The right moves for the new realities: alert to compensation committees: Do the procedures you use to select and manage your outside pay experts stand up to scrutiny? Here is how two comp committees 'owned the process.'.

• Author: Lederer, Jack L.
• Position: COMPENSATION COMMITTEE

AFTER WHAT SEEMED TO BE an eternity of political back-and-forth, the Dodd-Frank Wall Street Reform and Consumer Protection Act is the law of the land. It calls for a litany of significant changes to corporate governance and executive compensation, including say on pay, proxy access, compensation clawbacks, and restrictions on broker discretionary voting.

The law will require public company compensation committees to be much more independent in their membership and transparent in their dealings with pay experts and in delineating their executive pay rationales in proxies.

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Robert J. Jackson Jr., a former Treasury official in the office for TARP executive compensation, recently told a high-level audience at a compensation symposium that he wouldn't be surprised if, in the next few years, public company boards will be required to have an outside director experienced in executive pay issues on the compensation committee, similar to the Sarbanes-Oxley requirement of a financial expert on audit. At this point, some boards are proactively searching for HR executives to fulfill this qualification.

Yet even in the face of this white-hot scrutiny, many compensation committees continue to do things the old way, drawing on well-established rituals when they should be adopting new, independent procedures. To recruit an outside pay consultant, for instance, they call friends on other boards for suggestions. Or, they ask the company's human resources department for a few finalists.

A conflicted position

Let's illustrate this with an example. A major Midwest public company board was recently in the final stages of selecting a compensation consultant. A human resources officer called us to say he'd been asked to give the compensation committee a list of finalists. But, by definition, it was a conflict-of-interest situation. He was one of the top five paid officers listed in the proxy, yet he was expected to recommend an independent pay consultant who would advise on his remuneration.

Because he recognized his conflicted position, the officer contacted us. Curcio Webb offered to act as an independent resource and was retained to assist in the process. We met with the head of the compensation committee, who took the additional step of excluding management from the interview and selection process.

Management reviewed the 10 submitted requests for proposals with the committee's blessing and selected six. The chairman of the committee...