Due dilligence on executive pay.

• Author: Rich, Jude
• Position: Chairman's Agenda: Governing for Shareholder Prosperity

The simple fact is that some compensation committees do need their own consultants.

The clamor over the high levels of executive pay in the United States has reached its highest pitch yet. Critics in the media, academia, consulting, and even within some major corporations are decrying the failure of executive pay to relate closely to performance on behalf of shareholders. These critics believe that high pay levels without high performance have created a "trust gap," to quote Fortune magazine. They argue that rank-and-file employees have watched executive pay soar at the same time they have seen force reductions, fewer promotions, and smaller merit increases.

Criticism about executive pay began appearing regularly in the press as early as 15 years ago. Now, however, powerful constituencies are marshalling their resources to oppose unreasonable pay programs. Congressional committees are once again investigating excessive executive pay levels. More importantly, groups of shareholder consultants and institutional investors are aggressively opposing excessive executive pay packages.

Faced with increasing public criticism and shareholder activism, compensation committees are stepping up their efforts to exercise due diligence in approving top executive pay levels and programs. Unfortunately, these committees are handicapped in their efforts. Committee members in large companies are composed mainly of senior executives of their own companies and may serve on other boards and committees. They don't have time to do the required staff work to monitor pay.

Moreover, deciphering the labyrinth of complex incentive arrangements that compensation consultants and in-house attorneys devise requires a specialized expertise that takes even the best and most conscientious committee member years to acquire. If management hires consultants with this expertise, the consultants are dependent upon management for their livelihoods. As one compensation committee member told me recently" Our CEO's compensation package is a hodgepodge of indecipherable gimmicks constructed by a steady parade of different consultants." The consultants are changed when management doesn't get the answers it wants. Other committee members have told me that some consultants will agree to almost anything to maintain their lucrative relationship with the company.

The solution is obvious: Where any question exists about the appropriateness of pay, compensation committees should retain their...