Compensation committees may have more work to do to fully understand the level of risk in their organizations' pay plans, according to findings of a recent survey by compensation consultancy Pearl Meyer & Partners.

While 60 percent of the 630 directors and employees polled say they're confident that their compensation committees fully understand the level of risk in their companies' compensation plans, 21 percent lack confidence in Committee members' understanding of risk-related issues, and the remainder were uncertain, PM&P reports in its "On Point: 2010 Executive Pay-for-Performance Survey."

Of the 408 managers and 222 outside directors surveyed, only about one-third say their companies have a formal process in place for risk assessment. The rate was 50 percent among public company respondents. SEC rules require all public companies to undertake such an assessment.

The prevalence of risk assessment also correlated with company size, ranging from 46 percent among companies with over $1 billion, down to 24 percent of companies under $100 million.

The compensation-related risks of most concern to directors and management were excessive payouts, regardless of performance, ranked as a top concern by more than 60 percent of both groups, followed by misalignment of short-term performance with long-term strategy. Directors expressed more concern over the potential misalignment of pay and performance and the need to ensure that incentive plans balance, rather than mitigate risk.

Meanwhile, the findings show corporate boards are taking a bigger role in setting and enforcing performance standards. As a result, public companies are likely to make fewer incentive payouts to executives who fail to hit specific performance targets, says Matt Turner, managing director of PM&P.

Companies have traditionally had some discretion to make payouts when performance targets were missed to recognize executives' efforts or factors outside their control. Now, Turner says directors face pressure to directly link pay with meaningful performance, since proxy disclosures give investors detailed information about how incentive plans are administered.

Most public company respondents have the option to make modest discretionary adjustments to annual cash incentive plans, but the application of that discretion to override performance formulas "must clear a higher hurdle," says Turner, it's increasingly being used to reduce payouts.

Meanwhile, some 73 percent of outside directors and 34 percent of managers said corporate boards have gained influence over management in the oversight of performance-based plans over the past three years. Similarly, 68 percent of directors and 29 percent of managers believe boards today are taking a more active role in setting performance goals. Fewer than 15 percent of managers and 6 percent of directors think management has increased its influence in either area.

While most directors expressed a willingness to pay executives more for truly superior performance, they're uncomfortable with the idea of open-ended pay programs. Turner says their concern likely relates to uncapped cash bonuses and equity "mega grants."

"Directors are less comfortable than they were five or six years ago with extremely large payouts even when performance is strong, which signals a shift in thinking that paying for effort for executive compensation not good idea," say Turner. "Pay has to be based on results, not how hard they tried."

As the job of ensuring pay for performance becomes increasingly important, boards and comp committees will have to spend more time digging deeper on performance measures to ensure they're confident that the measures they have are linked to value creation, says Turner.

An executive summary of the findings is available here, and the full report can be ordered here.

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