By David A. Bjork
While boards and their compensation committees do a good job of overseeing executive compensation, there are several common flaws in what is otherwise a strong process.
First, committees often don’t take time to look at larger governance issues such as compensation philosophy, peer group data and mix of pay. Meeting agendas are so full that members tend to focus only on required actions. The committee manages to complete all tasks for the year by maintaining the program and following precedent, rather than evaluating it and questioning whether past practices are right for the future.
Second, the committee chairman doesn’t establish an independent relationship with the executive compensation consultant and instead lets management control the relationship. While committees generally select their consultant and make it clear that the consultant works for the committee, not for management, they often drop the ball at that point. Then, management maintains contact, tells the consultant what needs to be done, and decides which information to show the committee and whether to invite the consultant to meetings.
Third, committees tend to take a casual approach to documenting their process, even though such documentation is the only evidence of the committee’s diligence.