Wall St. pay wrath thrusts directors in spotlight

By Jonathan Stempel - Analysis

NEW YORK (Reuters) - Outrage over the lavish compensation that Wall Street has awarded itself for doing a crummy job is likely to increase the focus and burdens on the people who set and monitor how pay is doled out: corporate directors.

The financial crisis has prompted demands by shareholders and politicians to rein in out-of-control pay, especially when it spurs bankers and traders to take too much risk.

This week the U.S. Federal Reserve set plans to crack down on pay in the banking industry, while White House pay czar Kenneth Feinberg decided to slash most of the cash pay for top executives at seven companies that got massive taxpayer aid.

Directors of public companies, especially those who sit on compensation committees, will feel the brunt of the growing focus on pay, at a time when many institutional shareholders and governance critics demand the ouster of ineffectual directors.

"They are now even more concerned about doing a good job and the reputational risk if they don't," said Pearl Meyer, co-founder of Steven Hall & Partners LLC in New York, who has advised boards and management on executive pay for more than 30 years. "What is happening at the board level is a significantly increased time commitment."

Compensation committees will face more pressure to devise pay packages that more closely tie pay to performance.

They are also likely to add more emphasis to longer-term results, and insist that awards to chief executive officers and others be forfeited or "clawed back" should short-term boosts to earnings or stock prices prove illusory.

"If I were a director sitting on a compensation committee, I would definitely work harder to justify whatever compensation package needs to be paid," said Espen Eckbo, a professor at Dartmouth College's Tuck School of Business and founder of the Lindenauer Center for Corporate Governance.

MORE WORK NEEDED

In a recent survey for the National Association of Corporate Directors, 78 percent of directors polled said CEOs of major companies are overpaid relative to their performance.

Of these directors, 56 percent said this is in part because there is a lack of genuine performance objectives in the first place. More troubling, 22.8 percent said their own boards did not set long-term goals for their CEOs' performance -- such as developing a deep pool of talent below the executive suite.

"Tying compensation to long-term goals needs more work," NACD Chief Executive Kenneth Daly said in an interview. "But performance metrics are difficult to define because they are not all quantifiable. It is hard to quantify, for example, the importance of developing good bench strength."

Directors face several other problems in setting pay.

By cutting guaranteed and other pay too much, directors risk angering and perhaps losing top talent. Feinberg on Friday said he absorbed many arguments about the need to retain key employees as he weighed how dramatically to rework pay plans.

Another problem: boards often do not see eye-to-eye with management, especially on pay, creating an "unfortunate divide," said Jeff Cunningham, chief executive of Directorship, an online service for directors based in Boston.