The Great Debate

Prepare for changes in executive compensation practices

–  Patrick R. Dailey is a human resources executive and specialist in executive compensation. The views expressed are his own. –

The Obama administration is moving aggressively to reform executive compensation practices and impose more stringent governance regulations. These policy and regulatory initiatives are a result of the administration’s publicly stated beliefs that the global financial crisis of 2008 was in large part a result of executive compensation programs that were too highly-leveraged and short term, thus providing incentive for operating executives to engage in excessive risk taking – the corporate version of always swinging for the fences.

Without question, all public corporations will soon implement more stringent regulations and practices governing executive compensation.

Significant change is emerging in five areas of executive compensation and its governance.

Compensation Committees will have more clout

The Treasury Department seeks to raise the level of confidence among shareholders regarding executive performance targets and fairness in plan design by “beefing up” authority of the Compensation Committee to act in the interests of long term shareholders. Changes may likely include:

-  Strengthened independence requirements for Committee members. -  Increased decision-making authority and accountability. -  Committee duties and reporting requirements will be more specifically-defined by SEC regulations. Compensation plans must pass new tests for shareholder alignment and risk