CFO.com’s Stephen Taub examines new Chief Financial Officer pay data:

Median CFO pay increased by 5.2 percent in 2007, to $2,894,275 from the prior year's $2,752,027, according to a new Equilar study of Standard & Poor's 500 companies.

The executive compensation specialist noted that median total equity compensation actually jumped 8.2 percent, while median bonus payouts dropped 3.4 percent to bring down the total. The study covered 313 of the S&P 500 finance chiefs in place for at least two years.

The sharp median pay increase contrasts with a 1.3 percent increase in median CEO compensation in the same time frame, recorded in an Equilar study published in April. "The fact that median CFO compensation appears to be rising faster than median CEO compensation may indicate increased prominence for CFOs in the executive suite," Equilar theorized.

Breaking down the numbers from 2006 to 2007, the median base salary for S&P 500 CFOs increased by 9.1 percent, to $525,000 from $481,250.

In 2007, S&P 500 CFOs received a median aggregate bonus of $576,880, down 3.4 percent from the median of $597,263 reported in 2006. In addition, 93.6 percent of CFOs received any form of bonus compensation in 2007, down from 99 percent in 2006.

Meanwhile, from 2006 to 2007 the total value of equity awards for S&P 500 CFOs increased by 8.2 percent, rising to a median of $1,523,810 from a 2006 median of $1,408,804. The percentage of CFOs receiving equity grants was nearly flat, registering at 95.5 percent compared to the prior year's 95.8 percent.

A selection from Selena Maranjian's opinion on CEO pay written for The Motley Fool:

Wouldn't you agree that companies… must house scores, if not gobs, of talented executives? Now, wouldn't you think that many of these folks would love to run their company or a similar one? That they have the smarts and skills to do so? And wouldn't you think that if there were some CEO positions available at major corporations, these folks would gladly vie for the jobs -- and be willing to do them for a mere few million dollars, at most?

Given this supply of potential executives, why on earth do we have so many CEOs making tens, if not hundreds, of millions of dollars per year, even at poorly performing companies? Why are some CEOs collecting huge sums just upon landing their jobs, while others get enormous packages along with a pink slip?

A recent issue of Forbes tackled the topic, noting about Citigroup's (NYSE: C) new CEO, Vikram Pandit: "To recruit him the troubled bank paid him $241 million ... since his arrival, the stock has fallen a further 25%." I'm sorry, but it would be hard for me as an investor to have faith in a troubled company that thinks a new CEO is worth a quarter of a billion dollars.

The explanation for this ridiculous situation isn't a new one: Warren Buffett and his partner, Charlie Munger, have decried it for many years. CEO salaries have been spiraling out of control because boards of directors have been letting it happen. Because as soon as one CEO gets a hefty compensation package, others ask for -- and typically get -- similar ones. ("Everyone's doing it.") Because many directors on compensation committees either don't have the backbone to say no or are cronies of the CEO who selected them, or both. Many directors are former CEOs, as well.

If you add up all the overpayments to CEOs, you'll end up with billions of dollars that could have been deployed elsewhere, helping the companies grow, paying dividends to shareholders, or paying down debt. Lavish executive compensation is rarely the best use of a company's dollars.

It's hard to be optimistic about this situation, as those in charge seem to have little incentive to change anything, but there is some reason to hope. There have been incremental improvements to the status quo, with more possibly on the way. For example, many shareholders can now weigh in on CEO compensation, albeit via non-binding votes. Presidential hopefuls are also interested; Sen. Barack Obama, for example, supports requiring corporations to let shareholders have a "say-on-pay." Companies are now also required to disclose executive pay in detail, breaking out options and other compensation components, and valuing them.

With any luck, we'll see some win-win reforms enacted. For example, if CEOs are rewarded largely with company stock, they'll have some incentive to help the company perform better.

In the meantime, let's keep an eye on the situation and exercise our say-on-pay privileges when we can.

A look at the executive compensation atmosphere abroad by Sam Pizzigati and available in its entirety at http://www.alternet.org/workplace/86563/?page=entire:

The Dutch parliament, observers believe, will shortly enact into law legislation that will heavily tax American-style executive windfalls — and maybe set some global precedents.

Other European nations, news reports indicate, are already taking notice. Earlier this month, in Brussels, European Union finance ministers “applauded” Wouter Bos, the Dutch finance minister who’s leading his nation’s charge against executive excess. The chair of the Brussels session, Luxembourg prime minister Jean-Claude Juncker, called the “bloated payouts” going to corporate executives “a social scourge.”

The legislation that Bos is pushing in the Netherlands will impose a 30 percent tax on all executive severance packages that run over 500,000 euros, the equivalent of almost $800,000. Last year, the CEO of the top Dutch baby food maker exited his executive suite with $124 million, a windfall that outraged the Dutch public.

Before that landmark payout, executive pay reformers in the Netherlands had been content to press corporate boards to disclose more info on what they were paying their top execs. That disclosure, they figured, would help shareholders blow the whistle on extraordinary executive earnings.

But this sunshine strategy hasn’t worked, in the Netherlands and other European nations as well, and angry lawmakers are looking at legislation that specifically targets executive excess.

The Dutch are leading the way. The executive pay reforms now pending in the Netherlands include, beside the hefty new tax on severance windfalls, one proposal that would limit bonuses and stock options to 100 percent of an executive’s pay and another that would raise the required employer contribution to company pension funds by 15 percent wherever companies hand executives over $800,000 in annual pension benefits.

In Germany, the Social Democratic Party, a junior partner in the current government, is calling for a $1 million annual limit on how much companies can deduct off their corporate taxes for executive compensation.

“We must consider placing a larger share of the tax burden on the income that grows the most quickly – and often without a great deal of effort,” explains Karl Lauterbach, a leading Social Democratic Party lawmaker.

The European Union parliament, meanwhile, is reportedly “eyeing curbs on stock options, bonuses, and golden parachutes,” a “clear sign,” says one British daily, “that the EU noose is tightening” on bankers,  private equity  funds, and “corporate elites that have enjoyed light-touch regulation.”

The Dutch executive pay reform proposals have Europe’s “superclass” — and its business press apologists — absolutely aghast.

“We should not accept state interference when it comes to our pay,” UK economic columnist Damian Reece harrumphed earlier this month. “The precedent some in Europe, like the Dutch, want to set is intolerable. A minimum wage is one thing, a maximum wage is quite another.”

But don’t expect the pressure for “state interference” to ease anytime soon. Europeans have become too accustomed to living in relatively equal societies to tolerate American-style executive pay.

That became clear at last month’s annual shareholder meeting of the Royal Bank of Scotland. RBS last year bought out a Dutch bank and then handed that bank’s departing CEO almost $50 million in goodbye pay. One shareholder at last month's annual meeting demanded — to loud applause — that the executives on the RBS board “reconsider” the company’s “entire remuneration policy.”

“You are being paid as if you are superhuman,” the shareholder angrily noted, “but you are not.”

