Report Addresses Executive Compensation

The National Association of Corporate Directors (NACD) last week released a guide to address out-of-control executive compensation issues, recommending that consultants could be the answer to some of the challenges facing corporate compensation committees.

This 2003 Report of the NACD Blue Ribbon Commission provides a specific set of principles and practices to guide boards and compensation committees in their deliberations over executive pay. The commission recommended hiring consultants that do not report to executives, ending pay practices that reward failure and doing away with CEO contracts.

"While there is no prescriptive answer to the right formula for a CEO pay package, we believe there is an identifiable set of practices that boards can apply to their deliberations," says Barbara Hackman Franklin, co-chairman of the commission, corporate director and former U.S. Secretary of Commerce. "Coupled with a spirit of courage and rigor, these practices can help ensure that we motivate and retain the best talent while minding the long-term interest of the organization and its shareholders."

The report's recommendations take into consideration current and pending regulations, including new stock market listing rules approved by the Securities and Exchange Commission (SEC) on November 4, 2003.

Specifically, the report calls for consultants that would report directly to the board's compensation committee and who would not be used by the company in any other capacity. The report calls for the end of severance pay when an executive is released for poor performance. It seeks to end the changing of performance measures after the fact "to provide additional compensation despite failure to achieve stated objectives." And, the report states that boards must "recapture incentive payments to executives who do not meet performance objectives, basing final payments on audited books."

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