NO area of corporate governance attracts more attention than executive compensation - what to pay company directors and senior executives. Opinions continue to vary when it comes to whether executive pay is right, but several common themes exist in nearly all the developed economies in the region.

First, there is a scarcity of outstanding leadership talent, which continues to command a high price in a market-driven economy.

Then, shareholders have become more vocal, challenging excessive executive pay, especially following poor performance.

Thirdly, increasing transparency in executive pay levels is said to be fuelling even higher pay rates, as companies scramble to outdo each other in chasing the best leadership talent.

So how do companies reward top talent competitively without alienating shareholders and other interested parties? There are simple practices that companies can adopt:

- Select an appropriate peer group for benchmarking. Many companies set pay levels relative to a chosen comparator group of industry peers. This practice is effective if you have the right peer group. However, peer group selection criteria are often volatile or may be biased towards companies that are significantly larger or smaller.

Hewitt's head of executive remuneration practice in Australia and New Zealand, Peter Ryan, explained that the use of multiple company size criteria and other techniques can provide more robust, defensible comparator groups that outline a fair basis for pay benchmarking.

Executive compensation tends to be more highly correlated with combinations of two or more company size and performance measures, such as market capitalisation and annual revenue, than with any single measure. Whenever possible, the comparator group selection rules should also ensure that the company under review is roughly in the middle of its peer group on these size and performance measures.

- Position target total compensation close to the middle of the market. Far too many companies try to target total compensation - aggregate compensation associated with delivering budgets or other performance expectations - in the vicinity of the market's 75th percentile. Not only is it mathematically impossible for more than 25 per cent of companies to pay at the third percentile or higher, widespread attempts are contributing to ongoing increases in executive pay, to an extent that is not matched by performance improvement in all cases.

Unless there are genuine reasons why a company needs to pay high in its market to attract talent, with the correct benchmarking, positioning executive pay closer to the market median for doing what is expected should generally suffice. If this positioning is accompanied by adequate leverage in variable compensation, actual total compensation can still reach the top quartile when outstanding performance is delivered.

- Ensure substantial leverage in variable compensation. It is common for leading companies to have variable compensation comprise a substantial percentage of a senior executive's target total compensation so that strong leverage between performance and pay is really possible. Ideally, variable compensation comprises a mix of short- and long-term elements to reflect an appropriate balance between short- and long-term performance goals.

However, variable compensation must be genuinely at risk and vary substantially in accordance with wide variations in performance. Many companies say that they rely heavily on variable compensation but pay their executives almost the same incentive year after year, which essentially amounts to a relatively flat incentive pay-off curve.

There should be a risk that there will be no incentive in a poor performance year, which for most companies is at least one year in five. At the other extreme, hitting a super-stretch performance level that warrants the maximum incentive payout and results in a steep incentive pay-off curve should also happen infrequently, but should be well rewarded when it does occur.

- Set stretch performance goals. High-performing companies tend to set very ambitious goals - which they do not always meet - and reward their executives well when they do achieve stretch goals. These companies are more likely to award some executives zero bonuses in less successful years as compared to their lower-performing peers, but deliver larger bonuses than their peers in better years.

At a minimum, in a listed company, the financial goals should at least match market expectations, indicated by the consensus of external analyst forecasts for the company.

Alternatively, industry performance benchmarks or the company's own performance history may provide evidence of whether the company's business plans reflect an appropriate degree of stretch. Stretch goal setting works, as long as the goals are specific, measurable, achievable, reasonable and timely.

- Check and refine compensation structure. A company can draw on suitable measures which are publicly available to track its progress in achieving balanced executive compensation and refining its strategy whenever necessary. One suggested test is to compare your company's recent executive compensation decisions with your percentile ranking on key company size and selected performance measures from peer benchmarked companies.

Ranking and measures on benefits, short and long-term incentives, total compensation, market capitalisation, revenue, profits and financial ranking may be used as a diagnostic to review both the reasonableness and adequacy of the company's executive total compensation, as well as the viability of the compensation component mix.

It is important to regularly benchmark against internal and external structures, measuring your company against international best practice standards. It is also vital to talk to leading remuneration consulting groups and for management to practice realistic goal-setting to improve the executive remuneration balance. These are two of the greatest secrets to business success.

The practices above are important principles that all companies in all markets can take on board to turn the performance pay rhetoric into reality, as well as to ensure executive compensation represents a win-win situation for executives and shareholders alike.

Excerpt from the Hewitt Quarterly magazine Vol 4, Issue 4, by Peter Ryan, executive remuneration practice lead, Australia and New Zealand ((peter.ryan@hewitt.com).

Adapted by Tan Yee Deng, rewards and analytics business lead, Hewitt Associates, Singapore ((yeedeng.tan@hewitt.com)