J. Edward Ketz is uniquely qualified to discuss the technical aspects of CEO pay judging by his resume - an accounting professor at The Pennsylvania State University focusing on financial accounting and accounting ethics, he also wrote Hidden Financial Risk, a book that explores the cause of recent accounting scandals. The following is an excerpt from the SmartPros.com opinion article “Politics of CEO Pay:”

The class division may not be as bad as slavery, but everyday Americans are unhappy with their lot. Who can blame them as the good jobs are outsourced to foreign lands and eliminated in corporate restructurings? Poorly paid service jobs have replaced the better paying jobs. Firms like Walmart do all they can to keep the low-paying jobs low. I have a nephew who was recently fired from Walmart after working there a number of years and receiving several raises. His boss told him that he could get his job back if he were willing to receive the minimum wage. Does that sound fair?

The disparity in pay might not be badly received if laborers felt that executives had so much greater skill and added a tremendous amount of value to the firm. Given what has happened in the credit markets, however, I believe that the average citizen is questioning the competence of corporate executives. If these privileged executives really knew what they were doing and really made incisive decisions, then how did the meltdown occur in the credit markets? And why should CEOs be spared their jobs when Americans, right and left, are losing their homes? When the average Joe or Jane makes mistakes, they lose their job. Why don't more CEOs get the axe because of their incompetence? And, when they are let go, why are they entitled to a severance pay that others can get only if they win the lottery?

Additionally, the disparity in pay might not be badly received if Americans thought that the executives were morally straight and honest and trustworthy. Given the thousands of accounting restatements over the years, that image has been shattered. Watching corporate officials pay huge fines and go to prison, one instead wonders how a person could become so greedy or how corporate big shots can envision corporate assets as their own. This point is driven home by jokes like child in a sandbox telling the other that his mom said it was ok to talk with strangers as long as they weren't CEOs…

At this point I do not think Americans are ready to rebel in any significant way. But, if CEOs continue to mold themselves into nobles like the French aristocrats of the 18th century while the wealth of average Americans continues to evaporate, don't be surprised if a decade or so from now the little guys storm an American Bastille, metaphorically or literally. Aggrieved peons and urban wage-earners can take only so much of this self-aggrandizement.

DolmatConnell & Partners, Inc., an independent executive compensation consulting firm, released today their 2008 Tech100 and LifeScience100 Studies. These studies, now in their fourth and second year respectively, provide insight into the evolving world of executive compensation in the 100 largest publicly traded High Technology and Life Science companies in the U.S.

Changes in CEO pay level varied significantly between the two studies and were linked to overall industry performance levels. In the Tech100, CEO base salaries increased 3.8% and actual total cash compensation increased 2.9%, while total direct compensation (base + actual bonus + annual long-term incentive grant values) fell 0.6%. This was in line with a median annual total shareholder return for the industry which was 1.6%. The picture in the LifeScience100 was vastly different, with a median total shareholder return of 14.4% last year. CEO base salaries increased 5.6%, actual total cash compensation increased 10.3%, and total direct compensation rose 11.8%.

Pay-for-performance is dramatically improving, as Boards and Compensation Committees are responding to shareholder concerns with respect to executive pay. DolmatConnell & Partners looked at the Top 20 and Bottom 20 performing companies in each industry and found several encouraging results.

In the Tech100, median target bonuses for the Top 20 performing companies were 120% of base salary and actual bonus payouts were 139% of target ($1.4M), whereas in the Bottom 20 companies, median target bonuses were 150% of base salary, and actual bonus payouts were only 19% of target ($225K). Bonus payouts in the LifeScience100 followed similar trends. Says Jack Dolmat- Connell, CEO of DolmatConnell & Partners, "It is great to see that Boards are finally getting tough relative to the pay of underperforming CEOs. This is what has infuriated investors for years -- high pay for mediocre or poor results."

Most studies of executive compensation look at the aggregate value of base salary, actual bonus and the annual long-term incentive grant values in a given year, also known as "pay opportunity" for a given year. In addition to this, the DolmatConnell & Partners' studies looked at the value of compensation "realized" in a given year -- what executives actually took home. The results of this new look are stunning -- CEOs at Top 20 companies in the Tech100 realized $9.0M in 2007, whereas CEOs at Bottom 20 companies realized only $3.4M, a very significant difference in compensation based on performance. Unrealized compensation (the value of equity still outstanding) differences were even more dramatic -- CEOs of Top 20 companies held equity worth $45.0M, while the equity outstanding of the CEOs of the Bottom 20 was worth only $8.1M. Says Dolmat-Connell, "This is incredibly positive news based on a completely new and better way of looking at executive pay. It is also fascinating to note that the vast majority of the value of the equity held by CEOs in the Top 20 was in the form of stock options, an investor- friendly long-term incentive vehicle, whereas the majority of the value of the equity held by the Bottom 20 CEOs was in the form of time-based restricted shares, a very investor-unfriendly vehicle."

Angelo Mozilo, chairman and chief executive officer of Countrywide Financial (NYSE: CFC), had compensation dropped 79% to $10.8 million last year - though more than $10 million isn't bad for an executive that drove his company to the brink of total disaster.

In an embarrassing incident for the company, it has recently come out that Mozilo also accidentally responded to an e-mail from a borrower. Here is the excerpted exchange:

“I am writing this letter to explain my unfortunate set of circumstances that have caused me to become delinquent on my mortgage. I have done everything in my power to make ends meet but unfortunately I have fallen short and would like you to consider working with me to modify my loan. My number one goal is to keep my home that I have lived in for sixteen years, remodeled with my own sweat equity…this home means the world to me…. it’s to the point where I cannot afford to pay what is owed to Countrywide. It is my full intention to pay what I owe. But at this time I have exhausted all of my income and resources so I am turning to you for help.”
–Countrywide borrower Dan Bailey

“This is unbelievable. Most of these letters now have the same wording. Obviously they are being counseled by some other person or by the internet. Disgusting.“
–Countrywide Financial founder, Mozilo

Mozilo was indeed correct, the e-mail was guided by a form letter available on an Internet forum, but the incident and wording are doing nothing to help his reputation.

From "Despite Candidate Criticism, CEOs Still Players in Presidential Race" by Alex Knott and Jonathan Allen of CQPolitics.com, a reminder of the difference between politicians' rhetoric and actions regarding executive compensation:

The three remaining presidential candidates have made an art of bashing top corporate executives at public campaign rallies and a science of cashing in on their profits behind closed doors.

According to a new study by CQ MoneyLine, at least 170 of the chief executive officers of American companies ranked in the top 1,000 by Fortune Magazine have donated to Democratic frontrunner Barack Obama of Illinois, his rival Hillary Rodham Clinton of New York, presumed Republican nominee John McCain or some combination of the three.

Heads of companies that had a combined revenue of $2.5 trillion in 2007 contributed a total of $575,000, a pittance in presidential-level campaign finance circles but an indication that the nation’s business executives have not been muscled out of the influence arena by anti-corporate campaign rhetoric or promises of reform.

The set of CEO donors represents a broad cross-section of the titans of American business, spanning 56 industries. Many of them have given the maximum amount allowable, even as they are targeted for scorn on the campaign trail. That amount is $2300 for each election - primary and general are considered separate elections.

