By Cydney Posner

In a New York Times article today there is a discussion of the potential for increased scrutiny of compensation committees in the wake of the furor over executive compensation. The article quotes an expert arguing that one of the unintended consequences of pay-for-performance measures, advocated by stockholder activists, is "the misalignment of incentives [that] has resulted in firm, sector and systemic risks. None of the corporate governance activists ever made the connection." The article notes that the economic catastrophes of 2008 exposed these problems. The author cites two factors that contributed to the pay scales under which CEOs now earn more than 300 times the pay of the average American worker. "First was the advent of giant stock option grants, a form of compensation made all the more attractive by a 1993 change to the tax law that maintained corporate tax deductions for executive pay over $1 million, but only if the pay was tied to performance. Second was the widespread practice of linking pay to the levels at companies of similar size or scope. Every time a board tries to keep an executive happy by offering above-average pay, the net effect is to raise the average that everyone else will use as a baseline." Now, the furor over executive pay has heightened the profile of compensation committees, and activists are starting to see more of the changes for which they have long been agitating.

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