When a high-level executive brings home an outsized paycheck these days, chances are there will be stock options and bonuses associated with it. But the process by which corporate boards agree to those extras can be a dizzying one.
It's a far cry from the old days when a chief executive who was often the chairman as well might have had a cozy pay arrangement with other board members, usually heavy on straight salary and laden with perks. But with changes in SEC rules, and the increasing power of institutional shareholders, the clubhouse atmosphere is long gone.
"The board, and the compensation committee, is not an old boys club anymore," said Raymond Fife, director of compensation consulting at Coopers & Lybrand LLP in downtown Los Angeles. "They devise pay plans with incentives."
That, in turn, has led to a much greater role by the board's compensation committee in determining executive compensation. And in this era of independent advisers and third parties to provide "objective" opinions, compensation committees are more often turning to consultants before settling on pay levels.
"In the past, (consultants) might have been hired by the chief executive, but with most of my clients today, it has shifted to the compensation committee of the board, or the chairman of the compensation committee," said Don Segolla, regional partner in the Los Angeles offices of KMPG Peat Marwick LLP.
After the compensation committee has hired a consultant, that person or group will attempt to set a pay plan that aligns management's financial rewards with those of shareholders and that will be competitive in the marketplace.
"Are the pay levels and compensation package appropriate, and how do we know? Those are the two most provocative questions you can ask," said Segolla.
Typically, compensation consultants will scour the proxy statements of other, similar public companies.
"Many times we will develop a peer group of companies, and we will give (a compensation committee) a bench marking, based on proxy statements, of what the competition is paying," said David Leach, managing director at Compensation Resource Group Inc. in Pasadena.
The all-important stock options are given a careful going over. Some compensation committees seek an estimated value to the options, so that they can demonstrate that the CEO is being fairly compensated. These values are determined by looking at current interest rates and estimated future performance of the stock, said Leach.
Some committees are also asking that "relative performance" ? that of a company's stock compared with similar public companies, or the S & P; 500 ? be the basis for options.
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