McCain, with 102 CEO donors, has accepted $282,000, easily outpacing Clinton’s $164,000 from 54 of the Fortune 1000 CEOs and more than double the $130,000 Obama has accepted from 45 of the nation’s chief executives.

“This isn’t just about expressing outrage,’’ Obama said last month as he spotlighted his support for Rep. Barney Frank ’s legislation giving shareholders a non-binding vote on CEO pay. ‘‘It’s about changing a system where bad behavior is rewarded so that we can hold CEOs accountable, and make sure they’re acting in a way that’s good for their company, good for our economy and good for America, not just good for themselves.’’

Obama, who makes a point of saying he takes no money from political action committees or federal lobbyists, has cashed checks from executives across the American corporate spectrum, including drug companies and oil companies.

McCain also has found fault with the nation’s top executives in very public arenas.

“Americans are also right to be offended when the extravagant salaries and severance deals of CEOs — in some cases, the very same CEOs who helped to bring on these market troubles — bear no relation to the success of the company or the wishes of shareholders,” he said in an economic speech the same week as Obama’s comments.

Clinton’s populist message has showcased how CEO pay has outpaced that of average Americans saying that these company leaders salaries have grown to “262 times the typical worker” in recent years.

“The CEOs and the boards of these companies are not sharing the wealth,” said Clinton, in a November speech on the economy. “So companies are actually profiting off of keeping workers’ wages stagnant.”

From Economist.com:

There are few things on which all three presidential candidates agree, but one of them is that something ought to be done to curb excessive CEO pay. Even John McCain, the candidate of the traditionally business-friendly Republican party, warns of a growing popular backlash against pay packages for top executives that would make Croesus blush.

The belief that executive pay is out of control rests on several arguments. This column considers three of them. The first is that the gap between the earnings of executives and rank-and-file workers is big and growing. The second is that top bosses' rewards keep rising even when profits fall. And the third is that investors have too little influence over pay packages agreed behind closed doors by imperial chief executives and their cronies on boards’ remuneration committees.

That the gap between earnings at the top and bottom of the corporate ladder has grown is not in dispute. According to figures from the Congressional Research Service, an arm of America's Congress, the average pay of American CEOs is now 180 times greater than that of workers, up from 90 times in 1994. Critics charge that this doubling has created huge resentment amongst ordinary workers, whose jobs are becoming more precarious as the economy weakens.

But while CEOs' rewards are undoubtedly the subject of heated debate around the nation's water coolers, their hefty earnings largely reflect significant changes in the marketplace, not boardroom backscratching. Over the past 14 years, technological innovation, globalisation and a host of other trends have made it much harder to steer huge companies to success. The best corporate navigators are highly sought after, so it's hardly surprising that they command a much bigger premium than the average employee.

There are, however, some grounds for concern, notably when a CEO earns vastly more than the rest of the senior management team. Jeff Immelt, the boss of General Electric (NYSE: GE), has described as “lunacy” deals that give bosses packages worth up to 20 times more than those of their immediate subordinates. Mr Immelt—whose own poor performance at GE recently has raised questions about whether he is worth his pay packet—has said he earns between two and three times as much as his top lieutenants.

Pay activists point to the recent debacle on Wall Street as further proof that the CEO pay system is seriously flawed. They cite the cases of Angelo Mozilo, the head of Countrywide (NYSE: CFC), America's biggest mortgage lender, and Charles Prince, the ex-CEO of Citigroup (NYSE: C), who both pocketed millions of dollars as their companies ran into deep trouble. Expect more outraged headlines in 2008 as CEOs cash in stock options and other incentives awarded years ago, while share prices and earnings tumble.

Yet there are signs that poor performance is leading to lower pay. Mercer, a firm that advises companies on compensation matters, has analysed the latest regulatory filings of a sample of 350 firms in the Fortune 1000. In a report published on May 15th, it noted that median total direct compensation—defined as base salary, short-term incentives and the expected value of long-term incentives granted in the fiscal year covered by the filing—for the CEOs of the 50 largest companies in its sample was $14m in 2007, almost 16% lower than in 2006.

Mercer's study also says boards are rethinking how to reward long-term performance. Rather than issuing standard options or grants based on absolute movements in firms' share prices, they are looking at schemes that link payouts to relative performance against an external index or industry peer group. And in some cases they are using strategic and operational benchmarks as measures. The snag with all of these schemes is that they can pay out handsomely even if share prices fall.

Board members may consider this a price worth paying to keep top talent on board at a time when stockmarkets are very volatile. Return-hungry shareholders, however, may disagree. A growing number of institutional investors are pushing for the right to vote on proposed compensation plans for top managers. But such reasonable demands for greater transparency are being met with stiff resistance in many boardrooms.

Four cheers, then, for Aflac (NYSE: AFL), a Georgia-based health insurer with $14.5 billion in revenue, which made history on May 5th when it became the first American public company to put its proposed compensation plan to the vote. Approved by 93% of the votes cast at its annual general meeting, the plan included a new pay package for Dan Amos, the firm's CEO, who earned $85.6m in 2007, $70.8m of which came from stock options that vested during the year.

Given Mr Amos's track record, such a result is hardly surprising: between August 1990, when he became Aflac's boss, and the end of last year, the company's total return to shareholders rose by a whopping 3867%; over the same period, the S&P 500 delivered a total return of 549%.

Bosses of poor performers will be far less keen to put their pay under a shareholder spotlight, but the pressure to do so is growing inexorably. Risk Metrics Group, a consulting firm, reckons 82 motions have been filed so far in 2008 calling for “say on pay” policies. Looks like America's presidential candidates will not be the only ones fretting about votes this year.

From Minnesota's Star Tribune, writer Chris Serres looks at CEO pay benchmarks:

"For the shareholders of Regis Corp. (NYSE: RGS), 2007 was a bad hair year.

Profit at the hairstyling company, which owns the Vidal Sassoon and Supercuts chains, fell 24 percent on slower sales growth and higher expenses.

But that limp performance didn't stop the company's board from awarding CEO Paul Finkelstein a $1.06 million salary -- up 19 percent over 2006 -- and a $747,000 bonus, up 118 percent from a year earlier.

In an era of increased scrutiny of executive pay practices, it may seem perilous for corporate boards to reward an underperforming CEO with a generous raise. Yet the practice continues, in part because of the long-standing custom of basing executives' compensation on the pay of their peers. Known as "competitive benchmarking," it has contributed to the runaway inflation in executive pay, corporate compensation experts say.

Finkelstein got his compensation package in part because Regis compares his pay with 15 companies, several of which are much larger than the operator of hair salons. Among them is coffee giant Starbucks Corp., which has nine times the market value and last year collected 3.6 times more revenue than Regis. That's comparing coffee and coiffeur.

H&R Block also made it on Regis' list of peers, although the tax preparer has six times the market value and 1.5 times the revenue.

Regis chief financial officer Randy Pearce defended the choice of Starbucks and H&R Block, noting that both are service-related companies with a national footprint like Regis, which has 13,500 hair salons.

And both cater to a "moderate customer" in terms of income and style. "Regis looks for peer companies that appeal more to the masses," Pearce said.

Oracle Corporation (NASDAQ: ORCL) founder and CEO Larry Ellison took home the title of highest paid CEO last year according to Forbes.

