Closing the trust gap on executive pay: these five fundamental principles point the way to the corrective actions that need to be taken.

• Author: Gupta, Raj L.
• Position: EVIDENCE AND PERSPECTIVES

On March 23, 2010, Drexel's Center for Corporate Governance held its 2010 Directors Dialogue, a one-day interactive discussion with a small group of leading executives, directors, and academics. The theme of event was "Risk: Opportunity or Disaster--A Boardroom Dialogue." Raj L. Gupta chaired this year's program. He also moderated the day's opening session devoted to executive compensation. For our first Evidence & Perspectives "guest column," we present an edited version of Raj Gupta's remarks. I hope you find his observations useful.

--Ralph Walkling

WHILE executive compensation has always been a topic of interest, it seems to have taken a life of its own in the last decade or so. Several factors are contributing to this heightened attention:

* Compensation is perceived to be excessive: the gap between the average worker and CEO has been widening for the last quarter century from 40 times of average worker to over 400 times.

* The perception is that there is at best a weak link between pay and performance. This belief gets supported when CEOs receive generous separation packages for nonperformance or being fired.

* The widely held belief is that compensation structure (mix of salary and annual and long-term awards) promotes a focus on short-term results and excessive risk taking.

* Intense competition for executive talent in an ever-demanding business environment.

* Failure of succession planning, leading to external recruiting for CEOs and senior executive positions. External recruiting is not always a panacea, but is always expensive.

* Weak board and compensation committee oversight. This is clearly changing.

* Peer group selection bias toward larger and higherpaying companies and targeting compensation at the top end of the peer group.

* Insufficient investor/ shareholder oversight, although both the directors and CEOs are generally sensitive to investor concerns.

* Tone at the top--setting 'easy to achieve' targets, changing performance metrics midstream, repricing options, too many subjective performance measures, etc.

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In short there is an increasing trust gap that needs to be addressed and corrective actions taken.

In the spring of 2009 the Conference Board convened a task force co-chaired by Bob Denham and myself to address this issue. At the outset we recognized that new regulations will come from various agencies as the Federal Reserve, Treasury, SEC, and others respond to political pressure and public...