly in stock options.

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Eight years later, Eisner and the Disney board are still embroiled in the aftermath of Ovitz's no-fault termination, trying to determine whether Disney's directors adequately scrutinized his hiring and firing. While such cases rarely go to trial, the Delaware chancery court permitted a shareholder derivative suit alleging a breach of fiduciary responsibility against Disney's board to proceed.

A key point is how much time and thought the compensation committee gave to reviewing Ovitz's employment contract and severance agreement. The case has far-reaching implications for compensation issues and the potential for making directors personally liable for rubber-stamping an irresponsible pay package.

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Compensation committees face real pressure deciding how to reward and motivate executives while simultaneously ensuring that management meets expected or planned results. The practice for executive compensation throughout the 1990s became, in some instances, not just to recruit the best talent and compensate competitively, but to structure packages that created risky incentives and sometimes were--in the view of investors and the public--alarming and excessive. Directors can no longer ignore shareholders' expectations for implementing a more balanced approach and reining in unrealistic compensation packages. As boards craft solutions to assess all parties' interests and demonstrate their diligence and independence, investors and regulators want compensation committees to place trust and accountability at the top of their agendas.

"Board members, management and shareholders are much more sensitive to governance issues since all the corporate debacles made headlines," says John T. Chain Jr., chairman of the board of Thomas Group Inc., a business-process consulting firm headquartered in Irving, Texas. "People are recalibrating their responsibilities because they want to ensure their companies are running as ethically as possible," he adds.

Chain is a retired Air Force general who served in the Reagan administration and has spent more than 10 years on compensation and governance committees, both as a member and chairman, of Reynolds American Inc., ConAgra Foods Inc., Kemper Insurance Cos. and Northrop-Grumman Inc., as well as participating on many nonprofit boards. He observes that companies are run by very smart, hard-working individuals, who frequently are paid astounding sums. "Under ideal circumstances, a CEO would only receive a bonus for extraordinary performance, not as an annual entitlement, but that's not reality," Chain laments.

Not Just a Formula

Creating compensation strategies is based not only on science but includes political, economic and sociological factors, observes compensation consultant James F. Reda, managing director of James F. Reda Associates, LLC in New York City. "It's not a coincidence that successful companies have successful compensation plans, with a...