How compensation gets manhandled: something in the way boards review and approve executive pay frequently goes awry. To avert these common breakdowns, here are six suggestions for sharpening compensation committee foresight.

• Author: Brossy, Roger
• Position: COMPENSATION COMMITTEE

THE TRAGIC AIRPLANE CRASH is ruled after a thorough investigation to be due to pilot error and only pilot error. How can this be when the craft was flown by an experienced and competent crew? The flight recorder indicates that the problem was not their level of experience and competence, but rather the poor communication and deficient process of interaction between the pilots.

In the same vein, how can the board members of the New York Stock Exchange have voted such outsized compensation for their CEO? Even allowing for the press's misreporting it as a single year's paycheck when some of it was deferred compensation from earlier years--and allowing for the general witch-hunt environment in which previously laudable acts are now considered larceny--just how could a board pay so much money for that job? Experience and competence were clearly not the problem; by any standard of accomplishment and track record, the NYSE had one of the very best boards you could select. But something in the communication and decision-making processes of boards and their committees can break down, and the NYSE board is not alone.

In our work as management consultants and board advisers--almost 60 years between the two of us--we've seen other boards struggle with reaching good decisions and we've thought about the reasons why. We think the struggles boil down to six different dynamics and six practical tools of resolution.

1. The real or imagined domineering CEO

   Situation: After a hearty round of greetings and getting the coffee poured, the CEO opens the compensation committee meeting. "Shouldn't we get started? We've got a bunch of items on the agenda and just an hour before the full board meeting." The tone has been set: lots to cover, little time, don't take us off track. Motions and seconds are asked for in approving the minutes of the last meeting, and the CEO leads onward as they go tab-by-tab through the three-ring binders that are full of charts, graphs, tables, and legal language. The CEO is crisp and decisive. He knows this material because it is the staff work of his own team, and frankly, some of it's personal. Fifty-nine minutes later, he brings the committee through the last tab, no further questions, and a quick adjournment. Few questions have been asked anyway, and the discussion has been limited to clarification of technical details more than anything.

   Resolution: The emergent "good governance" tenets put a tremendous burden on CEOs. We need more than 10,000 CEOs to run the public companies in this country, and we now ask not only that they be strong, decisive leaders capable of "taking the hill" but also that they have the charm and diplomacy to ask for and promote open-ended discussion and the grace to acquiesce to the wisdom and tempered views of a board of directors. Some have it and some don't, but it is certain that many CEOs who were successful in the old model will be driven to distraction by the new one.

   So what to do when a compensation committee is intimidated by a controlling--or seemingly controlling--CEO? Our thoughts on what works:

   * Schedule an annual committee discussion of philosophy and strategy, with no intention of addressing plan design. Ask the unasked questions: Does the entire program pass the test of fairness, justice, and transparency? Would the committee be at all embarrassed to have the dollar results of its decisions posted on a bulletin board at the company or a Web site subject to public review?

2. Dealing in piece parts

   Situation: It's the June meeting and the committee convenes to review and approve annual option grants. The head of HR leads the discussion...