Jeffrey Pfeffer serves on a compensation committee and discovers first hand why the pay process is so dysfunctional.

No one disputes that the competitive chessboard today is global, and will continue to become even more international in scope as emerging markets like China, India and Latin America burgeon. Yet, most U.S. multinationals, alleging impediments like travel impositions and language and cultural barriers, retain boards that reflect the American and not the global marketplace.

A new study says that hiring a CEO from within is better in the long term. “Inside CEOs, because of their deep knowledge and root in the firm, are more likely to initiate and implement strategic changes that can build the firm’s long-term competitive advantage,” says Anthea Zhang.

How global does it need to be if your customers are around the world?

This publication provides information on the board's role in risk oversight and includes six areas of focus coupled with action-oriented steps to take, along with questions for management, and tools that may help a board execute on its risk oversight responsibilities.

FinanceProfessor.com gives an overview (and provides relevant links) of several useful articles discussing executive compensation, highlighting findings that suggest that despite of good intentions stock options might actually make agency costs worst, that regulation and increased transparency may not work as well as more active shareholders, and that regulation and transparency do not lower pay levels.

It shouldn’t take a governance crisis to prompt a review of board composition. As industry changes force shifts in corporate strategy, most CEOs will, at some point in their tenure, find it necessary to ask themselves whether they have the right mix of expertise, experience and business savvy to advise and challenge senior management on the path to success. A board that has served adequately, even exceptionally, during one phase of the company’s life, may well be ill-suited for the next phase.

Furor over banker’s pay has put the spotlight on executive compensation. What appears to be a disconnect between executive pay and a company’s results has inspired renewed demands that companies "pay for performance." The critics are on to something—and it isn’t limited to the financial sector. There is something wrong with the way most companies approach executive compensation. Before companies can fix it, however, they must confront a fundamental irony. The very compensation systems that many criticize today are the product of efforts to achieve precisely that goal. However, they have failed because the typical vehicles for long-term incentive compensation—stock options and restricted stock grants—are only very weakly linked to performance.

Executive compensation packages that provide huge payouts for short-term stock-market gains have been blamed for playing a role in the risky behavior that triggered the continuing financial crisis. In a new research paper, a Wharton professor and several colleagues say they have come up with something better: A compensation structure based on long-term escrow accounts.

The real reason CEO compensation got out of hand.

Bernie Madoff, Lee Kun Hee and, less recently, WorldCom, Parmalat and Enron. In the wake of all this white-collar crime, people are calling for corporate social action. A Stakeholder Management approach could be the answer. But when a CEO is juggling everyone from employees to charities, the water surrounding their actions and results becomes murky. In “Does Stakeholder Management Have a Dark Side,” Carmelo Cennamo, Pascual Berrone and Luis R. Gomez-Mejia take a look at how managers could use causal ambiguity for their own ends.

The typical manager of financial assets generates returns based on the systematic risk he takes – the so-called beta risk – and the value his abilities contribute to the investment process – his so-called alpha. Shareholders in asset management firms, such as commercial banks, investment banks and private equity or insurance companies are unlikely to pay the manager much for returns from beta risk. What the shareholder will really pay for is if the manager beats the S&P 500 index regularly, that is, generates excess returns while not taking more risks. Hence they will pay for alpha.

In reality, there are only a few sources of alpha for investment managers. One of them comes from having truly special abilities in identifying undervalued financial assets. A second source of alpha is from what one might call activism. This means using financial resources to create, or obtain control over, real assets and to use that control to change the payout obtained on the financial investment. A third source of alpha is financial entrepreneurship or engineering – creating securities or cash flow streams that appeal to particular investors or tastes.

The CEO's reputation undoubtedly has an influence on the prestige of the business, but what determines the good name of the CEO? A survey of top Spanish CEOs reveals that personal credibility and offering a strategic vision are considered paramount. Surprisingly, ethical behavior was nudged off the Top 10, while good corporate governance and social and environmental responsibility came in even lower.

