Caremark Rx Inc.'s (NYSE:CMX) deal with CVS Corp. (NYSE:CVS) unfairly favors company insiders, according to a shareholder lawsuit brought to court by shareholders attempting to block the merger. Shareholders were also infuriated earlier this month when the company's board voted unanimously to block a higher, rival offer from pharmacy benefit manager Express Scripts Inc. (NDAQ:ESRX).

What's so unusual about this deal? Well, first of all, the Caremark-CVS deal has a whopping $675 million breakup fee - much larger than that of many large PE buyouts that took place recently. Secondly, Caremark executives and directors would also receive lucrative director positions at the combined company and could use the company's sale to free themselves from possible penalties and fines from an investigation by the Securities and Exchange Commission into potential backdating of stock options. In fact, CEO Edwin 'Mac' Crawford Thirdly stands to gain $48 million in stock, severance payments and consulting fees as part of the CVS deal. Finally, while the CVS offer is for stock in the company, and the Express Scripts offer was for stock plus a cash premium to shareholders. This is not to mention that the entire transaction took place near the stock's 52-week low, which is highly suspect.

Clearly there are plenty of reasons for concern. Lawyer Stuant Grant said it best: "Our main gripe is this was a sweetheart deal that gave the insiders a lot more than the outsiders". Whether or not this can be successfully resolved depends largely on the sentiment of larger institutional shareholders.

The Walt Disney Company's (NYSE:DIS) CEO Bob Iger revealed a $24.9 million pay package in a recent 14A proxy filing with the SEC. The compensation package included $2 million in salary, a $15 million cash bonus, and a $4.3 million payout from the vesting of performance options. Moreover, Iger also received $666,000 expense reimbursements for auto benefits ($14,400), personal air travel ($67,879), and security ($578,656). And this comes in addition to another $2.92 million in Disney stock options granted during the company's fiscal year. While this package pales in comparison to recent $100 million compensation packages, it still represents significant reimbursed expenses at the cost of shareholders. This is also a significant raise over his previous salary as COO, where he received $9.24 million in salary and cash bonus, $500,000 in restricted stock, 274,241 stock options, and other compensation of $1.02 million. But with Disney stock reaching new highs, he could be worth the price...

Metropolitan Capital urged Cyberonics (NDAQ:CYBX) shareholders to send a message to the company's board today in a press release intended to inform shareholders of its own nominations to the company's board of directors. In the press release, the company outlined the problems facing the company, and why change is necessary in order to unlock shareholder value in the long-term. These problems ranged from lack of board supervision to backdating scandals to poor corporate governance. Here's an overview of the fund's concerns:

"Lack of Board Supervision - The current members of the Board failed to adequately supervise and hold management accountable, and during a period of significant share price underperformance, on multiple occasions, approved compensation and severance packages for the former CEO that we consider to be highly excessive and inappropriate in light of the Company's poor share price performance and the circumstances surrounding his departure.

In contrast to the losses incurred by Cyberonics shareholders over the last few years the former CEO banked tens of millions of dollars in compensation, restricted stock awards and sales proceeds from options grants all thanks to the largesse of the incumbent Board. Even after his forced resignation, under a cloud of suspicion, and in the wake of the options back- dating scandal that has been so costly to Cyberonics shareholders, the present Board authorized a severance package for the former CEO that we value to be worth at least $5 million. Ask yourselves, "how did this severance package serve the shareholder's interests?"

Options Back-dating Scandal - Over an extended period the Company appears to have engaged in a process of options back-dating and spring-loading. The fallout from this malfeasance continues to be felt by the Company and its shareholders. In late November, when the Audit Committee announced the completion of their review of the Company's stock option practices, the Company estimated a charge of $10 million would be taken. The Company trumpeted its ability to "move forward from this point and execute on its business plan." By last week, the charge had increased to over $18 million-but unfortunately this time there was no boastful press release-that information had to be dug out of the Company's 10K, which was finally filed, albeit nearly six months late. As shareholders we must ask ourselves, "is this lack of transparency the best way for the Company to move forward and begin to rebuild its credibility?"

