It's not true, as some governance critics would have you believe, that compensation committees at major companies are stuffed with CEO cronies all too willing to kowtow to the chief when it comes to keeping his or her pay ahead of competitors'.
Nor is it true that all corporations are exceptionally diligent about explaining in voluminous detail how they arrive at compensation for top executives, though many do a good job of describing the metrics they use to make those decisions.
What is true in these days of heightened scrutiny is that some of the latitude that corporations have had in determining top officers' pay will be disappearing. The New York Stock Exchange, for instance, is pushing ahead with a series of proposed listing standards on executive compensation. The exchange's Board of Governors voted to approve them on Aug. 1, and forwarded them to the Securities and Exchange Commission for final ratifiction.
By promoting an aggressive set of standards for its listed companies, "The NYSE captured the high ground," says Frederic W. Cook, a top compensation consultant whose firm bears his name.
For many, if not most, major corporations, the new standards will simply be codification of existing practices. But for a few, they will present significant challenges.
One of the NYSE's principal recommendations is that all listed companies have a compensation committee. That may seem obvious, but Ira Kay, an executive compensation consultant at Watson Wyatt Worldwide in New York, estimates that about 1 percent of listed companies don't have one. In such cases, he says, the entire board may discuss and vote on executive pay.
"Most major companies have a charter of some kind, and rules and procedures already in existence" for the compensation committee, he says. "If not, they have a lot of implied types of things, such as: Who approves the CEO pay package? And who approves new stock option authorization requests?"
Many compensation committees have strong chairmen, often CEOs or former CEOs, says Cook. "I've been doing this for a lot of years, and in my experience, compensation committees were never patsies for the CEO," he says.
In a written best practices advisory for clients, Cook says that compensation committees should "adopt a written statement of compensation philosophy and strategy, select an appropriate peer group, and periodically review company size, performance and top executive compensation in relation to this peer group."
He adds that...