Let's have no 'outrageous failure of policy'; Bad regulations addressing executive compensation at the national level threaten to lead to bad practices at the board level.

• Author: Kristie, James

When Treasury Secretary Timothy Geithner testified before Congress in February of this year on the $100 million in bonus payouts at AIG, he called the bonuses an "outrageous failure of policy."

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As in board policy. Although we certainly have outrageous failures of government policy to deal with at the moment, Geithner seemed to be steamed at the AIG board for approving a compensation arrangement that paid out so munificently for such spectacularly disastrous results. What happened at AIG and other bonus-driven banking concerns wasn't just a case of pay for non-performance; this was more a contract to kill. As in, kill off their employers, with the taxpayer as collateral damage.

As a sharp-edged analyst at Breakingviews.com wrote, "The public is now so hostile to bankers that there is a risk of bad regulations being foisted on the industry." The government foisting bad regulations on the industry holds the risk, as night follows day, of boards foisting bad compensation policies on their management teams.

So what can boards do during this unsettled period? Well, how about trying to be in sync with what the ownership thinks makes for a rational policy? Keep your owners happy, and maybe that takes away some of the force driving the regulatory impetus.

The CFA Institute, which confers the Chartered Financial Analyst (CFA) designation and is a leading voice on global issues of market efficiency and investor fairness, has identified the top executive compensation concerns as companies began to rebuild from the market crisis. Below, I quote the CFA Institute 2010 Investors Wish List:

* Disclosure Template: Investors have the right to fully understand compensation plans, managerial incentives, and how the board of directors is protecting shareowner interests. More rules and pages of corporate disclosure will not bring clarity. We need a new approach to the CD&A (Compensation Discussion and Analysis) for better quality disclosure.

* Pay Benchmarks: Any disclosures should clearly demonstrate whether pay is based on meaningful, performance-based benchmarks tied to shareholder returns. The SEC should not allow firms to hide behind so-called proprietary interests to avoid reasonable disclosure of incentive metrics.

* Quality of Regulations: An overhaul of Item 402 of Regulations S-K and any related compensation disclosure rules is desperately needed because the CD&A has rapidly become legal boilerplate. In only a few cases does the...