Enhancing the board's review of executive pay.

• Author: Olsen, Scott
• Position: Compensation Committee

Compensation committee decisions are often taken in an atmosphere that is short both on time and data. Here are suggestions for reviewing committee procedures to ensure that both are in greater supply.

GEORGE BUSH is president. The country is at war. The economy is in a recession. Years of frenetic Wall Street activity have given way to investor wariness and revelations of insider manipulation. With their survival at stake, hundreds of large companies are slashing payrolls, yet despite the flagging fortunes of their companies, CEOs are pulling down huge compensation packages. As a result, this ordinarily arcane aspect of corporate governance is spilling into the press, becoming a rallying point for dissident shareholders, and raising eyebrows in Congress.

The year is 1991.

A decade ago, the normal healthy tension between shareholders and management over executive compensation escalated into a controversy involving regulators, politicians, the media, and finally the general public. Today we're seeing warning signals of a similar episode as shareholder resentment simmers over executive compensation levels, this time mostly in the form of stock options, even as performance languishes and layoffs are rising. It is not too early for corporate boards to begin to address those symptoms before they find their ability to do so is preempted by angry investors or even by Congress. Indeed, the lesson of the early 1990s is that once control of the situation gets away from the corporate community; the solutions that are adopted may create new imbalances, although the true effects may not be visible for years.

Sowing the seeds of the next crisis

It is now clear that the seeds of the current nascent crisis were sown by some of the very measures undertaken to remedy the last one. Because of the public perception in the early 1990s that executives were receiving large bonuses for rising profit margins that came at the direct cost of millions of jobs, shareholders, the press and the public clamored to break the linkage of rising pay with what appeared to be, in effect, corporate decline. A number of positive measures ensued, including the creation of a blue ribbon commission by the National Association of Corporate Directors (NACD) in 1992, which recommended among other things more effective compensation committees and better balance of pay with performance.

However, what began as a corporate governance issue spilled over into the political realm in 1993 when Congress passed IRC 162 (m), which denied tax deductions for pay in excess of $1 million unless compensation met certain standards of being performance-based. That wrinkle in the tax code set us on the path where we find ourselves today.

Once again we have learned that solutions reached in the middle of a crisis are usually counterproductive in the long run. The problem with this measure is that it encouraged corporations to rely excessively on stock options as the...