Compensation Committees and the Incentive-Plan-Information Gap: What boards don't understand can hurt the goal-setting process.

• Position: BOARDBOOK

One of the toughest challenges for a board's compensation committee is the approval of incentive plan goals. And the biggest hurdle is a gap of information.

The management team proposes the goals but is closer to the day-to-day operations of business and has a better sense of the difficulty of the objectives. Meanwhile, a compensation committee must balance goal-setting that is fair and properly motivates management with payouts that are appropriate for the results delivered to shareholders.

It is also one of the primary causes of many activist investors' success. At a recent...