Such checks and balances also are in play at AEP. Koeppel assists the board in linking business outcomes with compensation metrics. "We take the board through new scenarios every year," she says, noting that finance provided "a wider range of possible outcomes this year in light of the economy."

AEP's board has the discretion to make adjustments to the compensation plan if they perceive it to have negative unintended consequences. Directors did that earlier this year, when the company lowered its 2009 earnings guidance. The board changed AEP's methodology for annual incentive compensation by increasing the threshold earnings per share needed to fund the program, moving it to the midpoint, rather than the low end, of the company's earnings guidance. The board decided that "requiring employees to work harder to achieve incentive awards more-appropriately balanced employee and shareholder interests, since shareholders would be negatively impacted by the lower anticipated earnings," Koeppel says.

Such best practices may be moot, however. "The die has been cast," says Kay. "We're in a deep recession and people are looking for victims. Executive compensation is number one on that list. The government is getting high marks from the public. For the time being, Corporate America cannot defend itself."

Russ Banham is a contributing editor of CFO.

Putting More Claws in Clawbacks

One of the less controversial aspects of executive-compensation reform concerns clawbacks, or procedures for retrieving bonuses from executives whose managerial prowess was evident only for the very short-term, if at all. But current laws can make retrieving undeserved bonuses tricky. There isn't much case law on the subject, with only one successful clawback to draw from — a 2007 settlement with William W. McGuire, former CEO of UnitedHealth Group, who was required to repay $468 million of his bonus for allegedly backdating stock options.

A spate of pending litigation may change that. In April the SEIU Master Trust, a consortium of pension funds with approximately $1.3 billion in assets, demanded that the boards of directors of 29 major companies in its investment portfolio investigate more than $5 billion of incentivized executive pay alleged to have been tied to poorly understood derivatives and other financial instruments. Since 2005, the top five most highly paid executives at the 29 firms, which include AIG, Wells Fargo, Citigroup, American Express, Goldman Sachs, and McGraw-Hill, received more than $3.5 billion in cash and equity pay and more than $1.5 billion in stock options. During that same period, the share prices of the 29 firms plummeted.

Meanwhile, corporate antipathy toward "say-on-pay" shareholder provisions seems likely to fade even though many experts say such policies lack nuance. "It's a blunt instrument," asserts Russell Miller, managing director of Executive Compensation Advisors, a division of executive search firm Korn/Ferry International. "Shareholders will be asked to vote either yes or no. It doesn't give them the ability to vote on the merits or detractions of various elements within compensation programs, or to engage in any kind of meaningful discussion with management." Then again, most such provisions are nonbinding anyway, which once again puts compensation committees on the line as they debate whether to act on such votes. — R.B.

Laying Out the Tarp
Notable executive-pay rules within TARP legislation include:

• A prohibition on cash bonuses and incentive compensation other than restricted stock for the top five officers and others

• A prohibition on bonuses to these top executives in excess of one-third of their annual compensation, until the TARP loans are repaid

• Stringent "clawback" provisions requiring TARP recipients to recover performance-based compensation awarded to the top executives if the bonuses were based on statements of earnings, revenues, gains, or other criteria that are later found to be materially inaccurate (The new rule stiffens the clawback provisions of the Sarbanes-Oxley Act of 2002, which addressed only CEO and CFO pay.)

• A "say-on-pay" provision permitting shareholders to vote "for" or "against" a public company's executive-compensation program

• An end to "golden parachutes," as well as other restrictions on severance payments

• The effective banning of such executive perquisites as free country-club memberships and chic office remodels — R.B.

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