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.
Moreover, it is far from clear that imploring directors to do a better job would result in that actually happening.
Shareholders find it particularly difficult to replace ineffective directors or boards, especially when only a fraction of directors are up for election each year. For example, at Bank of America Corp (BAC.N: Quote, Profile, Research, Stock Buzz) and Citigroup Inc (C.N: Quote, Profile, Research, Stock Buzz), both subject to Feinberg's plan, all directors up for reelection won easy shareholder majorities this year.
As for banks, while the proposed Fed guidelines might curb what Chairman Ben Bernanke called misaligned incentives and excessive risk-taking, they would not set formal pay limits or bans on business practices.
Similarly, proposals to give shareholders a say on pay might carry little weight because the shareholder voice would be only advisory.
And experts noted that even protections created by 2002's Sarbanes-Oxley Act, a major governance law passed after Enron Corp's collapse, did not prevent last year's financial crisis.
DYNAMICS HARD TO CHANGE
What the Administration is able to accomplish, because of our collective financial interests, the public pressure and populist appeal, is likely to fade when the economy gets better, said Lawrence Mitchell, a business law professor at George Washington University.
Mitchell said that even if institutional shareholders grew more assertive in trying to remove directors who set pay, replacement directors might prove no better. Increasing demand for specialization means that when boards need new directors, they're going to draw from the same clubs, he said.
NACD's Daly is more optimistic, while recognizing that directors will need to do more to justify their own performance.
The director community is going to spend more time on evaluating long-term performance objectives, he said. That is not necessarily something compensation consultants are going to be adept at helping them with. Directors involved in strategy, risk and compensation will have to work more together, so there is not a Balkanization between committees.
Compensation for directors themselves, often tied at least in part to companies' stock prices, is also rising -- up 39.9 percent in the last five years, according to Steven Hall's Meyer.
But with rising burdens, Dartmouth professor Eckbo said it is no longer a good idea for directors to sit on more than two boards. He said directors to whom he speaks divide on whether changes taking place now are good for companies, and for them.
Some directors think this is the exact way to go, he said. Others say the increased demands are not what they signed up for.
(Reporting by Jonathan Stempel; Additional reporting by Karey Wutkowski in Washington, editing by Gerald E. McCormick)