Pay day

US pay rules: Corporate America can breathe a sigh of relief. Despite much sabre-rattling over executive compensation – including talk of capping top officials’ pay – the guidelines unveiled by US Treasury boss Tim Geithner on Wednesday contain no such bombshells. In fact, in light of the heated rhetoric that preceded them, they’re refreshingly sensible, even a bit dull.

Geithner says compensation should be linked to a wider range of metrics than just share price, and reflect the time horizon of the risks a company takes – hard to quibble with that. He also called for risk managers to have more of a say in compensation, which should give them more bite to go with their often-ignored barks.

He also backed “say on pay” legislation to give shareholders nonbinding votes on compensation – a sensible way to increase transparency and further engagement by managers with their owners, though it’s a reform many big US companies are already adopting.

THE main innovation to Geithner’s guidelines, however, may be the trickiest to implement. He proposes legislation that would give the Securities and Exchange Commission the power to make sure the compensation committees of public companies are manned by independent directors - those with no apparent business links to the company or its management.

This looks designed to eliminate tacit back-scratching that may go on among compensation committee members on corporate boards. Cosy board relationships are often cited as a factor contributing to big payouts, like the $160 million that Merrill Lynch’s Stan O’Neal received despite a tenure that essentially saw the firm nearly go bust.

Moreover, the “what goes around comes around” risk may dampen the ardour of chief executives sitting on pay committees from reining in other chief executives’ pay. Some of the consultants board remuneration committees hire, similarly, may have a bias toward generosity, since they want to secure future assignments.

The key will be to clearly define what constitutes an independent director within the spirit of these guidelines. Geithner wants the SEC to draft the specifics and enforce them, which makes some sense, since the agency is meant to be the shareholders’ principal advocate. But given its recent history of lax oversight, investors would be wise to keep their own eyes trained on compensation practices.