Looking at the 500 biggest U.S. companies, Forbes named Ellison the highest paid because though he has a salary of "only" $1 million, he exercised stock options worth $182 million.

For 2007, Oracle's stock price moved up about $5 to $22 from about $17 - adding $25 billion in market capitalization.

The more talked-about story from the report was that last year's #1, Apple Inc. (NASDAQ: AAPL) icon Steve Jobs, dropped to #120 with compensation of $14.6 million. The year before Jobs made nearly $650 million from restricted stock grants.

Consulting firm Mercer released its annual study of CEO pay, the summary of which is below:

"The drive for responsible executive pay continues to gain traction as new proxy rules require companies to disclose the value of compensation, benefits and perquisites.  While the median change in CEO total direct compensation (salary, bonus and long-term incentives) was 8.9%, corporate net income increased by 14.4%, up from 13% in 2005, and total shareholder return was 15.1%, more than double the 6.8% return in 2005. Companies heard the message that pay has to be linked to performance:  Over half of the companies granted performance shares – shares that are earned only if performance goals are met – according to the Mercer Human Resource Consulting 2006 CEO Compensation Survey. The annual survey of the latest proxy filings of 350 large public companies was published today in The Wall Street Journal.


The long-awaited total compensation numbers are in, disclosed for the first time this year: According to the Mercer 350 study, total compensation (total direct compensation plus benefits and perquisites) is not as eye-popping as expected.

 

Mercer reports a median total of $8.2 million.  The new elements totaled less than $1.3 million at the median or approximately 15% of the median CEO package.  Most of the added value came from the annual increase in pension values; the reported median increase was approximately $1.0 million.


CEO base salary increased to a median $995,000 after having been at $975,000 for two years. Constant incumbent CEOs received a median increase of 4.1%, higher than the median increase of 3.6% in 2005. In 2006, about one quarter of the CEOs did not get a pay increase; boards were tougher in 2005, when one third of the sample did not get a pay increase.


Median total cash compensation – salary and annual bonus – rose to $2.6 million, slightly higher than the $2.4 million reported in 2005.  The median increase for constant incumbent CEOs was 7.1%, the same rate as in 2005.  An increase in total cash is not surprising given strong corporate performance.  Median net income rose 14.4%.


The big story this year is that, as predicted, long-term incentives (LTI) are being linked to performance, Mercer's survey found. The number of CEOs receiving option grants declined from 192 in 2005 to 185 in 2006, and the number of CEOs receiving restricted stock grants declined from 181 to 172 in the same period.  However, the number of CEOs receiving performance shares, including performance-contingent restricted stock, jumped from 111 in 2005 to 178 in 2006.  The portion of the CEOs' LTI pay that was made up of performance-based shares and units jumped in the period 2005 to 2006 from 21% of the LTI pay mix to 31%, while restricted stock was stable, rising slightly from 22% to 23%, and stock options dropped from 52% of the LTI pie to just 46%. As recently as 2002, stock options made up 76% of CEO LTI pay.


"We have been predicting the rise of performance-based equity awards for several years," said Diane Doubleday, global leader of Mercer's executive remuneration business. "At the heart of shareholders' expectations for pay aligned with performance is the structure of long-term equity programs, specifically programs that vest or pay out based on performance. As of 2006, the accounting rules that facilitate using performance-based equity were in effect for almost all companies. As a result, we now see a significant increase in performance shares and performance-contingent restricted stock.  In addition, the new disclosure rules include previously unknown information about performance goals and targets."


"Target-setting will be the next area of focus, as companies are forced to define how performance is being measured and rewarded," said Peter Chingos, a senior executive compensation consultant with Mercer. "The increased disclosure and need for analysis is also likely to cause many companies to simplify their programs. The process of preparing the Compensation Discussion and Analysis (CD&A) caused some companies to make changes and will probably prompt more to simplify and clarify the performance criteria in their compensation programs. This could range from tweaking the programs to making major changes to ensure clarity to external audiences."


Did shareholders get what they wanted?  They continue to be unhappy with what they perceive as slow progress on reining in CEO pay. Several institutional investors have focused their efforts on having a greater influence on compensation.  This year there are more than 60 proposals for a "say on pay" – a proposal to put executive compensation to a non-binding vote by shareholders. In addition, shareholders have put forward more specific proposals to limit severance and require pay to be more tightly linked to performance. With majority voting for directors becoming widespread this year, directors who have been at the heart of controversy are more likely to hear shareholders' dissatisfaction loud and clear.


And many believe that the disclosures were so lengthy and confusing that shareholders' objectives have not been achieved.  Mercer's crystal ball anticipates further refinement of the disclosure rules before next year's proxy season."

In this piece, Felix Salmon of Portfolio.com discusses his rather unique perspective on how to curb CEO pay. Though it doesn't seem particularily inspired, it adds to the discussion:

In the spirit of Monday's post, here is Canada's Globe and Mail offering its take on executive compensation. In its "Report On Business," Bill Dimma writes:

"Except for those absent from our planet for the past couple of decades, infamous examples of the wildly excessive senior executive compensation that has become commonplace in the United States, though not limited to there, are so widely known that they've become urban legends. But unlike most urban legends, they're not myths but unfortunate reality.

But most of you have heard this sort of thing before. So what? It's like that famous line of Mark Twain's about the weather: "Everyone talks about it but no-one does anything about it." Should anything be done about these massive changes in senior executive compensation levels, or not? And if so, what? At the broadest level, there are only three approaches worth considering.

The first is for government to step in and impose some arbitrary limits or at least some quasi-voluntary guidelines. Not recommended. Even in war-time, this worked erratically and badly. The elemental forces of supply and demand can be ignored or played down for only so long.

The second approach is to do nothing, to believe and accept that the wild earnings numbers are simply a reflection of a market at work. This approach ignores the growing rumbles of discontent from society at large, including employees further down an organization, investors and shareholders, along with the media and opinion leaders.

The third approach also believes in letting the market work but takes it as a given that the current market isn't working well. So approach No. 3 focuses on ways to help ensure that the market for chief executive officers is truly a market, not one where too many CEOs win big, even when their shareholders win small or, worse, lose big.

Here are eight ways I believe the market can be improved:

1 - Go independent

The compensation committees of widely held public companies must be comprised entirely of independent directors.

2 - Understand pay structures

Every member of the compensation committee should be compensation-literate and, ideally, one should be an expert.

3 - When hiring Independent consultants ...

Any external compensation consultant should earn no revenue from a corporate client beyond fees paid for executive compensation work.

4 - Clear reporting structures

Any external compensation consultant should report functionally, though not administratively, to the independent chair of the board compensation committee.

5 - Screen your peer group

Choose wisely and fairly when you peg your company's compensation against others. This means being as close as is possible in measuring product-market offerings, size, and profitability.

6 - Align your goals

Internal quantitative measures of corporate performance should be aligned with longer-run shareholder goals.

7 - Disclosure, disclosure, disclosure

Public disclosure of senior executive compensation must be "full, fair, clear, and unambiguous," to quote from the recent report of the Blue Ribbon Commission of the Institute of Corporate Directors.