Lack of Good Corporate Governance - The incumbent members of the Board have seemingly been inured to issues of deficient corporate governance and have only reluctantly begun to address those issues under the threat of court action and in the face of our proxy fight.

Shortly thereafter, the Board approved a new five year contract for the former CEO-despite his having nearly three years remaining on his existing contract! The NEW contract increased his base compensation by more than 50% and included a substantial grant of restricted stock. Little more than a year later, the same Board found itself approving the aforementioned $5 million severance package for that former CEO.

Failure to Separate the Offices of CEO and Board Chair- It took nearly six months from the time we first raised the need to separate the posts of CEO and Board Chair with Company representatives for the Company to implement this basic and widely accepted policy of sound corporate governance (and this was only done after the former CEO, who also held the title of Chairman of the Board resigned under the weight of the options scandal).

Failure to Timely Hold Annual Meeting- After months of our petitioning them to do so, the Board only agreed to hold its 2006 annual meeting of shareholders on Feb 1, 2007, in order to settle the suit we filed in the Delaware Chancery Court to compel the Company to set a meeting date."

This information is not only important for Cyberonics shareholders to consider, but also shareholders in other companies. Many of the issues listed are precursors to problems - shareholders should be on the lookout for these warning signs before its too late.

Home Depot (NYSE:HD) investors are asking a Georgia judge to block the retailers from giving a $210 million severance package to former CEO Robert Nardelli. The shareholder group, led by Pontiac (Michigan's employee retirement fund), have filed a temporary restraining order in Superior Court of Fulton County. And this isn't the first time that Pontiac and HD have met in court - back in September, the fund charged that HD executives and board members had backdated options. While the company admitted that this was true, they maintained that it happened before Nardelli's tenure. We will not know the outcome of this case for several weeks; however, it is becoming increasingly apparent that executive compensation is likely to remain a hot-button issue throughout 2007.

Highly paid executives have recently found themselves under increasing pressure from shareholder activism groups, and new SEC regulations only make their situation worse. While some of these executive pay concerns are justified, there are many instances in which high pay is justified. For example, successful CEOs that specialize in turn-around situations typically command a higher premium because of the increased risk. However, many members of the media and shareholder activism groups fail to differenciate these CEOs. This is causing many highly paid CEOs to migrate to private equity controlled companies, according to a report from the New York Times.

Private equity groups can offer these CEOs many benefits that are impossible to obtain at most public companies, but are often much more active in their oversight. For example, many private equity groups prefer to give CEOs a significant stake in the company, which can help them generate real wealth if the company performs well. However, if the company doesn't perform as expected, it is a lot easier for the PE group to fire the executive than it would be to oust them from a public company. Moreover, the executive may not see a lot of monetary gain if the company does not perform well. However, many highly paid executives in the world of public companies have excellent management ability, and therefore are more apt to take on such opportunities. The downside, of course, is that the move may draw an increasing amount of talent from public companies to private companies.

The Home Depot Inc. (NYSE:HD) announced today that it would be reforming its executive compensation procedures after the ousting of the company's former CEO Robert Nardelli. Nardelli was awarded more than $225 million in compensation during his six years with the company. According to an 8-K statement filed with the SEC, "On January 4, 2007, the Board of Directors of the Company approved an amendment to Article II, Section 6 of the Company’s Bylaws to require that two-thirds of the independent directors of the Board approve any compensation granted to the Company’s Chief Executive Officer." Investors are hoping that these changes will help prevent any future problems with executive compensation.

Charlie Munger conducted an interesting interview recently with the Los Angeles Times in which he was asked about his thoughts on executive compensation. As Warren Buffet's right-hand man, he has a lot of experience in both the world of investments and management. In the interview he expresses the many problems with executive compensation and the efforts being made to curb it. In the end, he admits that it may be unsolvable.

Here is the text from the interview:

Q. How did CEO compensation get so out of whack?

A. Some of the worst sinners are compensation consultants. I have always said that prostitution would be a step up for these people. "Whose bread I eat, whose song I sing."

