De-fanging CEO compensation.

The assault on CEO compensation has been unrelenting. It has come from shareholders at annual meetings, from business publications, and from a host of self-appointed critics. Some of the assailants, such as writer Graef Crystal, CalPERS Chief Dale Harper, and Ralph Whitworth, head of the United Shareholders Association, have become as well-known as the CEO's whose "obscene" salaries they continue to denounce.

In many ways, this chastisement has produced concrete results. The SEC has proposed constructive changes to the way executive compensation is reported in proxy statements. Beleaguered CEOs and companies have appeared before various institutional shareholder groups and have modified their positions. And Lord knows how many compensation committees have deferred action on major CEO compensation moves they might otherwise have OK'd without a moment's hesitation.

It looks like, you might say, we are in for an onslaught of legislative proposals, proxy contests, and organized shareholder rebellions regarding executive compensation. This will occur at a few companies, but it need not happen at most.

Much of the sound and fury has been directed at a handful of high-profile CEOs, many of whom deserve the attention. When fairly analyzed, most CEOs are reasonably compensated, and many are arguably underpaid.

CE's sixth annual compensation survey of 229 companies |CE, September 1992~, completed in conjunction with David Meredith's Personnel Corporation of America, revealed that 59 percent are examples of high total pay/high performance or low total pay/low performance. Only 17 percent fall into the high pay/low performance category.

Nevertheless, the war cry of the compensation critic continues to be: "Pay for performance." Most boards and compensation committees agree with this philosophy; it is the implementation thereof that occasionally goes awry. Indeed, some of the most famous cases--Michael Eisner of Disney, Anthony J.F. O'Reilly of H.J. Heinz, Roberto Goizueta of Coca-Cola, and Paul Fireman of Reebok Industrial, for example--have been created by exceptional performance that exceeded expectations.

Finally, the matter of individually tailored compensation plans is so complex that few gadflies can keep up with it. And so, potential corporate governance revolutionaries are finding other issues that are more comfortable and rewarding to pursue. They also are realizing that executive compensation is not so much a factor in itself, but is more often the manifestation of a broader corporate governance problem.

Against this backdrop, it seems to me that a prudent CEO should consider a few simple steps to enable his company to defend its executive compensation policies and actions. Here are six suggestions:

* Purify compensation committee membership. Stipulate that this committee has only outside directors, none of whom is "beholden" in any way to the company or CEO, and none of whom has interlocking directorates. The CEO can serve ex officio, but that's all. If your company doesn't have enough conflict-free directors, maybe you should add one.

* Reappraise the compensation committee charter. See that it clearly states your policies. Print these policies in your proxy statement.

* Put all records in shape. Define what you mean by "pay for performance." Document your peer companies. Quantify you goals and show how actual performance has related over a period of years.

* Use consultants judiciously. Have outside consultants report to the compensation committee or, at least, be certain that the committee receives all consultant reports and has the opportunity to meet with and question the consultant.

* Arrange for full board approval of major compensation moves. Have the full board OK the compensation of the top five officers as shown in the proxy statement.

* Change the name and function to the organization and compensation committee. This gives more depth and meaning than strict compensation.

These suggestions are not very complicated and, for the most part, are already in effect at many companies. Acceptance of them won't keep the gadflies from hounding you, but it will offer some sensible rebuttals to their assertions.

In the end, executive compensation is much like my golf game. I can dress like a golfer, buy fine equipment, take lessons and practice interminably--but I still have to hit the ball effectively on the course and get it in the hole.

In corporate life, it is a smart move to reappraise the structure and procedures of your compensation committee. Buy you still must formulate a sensible and challenging executive compensation plan and then assemble a management team to implement it. That's the name of the game.

Formerly the CEO of F.&M. Schaefer (1972-1977), Robert W. Lear teaches at Columbia Business School, where he is Executive-in Residence. He is an independent general partner of Equitable Capital Partners and holds directorships with Cambrex Corporation Inc.; Crane Company; Scudder International and Scudder Institutional Funds; Korea Fund; Medusa Corporation; WICAT Systems Inc.; and Welsh, Carson Anderson, Stow Venture Capital Co. His latest book is "How to Turn Your MBA Into a CEO."