8 - Shareholder Say for Pay

Say for Pay is the current effort to convince companies to allow non-binding shareholder votes on senior executive compensation. This is an idea whose time has not yet come in the Canadian setting, but I predict that within two or three years it will become common here, as it already is in several other advanced countries."

This Dallas Morning News column was adapted from an item he posted on BlogMaverick.com and is also available at DallasNews.com.

"There is a game played by CEOs with the corporate issuance of lottery tickets, otherwise known as stock. Stock can be issued as warrants, options, restricted or unrestricted stock. No matter what you call it, every CEO asks for equity, knowing that the only goal is to hit the jackpot.

Every CEO hired looks to grab as much equity equivalents as he can and do everything he can to get that stock price up while periodically liquidating the stock and stuffing the cash in his bank account.

There is absolutely nothing wrong with doing so. Any CEO who doesn't take advantage of this golden ticket is an idiot. I would guess that more than 95 percent of CEOs hired to run companies with a market capitalization of a billion dollars or more amass more than $10 million in equity very quickly.

Those who manage to hold on to their jobs a while can get past the $25 million in equity mark pretty quickly and reach $50 million in 10 years. It's actually pretty tough to screw up and not get there.

Why? Because you have the entire mutual fund, hedge fund and brokerage industry doing all they can to help you.

Think about it. You can't turn on CNBC or Fox Business without seeing cheerleading for the market to go up. Every man, woman, child, fund, index or interested party who buys the stock is doing everything they can to get the stock of the company to go higher. They don't really care how you run the company as long as the stock price goes up.

Heck, even if they did care, shareholders don't really own anything and have zero say in the company. It's the ultimate in social networking. Everyone who owns the stock belongs to the fan page for the stock, and they are telling everyone they can how wonderful the company is and why the stock will go up, all the while praying that it does.

With all of that social networking power, how can CEOs not get rich?

The problem is that there is a huge disconnect between the CEO and shareholders doing well and those who work for the company doing well.

Yes, it's true that stocks can hit 52-week, or even multiyear, lows. Yes, it's true that CEOs see the value of their holdings shrink. But unlike lottery tickets, whose value goes to zero when you don't hit the numbers, CEO equity positions retain their upside. History has shown that if they go far enough underwater, they will get repriced and/or reissued – all in the name of keeping the CEO happy.

So while CEOs may get "less rich" for a while, the game is stacked to get them happy really fast when the upturn comes.

The pressure from Wall Street is to grow earnings forever, no matter what it takes. This isn't a problem when a company is doing well. But when the economy hits a bump, everyone wants to know what the CEO will do to get the price back up. This, as they say, "is where the CEO earns his pay."

Everyone who works for that company is at risk – of losing their jobs, benefits, raises, you name it. Employees live in the corporate cash zone, while CEOs and the top few in management live in the equity/lottery ticket zone.

Those in the cash zone always take the first hit. People, places and things that consume cash are the first things to go because cash expenses immediately reduce earnings. If you or anyone like you consumes cash, unless someone upstairs thinks you generate a straight-to-the-bottom-line return, you are about to become a corporate ghost. You'll be memorialized as a cut to increase earnings and mentioned in a press release that Wall Street will cheer and use to push up the stock price.

What makes me sad is that I think if given a choice, most of us would choose to hold on to our shares and accept an expanded price-earnings ratio for some period in exchange for people keeping their jobs.

I would love to receive an e-mail from a company saying something to the effect of:

Dear Shareholder,

We are facing a difficult decision that we would like your feedback on. Our earnings per share last quarter were 20 cents and, for the entire last year, 80 cents. Because of a downturn in business caused by XYZ factors, we face the choice of making 10 percent less or cutting headcount and related expenses in order to maintain our earnings and possibly even grow our earnings a couple cents this year.

As a shareholder, we would like to ask you whether you would consider allowing us to retain these valued employees. We recognize that it would require you to accept a PE multiple 10 percent higher than the current market. We hope you would be willing to make this concession. We think the jobs this will save will return far greater value to shareholders over the long run. We look forward to your vote.

Unfortunately, this is a fantasy that can't happen in this country. Which brings us back to CEO pay.

The only way to change this is to put CEOs in the cash zone. Make companies generate 100 percent of their compensation in cash that will be 100 percent expensable in the quarter paid.

That's not to say the CEOs can't own stock. Hell, yes, they can own stock. But make them buy it on the open market or as part of a program that's available to every company employee on the same terms. They are getting paid enough, and if they believe in their ability to run the company, they can put their money where their mouth is.

Shareholders tend to ignore how much stock goes to management, but they don't ignore cash. CEO cash compensation will go up, but total compensation will come down.

More importantly, CEOs getting paid huge sums in cash will stand out like a sore thumb when things aren't going well. They will be treated like everyone in the cash zone and held more accountable for their work.

The rich can still get richer, but everyone shares in the risk."

From writer Paul Murdoch of Forbes:

"Forbes' latest look at the compensation of top executives at the 500 largest companies in America shows that 120 of the 500 chief executives took pay cuts last year, in terms of base salary and bonus. The average reduction in salary plus bonus for those 120 executives: 29%. It is worth noting that some of these executives still managed to deliver handsome returns to shareholders.

Example: David N. Weidman, chief executive of Celanese. Sales of the chemical company were up 12% in 2007, the first double-digit increase since Weidman took the reigns three years ago. Profits, on the other hand, have increased at a slower rate, up 5% in 2007 and just 2% for the past 12 months. In fiscal 2007, the value of Weidman's salary plus bonus slipped 11% to $2.9 million. Yet, Celanese shareholders have enjoyed a 64% total return in 2007 and 36% over the latest 12 months. During those stretches, the S&P500 returned 4% and a loss of 7%, respectively.

The following table lists chief executives who have had their core compensation (defined as base salary plus bonus) cut by the greatest percentage in the last year despite outperforming the S&P 500 over the same time period. Some of these executives still brought home millions in total compensation, thanks to stock grants that vested during the year. Stock grants usually vest after a pre-determined time period or when a company's stock meets a specific price target.

Smith International's chief executive, Douglas L. Rock, is one such executive who cashed in on vested stock grants, while taking an 8.7% cut in base pay last year. His salary plus bonus in 2007 came to $3 million vs. $3.3 million the prior year, but Rock more than made up the difference, earning an additional $8.5 million in vested stock grants linked to performance. While Rock's total compensation in 2007 was a robust $12.1 million, only $700,000 below the average compensation of all 500 executives tracked by Forbes, shareholders of the oil services concern enjoyed a total return of 81% during the year.

For the list below, we excluded executives from our list of the 500 largest companies in America who exercised stock options last year or where the proxy statement did not provide a breakdown of annual vs. long-term bonuses."

Lower Salary Plus Bonus But Big Stock Returns

Chief Executive	Company	Salary & Bonus ($thou)	Change In Salary & Bonus (%)	Total Comp ($thou)	52-Week Total Return (FYE)*	Total Return Latest 12 Months**
Douglas L Rock	Smith International	$3,012	-9%	$12,056	81%	45%
David N Weidman	Celanese	2,908	-11	2,971	64	36
Charles R Schwab	Charles Schwab	4,586	-11	4,663	40	19
J Wayne Leonard	Entergy	3,032	-11	12,873	33	1
Andrea Jung	Avon Products	4,311	-8	12,012	22	4

Earlier this week, AFLAC Incorporated (NYSE: AFL) became the first publicly traded U.S. company to have a vote on its executive compensation.

