Today's critics of corporate boardrooms have plenty of ammunition. The two crucial responsibilities of boards -oversight of long-term company strategy and the selection, evaluation, and compensation of top managem...
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Today's critics of corporate boardrooms have plenty of ammunition. The two crucial responsibilities of boards -oversight of long-term company strategy and the selection, evaluation, and compensation of top management -were reduced to damage control during the 1980s. Walter Salmon, a longtime director, notes that while boards have improved since he began serving on them in 1961, they haven't kept pace with the need for real change. Based on over 30 years of boardroom experience, Salmon recommends against government reform of board practices. But he does prescribe a series of incremental changes as a remedy. To begin with, he suggests limiting the size of boards and increasing the number of outside directors on them. In fact, according to Salmon, only three insiders belong on a board: the CEO, the COO, and the CFO. Changing how committees function is also necessary for gearing up today's boards. The audit committee, for example, can periodically review ''high-exposure areas'' of a business, perhaps helping to prevent embarrassing drops in future profits. Compensation committees can structure incentive compensation for executives to emphasize long-term rather than short-term performance. And nominating committees should be responsible for finding new, independent directors - not the CEO. In general, boards as a whole must spot problems early and blow the whistle, exercising what Salmon calls, ''constructive dissatisfaction. '' On a revitalized board, directors have enough confidence in the process to vigorously challenge one another, including the company's chief executive.
As the stock market began its ascent in the mid-1990s, executive pay- always the subject of heated debate-mounted along with it. That's because among the largest U.S. companies, stock options now account-for more ...
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As the stock market began its ascent in the mid-1990s, executive pay- always the subject of heated debate-mounted along with it. That's because among the largest U.S. companies, stock options now account-for more than half of total CEO compensation and about 30% of senior operating managers' pay. One problem became particularly clear during the bull market's astonishing run: even below-average performers reap huge gains from stock options when the market is rising rapidly. The author proposes steps to close the gap between existing compensation practices and those needed to promote higher levels of achievement at all levels of the corporation. For top managers, he recommends replacing conventional stock options with options that are tied to-a market or peer index. Below-average performers would not be rewarded under such plans;superior performers could, depending on the way plans were structured, receive even more. He nets that managers at the business unit level should not be judged on the company's stock price -over which they have little control - and advocates an approach that accurately measures the value added by each unit. Finally, he suggests how certain indicators of value can be used to measure the contribution of frontline managers and employees. The concept of-pay for performance has gained wide acceptance, but the link between incentive pay and superior performance is still too weak. Reforms must be adopted at all levels of the organization. Shareholders will applaud changes in pay schemes that motivate companies to deliver more value.
The pay-for-performance concept is at the heart of a current controversy over the compensation of top executives. Here's how to tie such compensation to company performance in a way that will avoid controversy.
The pay-for-performance concept is at the heart of a current controversy over the compensation of top executives. Here's how to tie such compensation to company performance in a way that will avoid controversy.
Short-term incentives, those that cover a year or less, are designed to provide the flexibility in pay needed to reward level of performance appropriately.
Short-term incentives, those that cover a year or less, are designed to provide the flexibility in pay needed to reward level of performance appropriately.
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