Five Steps Toward Best Practices in CEO Compensation

1. Don't rely solely on comparability data: in order to satisfy IRS Intermediate Sanctions rules, boards and compensation committees must compile comparability data to demonstrate that the compensation is fair and reasonable. But that should be the last step in the process.

2. Begin compensation discussions with the CEO before making decisions. Boards should not just pay CEOs whatever they want; however, having an idea of what the CEO is anticipating before communicating the amount can save grief and tense negotiations. And it is best to know in advance if the CEO would prefer to defer part of the compensation.

3. Review the past contract and simplify: eliminate car allowances, spousal travel, parking spaces, country club memberships and other "perquisites" that become red flags for the media. Determine the value of these, because they have been part of the CEO's package, gross up the value, and add it to the base compensation.

4. Use compensation as a strategic tool: create a 457 (b) or other deferred compensation tools to encourage the CEO to remain in the position over a defined period of time.

5. Consider a bonus that is tied to the strategic plan so that the CEO and board agree upon it in advance and then measure the important actions to be achieved during the bonus period.