In an outcome that speaks volumes about the company and its leadership, 93% of shareholders approved of CEO Daniel Amos' $11.96 million compensation package - with only 3% voting against it.

Such results are not surprising given that in Amos' 18 years at the helm AFLAC shares have risen more than 3,000%.

However, even if shareholders had overwhelmingly disapproved, such "say on pay" votes are only a barometer of sentiment. The company's compensation committee still has final decision power over pay.

Even though the vote only cheered the status quo, it is an important symbolical step for a U.S. company - and the results of such votes in the future at companies that don't have stellar share performance might be less than glowing.

"Washington Mutual Inc., the nation’s largest savings and loan institution, was so badly burnt by the mortgage meltdown that it needed a $7 billion infusion of capital from the private equity firm TPG Capital and other investors to stay independent.

Although the Seattle-based thrift may ultimately still not survive, Kerry Killinger, its chief executive officer, will do just fine, thanks to the largesse of the board, which approved a compensation structure shielding senior management from the impact of the mortgage crisis.

Killinger received more than $14 million in compensation in 2006. Although he refused a bonus in 2007 because of the company’s poor performance, the 2008 proxy reveals that Washington Mutual more than made up for that by giving Killinger a hefty grant of stock and options awards valued at close to $13 million. This was on top of a base salary of $1 million, proving that the alignment between pay and performance is completely broken.

Washington Mutual also is protecting the compensation of its senior managers in the current year from any hits from the mortgage crisis. The thrift changed the performance measures of its 2008 bonus plan to exclude the effects of loan loss provisions, expenses related to business resizing or restructuring and expenses related to foreclosed real estate assets.

This at a time when Washington Mutual reported that it would lose $1.1 billion in the first quarter of 2008 and set aside a provision for loan losses of $3.5 billion. The thrift also said it would slash its quarterly dividend from 15 cents to a penny and give pink slips to 3,000 employees.

CreditSights Inc. warned on March 27 that the company could lose $4.2 billion this year due to increasing losses on mortgages and may have to raise at least $3 billion in capital to meet federal regulatory requirements.

The dilution from the infusion of capital by TPG and other investors is further punishment for Washington Mutual’s shareholders who had already lost 70 percent of their investment in 2007 and seen their dividend slashed by 73 percent.

The company’s biggest stumble “was a late entry into the subprime market as a way to juice the once fast-growing company’s sluggish earnings,” The Wall Street Journal noted. Despite a series of missteps by Killinger, the board approved an executive compensation structure to protect his pay package and that of other senior managers from the impact of the mortgage crisis.

Killinger’s 2008 equity award will be approximately 15 percent greater than his 2007 award and consist solely of performance-vesting stock options. Stock option grants provide senior executives with incentives to enhance the stock’s short-term performance to the detriment of long-term shareholders. Stock option grants promise executives all the benefit of share price increases with none of the risk of share price declines.

In an April 4 report, RiskMetrics Group’s ISS Governance Services recommended that shareholders support a campaign by the AFSCME Pension Plan and the CtW Investment Group to vote at the April 15 annual meeting to throw out all the directors on the board finance committee. The proxy voting service also called for shareholders to support the installation of an independent chairman and for the requirement that directors get a majority of the vote for election to the board.

The RiskMetrics report also questioned Killinger’s continued leadership. “Given the magnitude of the company’s losses and recent changes in the executive suites at Citigroup and Merrill Lynch, we question why the board did not replace Mr. Killinger as CEO, particularly given the critical strategic decisions that the company still faces.” Washington Mutual decided in 2006 to focus its mortgage business increasingly on higher-margin products, despite the recognition by analysts of the risk “inherent in the mortgage franchise.” These higher-margin products include option payment adjustable rate mortgages, alt-A loans and below prime loans. These higher-margin loans also are riskier. Among the largest U.S. mortgage lenders that year, Washington Mutual also made the highest proportion of loans to real estate investors and second-home buyers. Such loans are considered especially risky.

Not only did Washington Mutual increase lending to risky borrowers, it may have done so in questionable ways. Last November, New York Attorney General Andrew Cuomo filed a lawsuit against eAppraiseIT, the appraisal arm of First American Corp., alleging that it inflated the value of homes nationwide in response to pressure from Washington Mutual. Cuomo’s lawsuit also attracted the attention of the U.S. Securities and Exchange Commission and the Office of Thrift Supervision.

Appraisals ascribe a value to property that determines the amounts that banks are willing to lend to the buyer. Mortgage brokers and lenders then collect fees based on the dollar value of the loans they make to the buyer of the property.

This means that in addition to its involvement in what is possibly illegal activity, Washington Mutual has a mortgage loan portfolio of lower quality than previously thought to be the case. The company now faces a higher risk of credit losses as homeowners are stuck with homes whose true value is much less than they thought and with mortgages they can’t pay.

Washington Mutual’s aggressive lending practices began to reveal their true value when losses began to mount. The company reported a $1.87 billion loss in the fourth quarter of 2007. Moody’s Investors Service cut the company’s credit rating to a notch above “junk.” The lower credit rating indicates that investing in Washington Mutual is considered to carry a higher risk than before. Toward the end of 2007, the company announced it would lay off 3,300 of its 50,000 workers.

Instead of properly monitoring risk, Washington Mutual has followed lending practices that make risk more difficult to identify and structured management’s compensation to sidestep the consequences, a scary proposition considering that further write-downs are expected. According to some estimates, the company will need $8 billion to cover borrowers who can’t afford their mortgage payments, although Moody’s estimated that the company might need as much as $12 billion.

And what if Washington Mutual goes the way of Bear Stearns or Countrywide? Killinger should have no worries, with a golden parachute worth more than $22 million, if he is terminated before a change in control."

"The nation’s fourth-largest bank is a bellwether for the mortgage crisis, says Jonathan Weil, an accounting columnist at Bloomberg News. “As long as Wachovia Corp. hasn’t cleaned up its books, there’s probably still more to come,” he says.

Weil says it’s clear that Wachovia hasn’t yet fully disclosed the impact of delinquent mortgage loans on its financial statements because the stock market value of the bank is less than its book value, or net worth. At the end of 2007, the bank’s book value (assets minus liabilities) was $76.9 billion, but its stock market value was only $60.9 billion. “The $16 billion gap shows the market doesn’t believe the company’s balance sheet is holding up,” Weil says.

The banking company’s net income in the fourth quarter of 2007 plunged to $51 million or three cents a share, from $2.3 billion or $1.20 a share a year earlier, and its revenue fell 17 percent to $7.2 billion. Mortgage-related losses were $1.7 billion. Its non-performing assets soared to $5.4 billion on Dec. 31, 2007, from $1.4 billion a year earlier. But the bank’s loan-loss allowance, or the money set aside to cover bad loans, now $4.5 billion, is not large enough to fully cover its non-performing assets.

