'Evolutionary' reform.

Jeff Diermeier, president & chief executive officer of CFA Institute writes that "evolution, not revolution, is the best approach to reforming executive pay," in an article in the September/October issue of CFA Magazine.

Say on Pay. While it hasn't won universal favor in the United States, the issue has been one of the most frequent proxy proposals of recent years, and that trend is expected to continue into next year's proxy season. This coincides with CFA-member views, as most [who responded to surveys last year] want say on pay and also want boards to treat these votes to be more than merely advisory.

Pay for Performance. Where investors like to see the rubber hit the road is in circumstances where performance is poor. They want to see reduced pay, hopefully with an appropriate horizon. Compensation committees everywhere are trying to match pay with performance. U.S. companies have been required to do so since 1993 (or face tax consequences). As a result, most executive pay is heavily incentive weighted.

The Fundamental Issue. Compensation estimates for the average U.S. executive range from 180 times to more than 500 times that of the average employee and is viewed as an issue of fairness, morale and motivation within firms.

Diermeier says "pay-package negotiations should the into the company's strategic plan and performance measures should relate to discounted cash flows that describe long-term value creation (which would include caps to prevent unlimited upside).

"It appears that nonfinancial measures reflecting a company's fundamental drivers are underused in most executive compensation schemes," writes Diermeier.