While not as impressive as the headline “funny money” payments to a handful of executives, severance costs are not the only direct, cash costs incurred when CEO failure occurs.

This study investigates the relation between the use of compensation consultants and CEO pay levels. Using new proxy statement disclosures from 2,116 companies, we examine claims that pay is higher in clients of compensation consultants, and test whether any pay differences in users and non-users of consultants are due to differences in economic or corporate governance characteristics. We find that CEO pay is generally higher in clients of most consulting firms, even after controlling for economic determinants of compensation. However, when users and non-users are matched on both economic and governance characteristics, differences in pay levels are not statistically significant. These results are consistent with claims that compensation consultants provide a mechanism for CEOs of companies with weak governance to extract and justify excess pay. Finally, we find no support for claims that CEO pay is higher in conflicted consultants that also offer additional non-compensation related services.

Most managers in the United States would shed workers to sustain profitability, whereas Japanese firms often consider job security one of their primary concerns. Both approaches, and their economic impact, can be explained through insider and outsider models of corporate governance. A new study examines the different results of similar corporate governance models by studying firms in different countries and closely examining the relationship between shareholders, managers and employees.

This note addresses how performance management—the integration and application of the right information within decision-making processes and enabled by technology—may improve governance and reduce information asymmetry. Typical hazards of information asymmetry include missing financial projections by a wide margin, letting knowable risks knock a company off kilter or being unaware when management action might damage corporate reputation.

Integrating performance management into the board agenda should minimize disputed territory between management and board and reduce the danger zone in which neither management nor the board is aware of a situation, such as competitor behavior, legal or ethical issues. The authors also explain how visualization technologies and the use of "alerts" can help board members be more effective.

Inc. magazine offers a list of suggestions for selecting, attracting, and running a good board of advisers.

A study by Stanford law and business faculty members casts strong doubt on the value and validity of the ratings of governance advisory firms that compile indexes to evaluate the effectiveness of a publicly held company's governance practices. "Everyone would agree that corporate governance is a good thing," said Business School Professor David Larcker, "but can you measure it without even talking to the companies being rated?"

The last few years have seen a mountain of legislation aimed at improving transparency around executive pay. So why is the controversy no closer to being settled?

Who, what, where and why? These are all questions that arise from the complex subject of executive compensation, and the individual questions do not exist in a vacuum. Rather, each element that determines executive compensation, such as the type of company and the country where it is located, affects every other element involved. The "gold standard" of executive compensation for many years has been the alignment of pay with shareholder value; however, researchers are beginning to conclude that shareholder value should perhaps not be the be-all and end-all of executive compensation schemes. But with so many competing factors, how should executive compensation be determined? Authors Pascual Berrone, Jordan Otten and Luis R. Gómez-Mejía provide a global perspective on executive compensation and propose possible changes to the dominant view.

Corporations grant executive recruiters wide latitude in choosing leaders for them. What do recruiters know that we don't - and should they really have so much power?

Information asymmetry may never be more pronounced than in the imbalance between managers and board members. Simply put, management knows more than the board. To level the playing field, the board can implement performance-based incentive systems. But these authors question, to what extent should boards integrate financial and non-financial measures of performance in corporate incentive plans?

An important American thinker in the early part of the twentieth century, James Burnham saw owners and managers in a perpetual struggle for power. In important respects, his ideas still resonate.

Leadership transitions are complex. Exchanges of responsibilities contain any number of challenges, primarily because they happen in real time with no pause in the or­ganization’s activities. The exiting executive is in the best position to direct events so that newcomers can avoid the usual “perfect storm” of tests: an overly stimulated imperative to jump into the job with both feet, ready for action; a sense that the appointment carries a change mandate; and an insufficient appreciation of company challenges, culture, and constraints.

Indeed, the last 90 days of the outgoing executive’s tenure may be as critical to a successful transition as the first 90 days are for a newcomer. Yet the norm all too often calls for a “clean break” between the outgoing and incoming executive. Our research suggests, however, that a productive exchange between the two executives can significantly diminish the factors that may derail the successor’s performance.