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How compensation gets manhandled: something in the way boards review and approve executive pay frequently goes awry. To avert these common breakdowns, here are six suggestions for sharpening compensation committee foresight.

Article Excerpt
THE TRAGIC AIRPLANE CRASH is ruled after a thorough investigation to be due to pilot error and only pilot error. How can this be when the craft was flown by an experienced and competent crew? The flight recorder indicates that the problem was not their level of experience and competence, but rather the poor communication and deficient process of interaction between the pilots.

In the same vein, how can the board members of the New York Stock Exchange have voted such outsized compensation for their CEO? Even allowing for the press's misreporting it as a single year's paycheck when some of it was deferred compensation from earlier years--and allowing for the general witch-hunt environment in which previously laudable acts are now considered larceny--just how could a board pay so much money for that job? Experience and competence were clearly not the problem; by any standard of accomplishment and track record, the NYSE had one of the very best boards you could select. But something in the communication and decision-making processes of boards and their committees can break down, and the NYSE board is not alone.

In our work as management consultants and board advisers--almost 60 years between the two of us--we've seen other boards struggle with reaching good decisions and we've thought about the reasons why. We think the struggles boil down to six different dynamics and six practical tools of resolution.

1. The real or imagined domineering CEO

Situation: After a hearty round of greetings and getting the coffee poured, the CEO opens the compensation committee meeting. "Shouldn't we get started? We've got a bunch of items on the agenda and just an hour before the full board meeting." The tone has been set: lots to cover, little time, don't take us off track. Motions and seconds are asked for in approving the minutes of the last meeting, and the CEO leads onward as they go tab-by-tab through the three-ring binders that are full of charts, graphs, tables, and legal language. The CEO is crisp and decisive. He knows this material because it is the staff work of his own team, and frankly, some of it's personal. Fifty-nine minutes later, he brings the committee through the last tab, no further questions, and a quick adjournment. Few questions have been asked anyway, and the discussion has been limited to clarification of technical details more than anything.

Resolution: The emergent "good governance" tenets put a tremendous burden on CEOs. We need more than 10,000 CEOs to run the public companies in...