Despite the bank’s financial woes, G. Kennedy Thompson, chairman and chief executive officer of Wachovia Corp., hasn’t suffered as much financially as the company’s shareholders. Thompson didn’t receive a $5 million cash bonus in 2007 that he got in 2006, but Wachovia granted him stock options and restricted stock with a combined grant date fair value of $14.3 million. This represents a $2.5 million increase or 21.1 percent more than the $11.8 million in equity awards he received in 2006.

Thompson’s compensation illustrates the truism that chief executive officers of large companies typically earn bigger paychecks than heads of smaller companies. The bigger paycheck frequently tempts CEOs to outgrow their competitors through mergers and acquisitions, rather than seeking to financially outperform their competitors. All too often, executives may pursue acquisitions to grow their companies even if the resulting transactions are risky, or poorly conceived. This is what the executives did at Wachovia.

Growth for growth’s sake can be a particularly destructive strategy at a bank, especially if it results in the making of poor quality loans. The banking company, cobbled together from more than 100 acquisitions since 1985, is now the fourth largest bank in the United States. Wachovia executives had financial incentives to pursue this expansion because the company’s executive compensation plan rewards executives for the revenue growth that results from mergers and acquisitions.

As Wachovia has grown, so too has the size of the companies that it considers its peers for executive pay. Like many companies, Wachovia looks at its peer group of rival companies to establish its executive compensation levels. A decade ago, the company, then known as First Union, used the top 25 largest banking companies as an executive compensation benchmark. Today, Wachovia’s compensation committee considers 10 of the largest financial services companies.

Peer group compensation formulas can provide cover for executives when industry-wide problems emerge such as the current mortgage credit crisis. In 2007, Wachovia’s compensation committee concluded that despite Wachovia’s financial exposure to the decline in value of subprime residential mortgages, its peers also had taken significant write-downs.

In May 2006, Wachovia announced the purchase of mortgage lender Golden West Financial for $24 billon. At the time, Thompson praised Golden West for its “singular focus as a risk-averse residential mortgage portfolio lender.” The merger was completed at the peak of the real estate bubble, and since then Wachovia’s stock price has fallen more than 40 percent.

Golden West specialized in offering so-called “option ARM” mortgages that allowed borrowers to select a minimum payment option below the amount of interest due. Golden West often combined these loans into mortgage-backed securities for use as collateral to borrow more money. Adding to the company’s risk, more than 60 percent of Golden West’s outstanding mortgages originated from California, where real estate values reached what many people suspected were unsustainable levels.

Wachovia’s expansion in the residential mortgage business could not have come at a worse time. As the mortgage credit crisis spread in the fourth quarter of 2007, Wachovia’s deteriorating loan portfolio required an increase in its loan-loss provision to $1.5 billion. Wachovia’s quarterly net income fell 98 percent, as its bad loans and delinquencies increased. Unfortunately for shareholders, Thompson has not been penalized for the consequences of the ill-conceived expansion strategy."

"John J. Mack, chairman and chief executive officer of Morgan Stanley, received $41.7 million in compensation in 2007, a year in which the prestigious Wall Street firm reported the first loss in its 72-year history because of a $9.4 billion charge on subprime related investments. Under his employment contract, which expires in 2010, Mack also is entitled to tax gross-up benefits, as well as continued medical and dental benefits.

Mack did not receive a bonus in 2007 because of the company’s losses related to the mortgage crisis, but he did receive stock awards valued at $40.1 million and $399,153 of other compensation on top of his $800,000 salary, according to the company’s 2008 proxy.

Among the chief executives of Wall Street firms that have taken a major hit from the subprime mortgages, he is the only one who has kept his job. Despite an effort by the CtW Investment Group, the California State Teachers’ Retirement System and other large investors to toss him from the board, Mack was re-elected as chairman at Morgan Stanley’s April 8 annual meeting. The write-downs led to a 44 percent decline in Morgan Stanley’s share price that erased $35 billion in shareholder value for the year ending March 7, 2008.

When he was brought back to lead Morgan Stanley in 2005 after a management feud threatened to tear apart the firm, Mack promised to double earnings in five years. The firm’s $3.59 billion loss for the fourth quarter of the fiscal year ending Nov. 30, 2007, forced Mack to renege on his promise and sent Morgan Stanley hat in hand to a Chinese investment firm for $5 billion infusion of capital.

In a press release announcing the loss on Dec. 19, 2007, Mack called the write-down “deeply disappointing, and agreed to forgo the year-end bonus. But instead of accepting ultimate responsibility for Morgan Stanley’s performance, he blamed the “isolated losses” on a “small trading team.” In a conference call with investors about the earnings, Mack said the firm’s losses “resulted from an error of judgment that occurred on one desk, in our fixed-income area, and a failure to manage that risk appropriately.” 

That trade represented 23 percent of the firm’s common equity in fiscal 2006 and prompted Moody’s Investors Services to raise questions about the “effectiveness of Morgan Stanley’s trading risk management.”

In fact, much of the blame for the firm’s losses rests with Mack. Shortly after returning to lead Morgan Stanley in 2005, he pushed the firm to take more risk and bet more of its own money on big trades and investments, a strategy that prompted the company to dive deeply into subprime mortgages, leveraged loans and derivatives and backfired badly. Mack also compromised the independence of the firm’s risk management by having the chief risk officer report to Zoe Cruz, co-president, who also oversaw fixed income trading, instead of reporting directly to him.

After the firm’s 2007 trading losses came to light, Mack fired Cruz and said the firm’s risk managers would now report to the chief financial officer. “Mack’s strategy is to be aggressive and use the balance sheet to support businesses that he’s expanding,” said Dick Bove, financial strategist at Punk, Ziegel & Co. “It’s not working and management turnover is excessive.”"

"While working Americans are struggling to make ends meet, corporate chief executives who lose their jobs walk away with outsized pay packages. “When companies fail, should they give millions of dollars to their senior executives?” Rep. Henry Waxman, chairman of the U.S. House Oversight and Government Reform Committee, asked during a hearing featuring E. Stanley O’Neal, former chief executive of Merrill Lynch & Co. Inc., and two other top executives at the center of the financial crisis.

O’Neal lost his job as chairman and chief executive of Merrill Lynch last October, after the firm posted a $2.24 billion third-quarter loss due to a staggering $8.4 billion write-down on investments in junk mortgages and risky debt securities. The Wall Street firm posted an $8 billion loss for 2007 and shareholders saw the value of their shares drop more than 40 percent.

Yet O’Neal left with stock options, unvested shares, deferred compensation and pension payments worth more than $160 million. But O’Neal told lawmakers at the hearing that “I received no severance package. I received no bonus for 2007, no severance package, no ‘golden parachute.’” Instead, he said what he received was earnings from earlier years.

Much of this amount is in the form of unvested restricted stock and unexercised stock options granted over the six-year span of O’Neal’s tenure at Merrill Lynch. During this period, Merrill Lynch failed to outperform the Standard & Poor's (S&P's) 500 on an annual basis. The discrepancy between O’Neal’s generous compensation and his lackluster performance that led to some of the largest quarterly losses in his company’s history points to an executive compensation program that lacks accountability and rewards short-term gains at the expense of long-term value.

