A new study conducted by the Institute for Operations Research and the Management Sciences (INFORMS) found that employee stock option plans (ESOPs) offered to executives as part of their compensation package could significantly increase the risk of fraud in the form of rigged share prices. The study's authors said, "Our results demonstrate two factors substantially increase the likelihood of financial misrepresentation: extremely low performance relative to average performance in the firm's industry, and high percentages of CEO compensation in stock options." Interestingly, the authors found that bonuses did not have the adverse affect of stock options.

These days there is great incentive for performance-based compensation as it is supposed to motivate executives to boost performance. Many of the tax laws and new disclosure laws clearly favor these types of performance-based compensation. However, it appears as if stock options may now be a double-edged sword - the SEC must identify new ways to discourage aggressive, unethical or illegal behaviors.

Executive compensation has been a hot-button issue this year after Home Depot and Pfizer CEOs left their companies with multi-million dollar golden parachutes amid declining stock prices. Despite this spotlight, however, little has actually been accomplished in the way of curbing executive compensation. Shareholder proposals during the last proxy seasons were marginal at best, with only three major companies adopting the nonbinding shareholder vote on executive pay. The majority of the proposals were shot down by majority holders that included larger institutions and mutual funds. Meanwhile, the actual numbers continue to astound as CEOs stand to make 179 times what the average worker makes and around 2.5 times as much as the average executive at their company. So, what can be done to reign in these figures? Well, without at least a nonbinding vote it may take more instances like Home Depot and Pfizer to finally convince institutional investors that there is a problem.

Warren Buffet slammed the tax differential between the rich and poor yesterday during his charity benefit for Hilary Clinton. Buffett cited himself, the third-richest person in the world, as an example. Last year, he was taxed at 17.7 percent on his taxable income of more than $46 million. Meanwhile, his receptionist was taxed at about 30 percent! Buffett said that this was despite the fact that he was not trying to avoid paying higher taxes - that is, he doesn't use tax shelters. He then challenged Congress and his audience to see what the people who "clean our offices" are taxed and compare that to the rich in America - it's simply not a fair system. This is just another example of the despairity between the rich and poor, whether it be in terms of executive compensation granted by corporations or taxes levied by the government

Government regulators have recently announced a new bill that would tax private equity firms' profits as ordinary income instead of capital gains income. For years, private equity firms like Blackstone have invested their clients' money and had the proceeds taxed at the capital gains rate of 15% instead of the corporate tax rate of as high as 40%. Now regulators are arguing that the fees these private equity firms collect (usually a portion of their returns) should be taxed at the corporate tax rate as ordinary income instead of the lower capital gains tax rate. This income is known as carried interest. Government officials argue that if you invest other people's money and make a profit, then that profit should be taxed as ordinary income - it's as simple as that.

Yahoo's former CEO Terry Semel is one of the best examples of a working model for executive compensation. Upon moving from CEO to a non-executive chairman position, he will be foreiting 4.5 of the 6 million in stock options he received in May of 2006 while also forfeiting any severance pay. The company's stock was doing perfectly fine up until last year when Yahoo's numbers began to suffer - then some questioned Terry's paycheck. However, many failed to realize that while he did receive stock options during this time, they were options with a high strike price of $31.59 a share which gives it a present value of just $63 million with a clause that he would not receive future stock options for three years. And with a $1 salary and an all-option bonus, this meant that the $63 million over three years became only $22 million assuming he continued to perform well. This is how executive compensation should work - executives should have a large stake in the company and have that stake tied directly to performance. Let's hope more companies catch on and follow this same trend.

Proxy season is in its final months and little has changed in the way of measures to curb excessive executive compensation. So, what have the new rules really accomplished? Well, it now takes companies much longer to create compliant disclosures at additional cost to shareholders. And while the disclosures may be written in easier English than the original ones, they are still very far from perfect. In fact, it is rather unlikely that the average investor would take the time to read through the hundreds of pages of documentation.

So, what can investors do? Well, there are several new services out there that help evaluate executive compensation and break it down in numbers easier to digest for the average investor. ExecutiveDisclosure.com assists in evaluating executive compensation by offering two types of comparisons: Pay Vs. Performance and Pay Vs. Peer Pay. Pay versus performance measures the percentage increase in stock prices versus the percentage increase in compensation. Obviously, if pay is outpacing perforance, there is a problem. Meanwhile, the peer comparison gives an initial basis for comparison.

In the end, the SEC still has a long way to go until executive compensation is readable for the average investor. Until then, services like ExecutiveDisclosure.com may be the best option for investors.

A group of Verizon Communications investors will be the first to test a dramatically different approach to evaluating executive compensation. The telecommunications company was selected by the group of investors due to its discount to its peers, excessive executive compensation and large bet on a future project - FiOS. The company's shareholders have created a forum through which they can discuss the prospects of the capital-intensive project as well as ways in which management can be incentivized to make it work. In fact, one of the primary objectives of the forum is to get investors thinking about management's stake in the success of FiOS and getting them to ask questions if it is not the case. The company is currently evaluating whether or not to particpate in the forum sponsored by ShareholderForum.com. Regardless, this is certainly an interesting development to follow...

The main question facing everyone involved with executive compensation is simply: How much is enough? The often large sums of money that executives receive have outraged many investors and columnists, but in a free market economy the best go to the highest bidder and the same thing goes for CEOs. No company wants to pay its CEO below that ever-increasing median either lest they face losing their leader. So, how does one remedy this situation?

Well, The Blue Ribbon Commission on the Governance of Executive Compensation in Canada conducted a study on the matter and came up with a very simple solution. The committee suggested that at the heart of all the controversy is the simply matter that most investors are just not aware of where these figures are being derived. Consequently, they believe that the single most important thing that companies can do is simply justify the compensation amounts in regulatory disclosures. This means not only disclosing all those members who had a say in the compensation amounts, but also disclosing exactly what performance measures pay figures are tied to and why. By explaining these figures in plain english, the commission believes that many problems can be avoided.