A roadmap for director pay: GE leads again; stung by scandal, companies should now be aiming for a better balance in board compensation.

• Author: Carey, Dennis
• Position: Pay and Performance

GENERAL ELECTRIC Co. has done it again. It set the benchmark for management performance in the 1990s. Now it's setting the standard for director pay: 60% of its directors' compensation will come in stock units that pay out only when the directors leave the board.

Other companies are also revisiting their directors' compensation, for good reason: Boards have become too closely aligned with investors. That is ironic but true: Directors are shareholder emissaries, but their shareholder-like compensation has overfocused them on investor drumbeat and underconcerned them with company policy or ethical transgression.

Years ago, companies placed directors' paychecks under their plate: When the lunchtime board meeting adjourned, directors folded their napkins and pocketed the check. Pressed by the rise of investor sovereignty, companies then pitched the pendulum the other way, transforming fixed retainers into stock options. The result: too much concern for quarterly results, too little for the fundamentals.

Stung by scandal, companies should now be reaching, like GE, for a better balance in director pay: both dollars and shares, and about the same of each. That will remind directors that they must assiduously heed the concerns of investors but also autonomously guide the decisions of managers.

Director pay must also be structured to avoid even the hint of insider advantage. That has become an insidious underside of directors' stock packages. When directors sell, outsiders can never be sure they are acting without privileged information. Giving directors shares that can only be sold once they've left the board, as GE has done, eliminates even the appearance of impropriety.

Companies should ask directors to put their own skin in the game by acquiring a significant number of shares within several years of joining the board.

At the same time, the compensation for directors must also address the far harder job of recruiting directors in the wake of the past year's corporate disgrace and public reform. Four factors are conspiring to make it so.

First, to ensure effective oversight, the New York Stock Exchange now requires that boards be dominated by independent directors and that their key committees consist of purely independent directors.

Second, to ensure time for that oversight, some companies are restricting the number of outside boards on which their executives and even their directors can serve. Consider GE's policy: CEO Jeffrey Immelt may sit on...