Corporate compensation committees need to be more independent if businesses want to overcome public distrust about executive pay practices, according to a report issued by a national trade group that represents corporate boards.
Billing the report as a ``how-to'' manual for corporate compensation, the National Association of Corporate Directors outlined a series of steps that firms should take, including adopting a principle of ``fairness'' that holds that there should not be ``unexplainable gaps between executive pay and that of other employees.''
Some of the December report's critiques and suggestions are not new, and echo what labor unions and executive pay watchdogs have urged. But the report is drawn not from outsiders to the system, but from a committee of former corporate chief executive officers, board members and executive pay consultants.
``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,'' said Barbara Hackman Franklin, co-chair of the NACD panel, and a former U.S. Secretary of Commerce. She is also a director at five companies, including Dow Chemical Co. and Milacron Inc.
Giving compensation committees more independence, like letting them hire their own executive pay consultants, is key, NACD said.
``The report strongly recommends that the compensation committee bring in its own independent adviser,'' said Doreen Kelly Ruwak, vice president of the Washington-based trade group. Many compensation committees use the company's existing pay consultants, but they should seek outside advice, NACD said.
``We're in a high-scrutiny market,'' said Kelly Ruwak. ``The issue is whether the comp committee has principles in place.''
The group also recommends that:
* Executives should be rewarded based on specific company performance measures, rather than stock price, over the long term.
* Executives should be required to hold stock in the company, and have stringent holding periods.
* The board should link pay to performance metrics, and those metrics should not be changed after the fact if objectives are not met.
* Boards should disclose every element of compensation clearly, even if not required to do so.