It isn't that the CEOs are such terrible people, it's that the system, with its envy-driven compensation mania, has developed to a place where it brings out the absolute worst in good people.

Q. What about corporate directors? There's been a move to pay them more and try to make them more accountable. Would that help?

A. Paying directors more is going to make the compensation excesses harder to fix. The more you pay directors, the more the directors are going to want to pay the CEO. Putting more duties on the directors and giving them more money is like trying to extinguish a fire by pouring gasoline on it.

If I were running the world, I would not allow directors to be paid at all. I would make directors be exemplars and serve just as they serve on the boards of Harvard and Yale.

Q. What about putting limits on how much a CEO can be paid?

A. Congress tried to do that in 1993 by passing a prohibition on pay of more than $1 million. You can see how effective that was. I think you can assume that any law will be promptly evaded.

I don't see blanket limits as a good idea because it's not the dollar amount that's a problem. No one is the least mad when Tiger Woods earns $18 million. They figure he's earned it. What makes CEO pay so difficult is that only a few of the people who are earning these huge amounts are actually worth it. Everyone else figures they have to keep up, or recognize that their guy isn't as good. Who wants the recognition that the company down the street has a remarkable CEO, but we have a mediocre klutz?

I like the idea of high pay for people who are really worth it. The problem is that most of them are not. Every mediocre employee who rises through to the ranks to become CEO thinks he should retire rich. It's crazy.

Q. What is the solution?

A. The reason this has grown to such an extreme degree is that it is so hard to do something about it. It's like autocatalysis in chemistry--it's a reaction that just feeds on itself and keeps ballooning. If more executive compensation issues required shareholder approval, I think that might dampen some of the excess. That has been suggested, and there is a lot of discussion around that subject. But there are also a lot of malcontented nuts in the world, and you wouldn't want the malcontents to get too much power. I don't know. Just because something is a serious problem doesn't mean that you can fix it. There's an element of tragedy in this because some very good people are acting in some very bad ways.

Q. You don't seem to have much hope that things will change.

A. There's always hope. But, frequently, when things are very excessive, the correction is very painful. Korea had cowboy capitalism, with low fiduciary standards, and things got worse and worse. They had to go through a total collapse and a huge scandal, but it's now largely fixed.

I would like to see CEOs act as exemplars. I would like them to realize that they are setting an example when they are setting their own pay. But CEOs are very pompous and they assume they are right about everything. Saying that to them would be a total waste of breath.

I don't want to spend my life nattering against my friends' pay. But if you think there's an easy solution, you don't understand the problem too well.

We have had an enormous improvement in the garden variety of corporate fraud in America, in pretending to earn money that you did not. But the next level of reform will be much harder. In my opinion, not enough executives have gone to jail.

Home Depot's ex-CEO Robert Nardelli has become a media target after he resigned, revealing his 'golden parachute' amounting to over $210 million. This pay came in addition to his existing $300 million in compensation, which he received during the course of his tenure at the Home Depot. Meanwhile, shareholders suffered through sub par performance when compared to Lowe's (Home Depot's main competitor). Most investors fail to realize that this type of compensation is actually quite common in corporate America. Here are a few of the most notable instances of over-compensation in the past:

Pfizer's Henry McKinnell left the company with a $213 million pay package with an $83 million pension. This came despite shareholder losses amounting to over $137 billion during his tenure. Sovereign Bank's Jay Sidu left the company with over $44 million after being removed via a long proxy battle with shareholders. Many other CEOs were removed from their posts with tens of millions of dollars of compensation, from companies like Morgan Stanley (Philip Purcell), Viacom (Tom Fretson), and Hewitt-Packard (Carly Fiorina).

While there are many highly paid CEOs that deserve the pay they receive, there are countless others that profit handsomely while shareholders suffer through losses. While new executive compensation disclosure rules should help increase transparency, there is still a lot of work left to do before we see executive interests truly aligned with shareholder interests.