The events of the past few weeks are a harbinger of the intense scrutiny of executive compensation that can be expected.

When various members of the NYSE Board indicated their "surprise" at the magnitude of Dick Grasso's compensation, it was a timely reminder to public companies to revisit their compensation policies and procedures.

Here are a few considerations for directors and officers to keep in mind:

Compensation Committees

Companies should appoint a truly independent compensation committee.

Compensation committees should be small — three to five members — and each member should be independent of management, not only as a "legal" standard, but also as a "pragmatic" one.

Key items that should be considered include the following:

Committee members should be selected by the independent members of the board, not the CEO (either alone or in tandem with others);

Of course, the full board should ratify the selection of the committee members; and

Members should not be close friends of the CEO, or have affiliations, business relations, or interlocking relationships (for example, reciprocal board memberships) with senior management.

For details on director independence standards, refer to page eight of the NYSE proposal for improved governance, which explores the tightened definition of "independent director" within the context of the compensation committee (relevant section highlighted in link above).

Performance-Based Compensation

Compensation should be linked to legitimate corporate goals, though this is easier said than done.

To do so, compensation should be structured to align the interests of management with the interests of company shareholders.

This means that CEOs should be rewarded for producing growth in fundamental company values, such as market share, markets served, and shareholders' equity, not for achieving some particular share price or some measure of earnings per share.

The recent restructuring of GE CEO Immelt's compensation package, which links his pay to increases in cash flow, is an example of such a standard. For details, refer to "Cash Flow, Investor Returns To Determine GE CEO Pay" in CW's Sept. 23 edition.

In addition, instilling a proper "tone at the top," and adhering to good corporate ethics, should be criteria for bonus payments to CEOs.

Escrowed Compensation

A substantial portion of a CEOs compensation should be placed in an interest-bearing escrow account, and paid upon the successful completion of the CEO's tour of duty.

If the company were compelled to materially restate its earnings, or if the company were accused of fraudulent or other serious illegal conduct, the CEO's escrowed earnings would be withheld and remain available to fund any fines the company might be assessed by the SEC. The funds also might simply be returned to the company for the benefit of its shareholders.

Escrowed money should include a significant percentage of base salary, as well as all all discretionary, or bonus, compensation.

For example, if a CEO's base salary were, say, $5 million, perhaps only $2 million would be paid to the CEO, with the remainder withheld until the end of the CEO's term.

Deliberation and Documentation

The committee should follow and document meticulous procedures in determining the level of the CEO's compensation.

Careful notes should be kept of the deliberations, and the specific factors that go into a recommendation for base salary levels should be enumerated and articulated so that each member of the Committee understands them.

A comparison should be made with the salary levels proposed for the company's CEO with those paid to CEOs of corporate peers. And factors giving rise to bonus payments should be clearly delineated and understood.

To assist in the process, members of the committee should have access to appropriate expertise to help in determining compensation levels.

The Committee should be able to articulate lucidly why compensation is higher, if it is, than that paid to CEOs of comparable organizations.

Comprehension and Approval

All of the independent members of the board should make the ultimate determination of compensation awards. This was one of the critical failures at the NYSE, where — among other failures — compensation committee members claimed they did not fully understand what Grasso's pay package entailed.

Every independent board member should understand and approve the compensation paid to the five most senior officers.

And if the full board varies the recommendation of the Compensation Committee, the reasons for that variance must be articulated precisely.

File It

A lucid and complete description of compensation decisions, and all relevant details, should be included in company filings.

This column solely reflects the views of its author, and should not be regarded as legal advice. It is for general information and discussion only, and is not a full analysis of the matters presented.