A look at Merrill Lynch’s proxy statements over O’Neal’s tenure as CEO shows that his compensation was not tied to risk-adjusted performance measures. Instead, it was driven by revenue, earnings growth and return on equity. The company’s 2007 proxy statement placed a high priority on return on equity. Such incentive compensation that is based on earnings and revenue, can “push for ‘sales’ without adequate concern for quality,” according to Nell Minnow, co-founder and editor at The Corporate Library, a corporate governance research firm. This can lead to CEO pay based on artificially inflated numbers.

The consequences of this lack of risk accountability can be seen in the direction the company took during O’Neal’s tenure. Since taking over, O’Neal slowly pushed Merrill Lynch into riskier businesses, in his quest for higher returns. During the housing boom, Merrill Lynch became increasingly involved in packaging and selling pools of securities tied to subprime mortgages, eventually increasing its exposure to these collateralized debt obligations (CDOs) to more than $40 billion in late 2007. CDOs repackage income from a pool of bonds or other investments.

Merrill Lynch became involved in the packaging and selling of a particular type of CDO called “Norma” that bet heavily on securities that were among the most vulnerable to a rise in defaults of subprime mortgage loans. While this increased returns, it also increased the chances that losses for investors would be magnified in the future. In underwriting risky CDOs such as “Norma,” Merrill Lynch earned fees as high as $15 million for a typical $1 billion CDO. From 2004-2007 Merrill Lynch became the top underwriter of CDOs and generated hundreds of millions of dollars in profits from packaging and selling mortgage CDOs.

These profits helped take O’Neal’s annual compensation to high levels. In 2006, at the height of the real estate bubble, he was paid $91 million. However, according to critics, Merrill Lynch’s high-risk strategy created little value for investors or the broader economy.

Once the housing bubble burst, home prices began to fall and defaults on mortgages rose. The value of subprime backed securities and CDOs such as “Norma” began to fall quickly. Financial instruments such as “Norma” became responsible for the tens of billions in write-downs at some of the world’s largest banks, including Merrill Lynch.

In the face of large losses, O’Neal approached Wachovia Corp. with a merger offer that was not authorized by Merrill Lynch’s board of directors. If this merger had been completed, O’Neal might have walked away with as much as $274 million. In the end, the merger did not go through, and ultimately O’Neal was forced out. Still, he made out well, walking away with $161 million.

Merrill Lynch shareholders are left with the consequences of O’Neal’s risk-taking. According to some analysts, the firm still faces uncertainty about its future and has sizable exposure to "some of the most toxic assets in the marketplace.""

"Countrywide Financial Corp., once the nation’s biggest home lender, which originated more than $450 billion in mortgages annually, or about one-fifth of all home loans, embodies the subprime mortgage crisis more than any other company.

“It seems like CEOs hit the lottery even when their companies collapse,” said Rep. Henry Waxman, the California Democrat who chairs the U.S. House Oversight and Government Reform Committee, at the March 7 hearing on CEO pay and the mortgage crisis. No CEO epitomizes that better than Countrywide Chairman and Chief Executive Officer Angelo Mozilo.

At the mortgage lender, stock-option compensation rewarded executives for short-term stock performance even while they pushed lending practices that were not sustainable over the long run. During the height of the real estate bubble between 2004 and 2007, Mozilo cashed in on these short-term gains by exercising stock options valued at $414 million, prompting an informal U.S. Securities and Exchange Commission (SEC) investigation into the sales. As a result, he already had pocketed a tidy profit by the time the long-term consequences of his decisions finally caught up with the company’s share price.

In 2004, Countrywide became the largest U.S. mortgage lender, in part, by using aggressive sales techniques and by lowering lending standards. Like other lenders, Countrywide also introduced exotic mortgages that allowed borrowers to qualify for larger mortgages. As the housing boom peaked in 2005, an increasing percentage of Countrywide’s borrowers were sold “pay option ARMs,” a nontraditional mortgage the lender first offered to its borrowers in 2001.

A pay option ARM is an adjustible rate mortgage loan that allows the borrower a choice of payment methods, including a minimum payment option that is less than the interest owed. Borrowers who select the minimum payment option have the difference between the interest they owe and the interest they actually pay added to their outstanding loan balance each month in a situation known as “negative amortization.” Over time, borrowers who pay the minimum payment also face elevated interest rates.

As the real estate bubble deflated in the second half of 2007, Countrywide suffered $1.6 billion in mortgage-related losses. By the end of the year, more than 5 percent of Countrywide’s $28.42 billion in pay option ARMs were at least 90 days overdue and 71 percent of its pay option ARM borrowers were making minimal payments. Countrywide also disclosed that only about one-fifth of its borrowers had fully documented their incomes before receiving the loans.

In August 2007, deteriorating credit market conditions forced Countrywide to seek outside financial help by selling $2 billion in convertible shares to Bank of America. As the mortgage credit crisis worsened, Countrywide risked losing both its investment-grade rating and also violating its bank loan covenants. In January 2008, Countrywide announced a $4 billion merger with Bank of America, at a loss of $20 billion in market value from the previous year.

Before this end-game transpired, Mozilo had doggedly bargained a very lucrative employment agreement at the end of 2006, despite the vocal criticism it received. In fact, in an e-mail to Countrywide’s compensation consultant, Mozilo complained that “Boards have been placed under enormous pressure by the left-wing, anti-business press and the envious leaders of unions and other so-called “CEO Comp Watchers.” At the time, Mozilo also proposed to collect a $3 million pension while he remained an employee of Countrywide.

On the Friday before Christmas 2006, Mozilo and Countrywide finalized his new employment agreement. The annual pay terms included a base salary of $1.9 million, an incentive bonus of between $4 million to $10 million, an equity award of $10 million and continuation of Mozilo’s other perks and fringe benefits. The new contract also promised him the $37.5 million in severance benefits.

But when the financial success that made it possible for him to get such an employment agreement proved so fragile that the entire company had to be sold at a fraction of its previous market capitalization, Mozilo could no longer avoid making some concessions. Facing growing public criticism, Mozilo announced that he would voluntarily give up his $37.5 million golden parachute that he would receive when Bank of America completed its acquisition of Countrywide. Reflecting the changed financial conditions, the company also canceled its plans to host a ski trip for mortgage bankers at the Ritz-Carlton ski resort in Avon, Colo., where rooms start at $725 a night. The itinerary reportedly included dinner at Spago, the famous restaurant whose menu includes Kobe steak as an entrée for $105.

But Mozilo will not be leaving Countrywide empty-handed. He is entitled to an enhanced supplemental executive retirement plan with a lump sum worth $22.4 million, a pension plan with a present value of $1.3 million and $20.6 million in deferred compensation. And while Countrywide shareholders have seen the value of their investment fall 85 percent since February 2007, Mozilo also will keep his $414 million in stock options that he exercised between 2004 and 2007. On top of that, Mozilo, who intends to retire after Bank of America Corp.’s (BAC's) pending takeover of Countrywide this year, will receive $10 million worth of stock in BAC, according to filings with the SEC."